Why does it seem as though everyone wants to sell you an annuity?

Annuities are the type of investment that sounds too good to be true: You invest a certain amount, you receive a tax-deferred payment from the annuity for a fixed number of years, and there is even a death benefit. Annuities may be a good investment for someone who is in a high income tax bracket, and who is also not a senior citizen. But, according to one independent insurance analyst who was quoted in the Wall Street Journal, "Annuities are almost never appropriate for seniors."

Then why do a lot of seniors have annuities?

They are lucrative for the sellers of annuities.  The commission paid to the investment advisor is often in the 6 percent range, and sometimes as high as 8 percent. At a 6 percent commission, for example, sale of a $200,000 annuity will bring in $12,000 for the investment advisor. But the commissions don't stop there -- annuities have internal expenses that can run about 2 percent per year, with all of that coming out of the principal of the annuity.

Besides the commissions, what is the problem?

Although annuities are promoted as a good basic investment, there are some major differences between annuities and stocks or mutual funds. Annuities usually have a period, usually seven years, during which the annuity cannot be cashed in. In other words, you are stuck with the annuity for at least seven years.

Not every annuity will hold its value. A "variable" annuity is actually a collection of mutual funds that may substantially lose their value in a bearish stock market.  It is very similar to investing directly in mutual funds.

The tax advantages of annuities often are cancelled out by the high fees charged by the institution selling the annuity.

Annuities can also mean additional income taxes for heirs of the person who buys the annuity because the annuity does not offer a "step-up" in basis when it is inherited, unlike securities and real property.

How are annuities taxed for federal estate tax purposes?  

The value of the annuity contract, determined as of the date of death, is added to the owner's gross estate.  This is usually the amount that will go to the owner's estate or the designated beneficiary.  If there is no remaining benefit at death, the value is zero.

What should you do if you want to buy an annuity?

1. Shop around to find an independent financial advisor who doesn't rely on commissions for his or her livelihood.  Look for an advisor who charges an annual percentage of the funds that are being managed for you.

2. If you decide to get an annuity, read all of the information that you are given. Do not rely on oral statements about the annuity from the salesman. Ask some hard questions about the annuity, including the "lock-in" period, and the chances of losing part of your investment, the commission and the internal expenses.