How to tell one type of annuity from another

Hand shaking coins out of piggy bank

An annuity is a type of retirement savings offered by insurance companies. You pay a premium, typically $20,000 to $100,000, in return for a monthly check.

You can choose when the payments begin and how long they last -- five years, 15 years or every month for the rest of your life.

There are three basic types of annuities:

Fixed-rate are the safest and most conservative, with your premium invested in Treasury bills and CDs. Although you know exactly how much you will get every month, this type of investment usually provides the smallest monthly check for any given premium.

Indexed offer the potential for higher payments because your money is placed in more lucrative mutual funds that track the performance of financial indexes, such as the Standard & Poor's 500.

If the markets are booming, your monthly payments will go up. If stocks hit the skids, the insurer guarantees a minimum payment, usually 3% of your investment. But such guarantees aren't free.

Indexed annuities charge higher fees and cap the maximum return you can make. If the S&P 500 is up 8.5% for the year but your cap is 7%, then only 7% of the returns are credited to your account. The insurer keeps the rest.

Go to the Financial Industry Regulatory Authority's Web site to learn more about indexed annuities.

Variable can provide the biggest payouts because your money is invested in higher-paying -- but higher-risk -- mutual funds. Most also offer a death benefit that returns all or part of the money in your account to your spouse or other survivors.

But variable annuities charge the highest fees of all. As the Wall Street Journal put it: "You need to shoot for high returns to beat the performance drag from the annuity's hefty annual expenses."

Annuities also offer a long list of options, such as long-term care insurance and a guaranteed minimum income, which sets a floor under your monthly payment even if there's not enough money in your account to support that level of payments. But you'll pay extra for each of those options.