An annuity is really an investment. The financial reality is that not all investments are equal. Just as you can have a good or bad investment, you can have a good or bad annuity. Usually, the merits of an annuity arise from how well they fit into your financial plan or how well they meet your financial goals. However, a good annuity can be independently assessed using certain criteria. Simply put, an annuity that does not possess most of these features might hardly benefit you.

Safety

As an investment that's categorized as an 'income option', safety is an important feature of annuities. Financial experts generally regard annuities as safer than other income options. However, variable annuities have a dubious track record as far as providing a safety net for investors. A good annuity provides better guarantees for the annuity investor where capital and guaranteed interest rates are concerned. Most importantly, a good annuity is provided by a strong and reliable annuity provider.

Good accumulation rate

Annuities generally provide moderate returns. However, certain annuities bear really competitive accumulation rates (interest rates or rates of return). Good annuities reward annuity investors with accumulation rates that outstrip returns from other income options like Money Market Funds.

Good payout (annuitization) rates

Just as an annuity must work well in the accumulation phase, it must perform in the payout (annuitization) phase as well. When an annuity matures, insurers use a rate per cash-value dollar to determine what the payouts would be. A good annuity bears higher payout rates, which ensure that you get a higher annuity income for your cash value at maturity.

Fees, charges and penalties

Some of the better annuities on the market do not have hidden fees or exorbitant upfront or backend charges. Variable annuities are not usually considered good annuities because they are riddled with expense charges for fund management. They usually have higher withdrawal/surrender charges to cover their operating costs as well. All annuities have some form of fees or charges to cover the annuity provider's expenses. However, good annuities have minimal fees, charges and penalties associated with them.

Liquidity

Annuities are medium-to-long-term financial instruments. However, withdrawal options give the annuitants much more access. Technically, annuities are liquid. However, some annuities operate in all-or-nothing mode; it is either you have the annuity or you surrender it with heavy penalties. Better annuities give the annuitant the option to withdraw only a portion of the funds (typically with a smaller penalty). When contingent expenses or difficult financial situations arise, the higher liquidity that withdrawal options provide are a life-saver.

Flexibility

A good annuity gives the investor more latitude with contributions. Flexible premium annuities give the annuity investor the opportunity to increase contributions, make uneven contributions throughout the accumulation phase and even miss premiums. Restrictive annuities tend to favour annuity providers more than annuitants, especially when they include insidious clauses like the 'paid-up annuity clause' that come into effect when you miss premiums.

Few annuities will bear all of the features of a good annuity. However, when purchasing an annuity, it is important to assess your options based on specific criteria. Ultimately an annuity must suit your needs, but an annuity that is good on more than one count is likelier to add tremendous value to your financial plan.

Learn more about this author, Darrell Victor.
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