NEW YORK (CNN/Money) - My 84-year-old mom is being advised by a financial advisor to liquidate her $180,000 portfolio, which is yielding her about $5,500 a year, and invest the proceeds in a variable annuity that will supposedly yield $9,800. The advisor says there will also be a 2 percent fee. Is this an annuity that will provide her a reliable and competitive return on her money or is this advisor just trying to make a nice fee?

-- Ray Ayerst, Strasburg, Colorado

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Annuities are a bit tricky to evaluate in that they can do a number of different things, so based on what you've told me I'm not quite sure what the advisor is recommending. But let's look at a few of the possibilities, starting with a quick explanation of the two main ways variable annuities can be used.

On the one hand, a variable annuity is an investment that allows you to earn a return and grow your capital. You do this by investing in variable annuity portfolios known as "subaccounts." The idea is that you can build a portfolio with these subaccounts much the same as you can with mutual funds.

Variable annuities have a couple features that mutual funds lack, however. The gains they generate aren't taxed until they're withdrawn from the portfolio, at which point they're taxed as ordinary income.

That is a plus, since you defer taxes and your money compounds more while within the annuity. It's a minus, however, in that ordinary income tax rates can reach almost 39 percent. Gains you generate on an ordinary mutual fund are just 20 percent.

One more thing: variable annuities have surrender fees that can nick you for as much as 10 percent if you withdraw your funds early on. Also, variable annuity subaccounts charge an annual management fee, but they also levy what's known as an "annual insurance charge." That combination can easily push a variable annuity's annual expenses over 2 percent per year, which drags down the net return.

The second way that a variable annuity can be used is to generate a regular payout, usually a monthly income stream that can last for the rest of your life (or that of your spouse).

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The size of the payments depends on several factors, the most important being the amount of money you've put into the annuity, your age (the older you are, the higher the payout) and the performance of those subaccounts I mentioned before.

Now, this gets a bit tricky, but when someone takes a payout stream from a variable annuity, the payments can jump around from month to month. The first payment is based on what's called an "assumed interest rate" or AIR. This is nothing more than a benchmark that's used to set the first payment. The AIR can vary, but typically it's 3, 4 or 5 percent.

If your annuity subaccounts earn a return (after annual expenses) that exceeds the AIR, your payment rises. If your subaccounts' return dips below the AIR, your payment drops.

What this means is that the payment stream from a variable annuity is, well, variable. Since the stock market tends to rise over the long run, you would expect that payment to go up and up. And, in fact, variable annuity payments do tend to rise over the years.

But during periods of market turmoil, the payments can drop significantly. The amount your payment would rise or fall depends on the subaccounts you choose.

But someone who had, say, 70 percent of her money in stock subaccounts and 30 percent in bond subaccounts probably would have seen her monthly payments drop by 25 to 30 percent during this bear market.

So what's unclear to me is this: Is the advisor suggesting your mom buy the variable annuity in hopes of continuing to generate tax-deferred gains or to collect a regular income?

If the advisor is recommending this as an investment, I'm not sure it's such a hot idea. The reason is that the combination of variables' generally high fees and that tax quirk of converting long-term capital gains to ordinary income generally means it can easily take more than 15 years before the tax-deferral advantage pays off.

In other words, mom might be better off in mutual funds unless she lives beyond 99.

If the advisor is recommending the annuity as a way for your mom to collect income, that makes more sense in my opinion, although it has down-sides too. For one thing, once you convert a sum of money into a payment stream via a variable annuity, you typically give up your right to tap into your capital.

In other words, if mom sinks her entire $180,000 into this annuity, she may not be able to get to her money for emergencies or unexpected expenses. Some annuities these days do allow you access to your funds. But you pay for that in the form of a lower income and higher expenses, and typically the access is limited.

Your mom should also realize that the income stream from a variable annuity can go up and down because it's tied to the performance of the underlying subaccounts.

So when the advisor quotes her a $9,800 yield (or 5.4 percent on $180,000), I have no idea when he means. To me, the idea of a yield in a variable annuity is a meaningless concept, especially if it's meant to imply that this yield is an assured income.

I think you and your mom need to do two things to resolve this issue. First, you both need to bone up a bit about annuities. What I've told you here is (sadly) only a superficial view of these hybrid insurance-investment products.

I've written more extensively about annuities in Money Magazine, however, and you can check out my three most recent opuses on annuities by clicking here, here, and here.

Given the sum of money involved, I also think it would be a good idea to consult an advisor who doesn't have an interest in selling you an annuity. For tips on getting in touch with an appropriate advisor, click here.

Finally, remember that the main issue that you and your mom face isn't whether a variable annuity is a good product. It's whether a variable annuity is right for your mother's situation and, if so, whether the annuity the advisor is touting is the right one to do the job or another annuity can meet her needs even better.

Walter Updegrave is a senior editor at MONEY Magazine and is the author of "Investing for the Financially Challenged."