Types

• There are two types of annuities you can invest in. The first is called an immediate annuity. This annuity makes payments to you immediately upon receipt of a large premium payment. The second type of annuity is called a deferred annuity. A deferred annuity functions like a long-term savings account and defers the payment of the immediate annuity payments.
  
  

Function

• Immediate annuities usually invest in fixed-interest investments but may also invest in mutual funds that pay a variable rate. Deferred annuities may invest in either fixed-interest investments, such as bonds, or variable investments, such as mutual funds.
  
  

Significance

• All of the money in the annuity, regardless of the type, is guaranteed according to the terms of the contract. Some annuities, such as variable annuities, don't guarantee your account balance. However, all types of annuities guarantee that the contract will be fulfilled according to its terms. Insurance companies invest your money and charge various fees on annuity contracts so that they're able to fulfill their promises to you.
  
  

Benefits

• The benefit of the cash reserves and the state guarantee corporations is that you have multiple layers of protection against an insurance company becoming insolvent and unable to make good on the promises in the contract. As a result, annuities are some of the safest financial products on the market.
  
  

Misconceptions

• A common misconception is that insurance companies aren't as safe as banks because banks are FDIC-insured. This is not true, however. Insurance companies are protected in multiple ways. The first layer of protection is the insurance company's own capital reserve. Second, insurance companies in every state buy insurance from other insurers. This "reinsurance" protects one insurance company failure from bankrupting its policyholders. Another protection insurance companies use is the state guarantee fund. This is a community fund that all insurers contribute to that guarantees that a minimum amount of money will be returned to policyholders if an insurance company fails.