My bank wants to sell me an annuity -- should I buy?

The steady path to a dream retirement
The steady path to a dream retirement

My bank has asked me if I want to put my money into an annuity. I don't know if this is a wise move or not, so I'm not sure what to do. What do you think? --Charlene

The Wells Fargo scandal has focused attention on a longstanding marketing technique in the banking world known as cross-selling, or convincing customers who already have, say, a checking and savings account to sign up for a credit card, invest in the bank's mutual funds or, yes, even buy an annuity. Depending on how aggressively this practice is carried out, cross-selling might consist of little more than a suggestion (or two or three) to consider another product or service, or it could involve sales quotas, commissions or other payments that might induce bank reps to foist products and services on customers that they may not want or really need.

I can't say definitely that you're the target of a cross-selling pitch, although I think it seems unlikely a bank rep would just suggest products, especially specialized ones like annuities, willy-nilly. What I can tell you, though, is that whatever the motivation for the recommendation, you shouldn't automatically go along with it just because someone at your bank made it. What really matters is whether it's in your best interests, not the bank's, for you to put money into an annuity.

So the main question you should ask yourself is: Do you really need an annuity?

Related: How to tell if you're on track to a secure retirement

There are many different types of annuities out there. Fixed deferred annuities, for example, are marketed as CD substitutes, places to stash cash and earn interest. Others are touted more as investments. With variable annuities you get to put your money into mutual fund-like subaccounts, while fixed index annuities allow you to participate in the performance of a market benchmark, say, the Standard & Poor's 500 index, although they typically also offer a small guaranteed return. A big selling point of these annuities is that the interest or other gains you earn go untaxed as long as they remain within the annuity.

While I wouldn't go so far as to say that no one should ever buy these types of annuities, I'm not a fan of them. I find that they can often be too complicated for individuals to understand and evaluate, have too many strings and conditions attached and are often laden with fees, costs surrender charges and possible tax penalties that can make them difficult to manage and erode their effectiveness. Many of them are classic examples of investments that are "sold, not bought."

In part that's because the people who sell these types of annuities often receive outsize commissions, not to mention vacations, prizes and other perks as outlined in a recent 2015 report from Senator Elizabeth Warren titled, "Villas, Castles And Vacations: How Perks and Giveaways Create Conflicts of Interest In The Annuity Industry." So I'd be wary of any pitch to invest in these kinds of annuities.

Related: The easiest way to invest your retirement savings

But there are two other types of annuities that tend not to be pushed as much that I think people should consider as a way to provide guaranteed lifetime income in retirement -- namely immediate annuities and longevity annuities. The premise behind these types of annuities is relatively straightforward (at least for the annuity world).

With an immediate annuity, you give a lump sum to an insurer in return for a monthly payment that starts at once and continues as long as you live. (Choose the joint-and-survivor option and the payment will continue as long as you or your spouse or partner is alive, although the payment will be smaller than for one person).

A longevity annuity works much the same, except that the payments start in the future, say, 10 or 15 years after you invest your money. Typically a longevity annuity requires a smaller investment than an immediate annuity, so a longevity annuity allows you to hold onto more of your assets now while knowing those payments are guaranteed to kick in later in retirement. You can see what size monthly payments you might receive from an immediate or a longevity annuity today based on your age, sex and how much you plan to invest by going to this annuity payment calculator.

If you'll already be receiving enough guaranteed income in retirement from Social Security and any pensions -- or if your nest egg is so large that your chances of running through it are minimal -- then you may not need an immediate annuity or a longevity annuity at all (or any other type of annuity, for that matter). And even if you do think an immediate or longevity annuity is right for you, you want to be careful about how much you invest.

Calculator: How much will I need for retirement?

Generally, once you put your money into an immediate or longevity annuity, you no longer have access to those funds for emergencies and such or to leave to your heirs. So the idea is if you want more guaranteed income than Social Security and any pensions will provide, you would devote only a portion of your savings to the annuity and leave the rest in a diversified portfolio of stock and bond mutual funds and cash that can provide long-term growth as well as liquidity for unanticipated expenses.

Keep in mind too that annuities don't qualify for FDIC insurance even if you buy them through a bank. That said, in the event an insurer fails, annuity and insurance policy owners do receive some protection via state insurance guaranty associations, but the amount of that coverage varies by state. To see the coverage conditions and limits in your state, you can go to the National Organization of Life and Health Guaranty Association site.

Believe it or not, I've given you only the Cliff Notes version of annuities here. So before you make a decision, you may want to check out this story on crucial questions you should ask before buying an annuity as well as this one on how to choose the right annuity for lifetime income.

At the end of the day, though, no matter who's suggesting an annuity, my view is that you shouldn't buy unless you know how it works, what it costs and, most important, you're convinced it's something you really need.

Getting started

Getting a job

Buying a car

Starting to invest

Buying a home

Starting a family

Retirement planning