I can't find the article now, but a year or two ago the Wall Street Journal did an analysis on products like these.

Here is what you need to know:

**Fixed annuity:** pays a fixed interest rate and can't go down. Basically a CD from an insurance company without the FDIC insurance. Since they are lower risk they don't require as much regulation, oversight, and the brokers who sell them don't need investment licenses.

**Variable annuity:** performance is linked to investments in a sub account. A pretty standard option is an S&P 500 index fund. Since they can fluctuate and lose value they are highly regulated and the brokers who sell them have to be licensed to sell investments. Basically a mutual fund with a annuity wrapper around it... and much higher fees.

**Indexed annuity:** In reality it's a fixed annuity disguised to look like a variable annuity with no risk. They can't go down and the rates they pay are based on how a particular index performed. Since they can't go down they have very little oversight and the brokers don't have to have investment licenses. HOWEVER, they don't give you returns identical to the index. They give you proportional rates and have caps. If the SP 500 is up 10% you might only earn 5%, and if the SP 500 is down you get 0%. Now, remember that this is really a fixed annuity disguised to look like a variable annuity. Why would the insurance company pay more interest on an indexed annuity than a fixed annuity if they have the same amount of risk? Short answer, they don't pay any more. They just look like they could pay more in the sales literature. By the time you offset the +5% years, the +1% years, the 0% years, ect. and then add in fees these products are engineered to pay out similar returns to a fixed annuity. The WSJ's analysis concluded that after a 7 year period many indexed annuities averaged similar returns to fixed annuities over the same period.

**Reporting returns:** This isn't commonly known, but mutual funds and annuities don't report returns the same. Mutual funds report past returns AFTER fees. Annuity sales literature normally talks about 'future' projected returns and they can get away with telling you the returns before fees.

Example: Indexed annuity returns 6%, 0%, 7%, 0%, 6%, 2%, 5%.

Average returns: 3.71%.

Now let's say there is a 1% fee. Make that average returns: 2.71%

An ex-annuity salesman once told me about an annuity that guaranteed 6% payouts for life, and of course many annuity salesmen spun that to mean 6% returns. However, the normal fees were 1.5% and the extra fee to get the guarantee of 6% was 1.5%, so after fees the 6% turned out to be a 3% guaranteed payout.

**Things to look out for:** The commissions on indexed annuities are high, which is why brokers sell them. They also have really long surrender periods. Your money could be tied up for 10 years. These products are also very complex and the math is designed to confuse you into believing you can get high returns with no risk. Anytime you see high returns and low risk remind yourself that every investment is an exchange of capital and that both parties want the best terms they can get. If they could get capital at lower rates why are they paying more? Likely because the risk is higher or the returns aren't what they seem.