Get to know annuities
There are loads of combinations; but the basics are easy to understand.
NEW YORK (CNN/Money) - When it comes to converting assets into a steady income stream, annuities can play a valuable role.
Although they can get brain-numbingly complex, the basic premise of annuities that make regular payments -- known as payout or immediate annuities -- is pretty simple.
Basically, they work like a life insurance policy in reverse. Instead of making regular premiums to an insurance company that pays a lump sum upon your death, you give the insurer a lump sum of cash in return for regular income for a specific period, or until you die (with what is called a life annuity).
An annuity offers more than just a guaranteed lifetime income, however. It also allows you to draw a higher annual income from your assets than you could manage on your own, even if you earned the same rate of return.
How is that possible? The answer is that while you must base your payments on a single life -- your own -- insurers can base annuity payments on a pool of thousands, in some cases millions, of people.
And they know that while some of these people will survive to their life expectancy and beyond, many others will die earlier.
So insurers can boost their payments by, in effect, transferring the money of those who die early to those who die late.
The size of the payments you receive from an annuity, how long you get them and whether your heirs collect from the annuity after your death all depend on what kind of policy you choose -- a fixed-payment annuity or one with a variable payment that fluctuates with the market but offers the possibility of a rising income over time.
Many annuities come with features designed to enhance their sales appeal. Some promise to increase payments with inflation, for example; others guarantee that your payments won't drop below a specified minimum. Such bells and whistles may make you feel more comfortable -- but they aren't free.