Annuities have become a popular option for retirement and investment planning of late as more and more people look for ways to bolster their 401K and ensure a comfortable life in their senior years. This type of investment, like most retirement options, relies on you contributing funds for a set number of years.

An investment management group then invests the money on your behalf, it earns interest over time, and at a set age you begin to receive payouts. However, there a different types of annuities you might choose to invest in.

Indexed annuities are something you may want to explore as they can offer benefits not available through average annuities. Of course, if you don’t understand how they work, you could also end up with unrealistic expectations. Here are a few pros and cons you should know before you decide if indexed annuities are right for you.

PRO: You Can Earn Higher Interest Rates

Perhaps the biggest draw of indexed annuities is the opportunity to earn greater yields than you could with comparably safe investments, such as CDs, for example. At the very least, any principle you contribute is generally fully protected from loss, so you’ll never dip below the amount you put in.

In addition, any gains you enjoy will be permanently locked in when your index option expires. You’ll also receive a minimum rate of return. Although it could be as low as 2-3%, your investment manager will guarantee this rate.  Plus, it’s more than you’ll earn with most CDs these days.

You stand to gain the most if the market performs well. In years when the market experiences gains, you could earn much higher interest on your account, perhaps even into the double digits. Your investment manager cannot guarantee these higher rates, but it is possible, depending on market performance and your level of participation.

PRO: You Can Pair it with Life Insurance

You can often package Indexed annuities with life insurance policies. You’ll contribute a set amount monthly, with a portion going toward your insurance and the rest going into your annuity. In most cases, you also have the option to contribute additional funds as money comes your way.

PRO: Income Riders

This is simply a guarantee of a lifetime income stream, which means you’ll receive payouts after a certain age. It’s best to speak to your expert in wealth management in San Francisco to make sure that your plan comes with this benefit and that you fully understand what it provides.

CON: Caps

Although indexed annuities offer higher potential gains than many other types of investments (at least those that are safe and stable), you need to be aware that some of them feature caps. What this means is that no matter how much the market gains, you might be limited in the amount of interest credited to your account.

Even with caps in place, you could still earn more interest than some other types of investment. That said, it’s your responsibility to understand the ins and outs of your investment accounts to ensure that you get the best possible returns.

CON: Fees

Nearly every type of investment involves fees. Not only will you be on the hook for management and administration of your account, but there could also be fees on earnings, too. Again, it’s best if you speak to your advisors about what these fees are and how they will affect your annuity.

There are so many types of annuities to consider when it comes to investing for retirement – it can be confusing. However, you need to understand your options so that you can select the right investment opportunities and enjoy the greatest benefits.

CON: Penalties

Like most types of investment or retirement accounts, you’re going to face penalties for withdrawing funds early. However, you should speak to an investment consultant about how this works.  Indexed annuities may offer “loan” options by which you can borrow funds and repay them to your account without penalty.

There might be times when you need to access the funds you’ve set aside for your retirement, but you don’t want to pay a load of penalties to do so. When you properly understand the benefits and drawbacks of your annuity, you should be able to select an account that is right for your needs.