Annuities are more complicated than toy assembly instructions on Christmas Eve. How do we really know if we are getting a good deal? And are they ever a good investment?

An honest salesman would say, “That depends on when you die.” If you outlive your actuarial mortality rate, the answer is probably yes. The only way you can know is when you die, and at that point you won't care.

When shopping for an annuity, start with basic insurance. It is called a “single premium, immediate, lifetime annuity with death benefit.” Phew, that's a long name.

I received a quote for a 65-year-old man for a $100,000 premium, immediate, lifetime benefit policy with a death benefit. The policy provides monthly payments of $491.66 — or $5,900 every year. What about the death benefit? If the total monthly payments you received before death were less than $100,000, your beneficiaries receive the difference.

That sounds nice, so where's our risk? If you live for 10 years, you would have received $59,000 in benefits and your beneficiary would receive the remaining $41,000. So what's the problem? If you die before your expected mortality, you loaned the insurance company your money interest-free over that time period. If you live longer and receive more in benefits than the premium you paid, good for you.

Annuity salesmen point out that the $5,900 annual benefit is the same as 5.9% interest, with some additional tax benefits—not bad in today's low-interest-rate environment. But ultimately, your longevity will determine if it's a bad investment. Of course, it may still be a good idea.

Things get more complicated when an insurance company tailors a product to your needs. Ask for the quote I mentioned above, and then for others with only one rider at a time.

The most common concern about an annuity is inflation. I was quoted on the same policy with a guaranteed 3% inflation adjustment built in. By adding the inflation rider, the monthly benefit dropped over 27%, to $355.23 a month, or $4,262.76 annually. I asked the agent how long it would take for the lower monthly benefit to catch up in total benefits with the first policy; the answer is somewhere in the 22nd year.

So which would you prefer to protect you against inflation: A higher monthly benefit that works in your favor for 22 years, or a policy paying you a lower amount? I would opt for the larger amount and put some of the difference away every month in a high-yield investment.

Some folks opt for the inflation rider if they have a family history of longevity or a spouse without a lot of financial knowledge. OK, that makes sense.

Continue to get quotes, one option at a time. Always run the numbers yourself to understand the financial ramifications of each option.

Many companies now advertise bonuses and guaranteed rates of return. Generally, this is for an annuity that builds up equity before you draw benefits. Here is how you price compare: Ask your agent what the “five-year accumulation” will be. For example, if you paid a $100,000 premium and had a 5% guarantee, your total accumulation would be $125,000. Then ask how much your monthly check would be.

Now, compare that to another quote: Say you want a $125,000, single premium, immediate, lifetime annuity with death benefit, how much would you draw monthly? If that monthly benefit is more than the amount in the previous paragraph, this is the better option. You may get a 5% buildup with the former, but when you buy your insurance, you pay too much.

For those in the insurance industry who may be poised to send me hate mail, I offer this caveat: I am not licensed nor qualified to sell annuities. That is between a trusted annuity adviser and his or her client. Show the client your commission schedule on the products you are quoting. Then run the numbers and prove it is a good investment. Offer the best price for the insurance portion and a good return on the investment portion, and the client will likely buy. My goal is simply to help our readers shop wisely.

Before you start asking for quotes on annuity products, you’ll want to do some homework. To help you get started we’ve put together an easy-to-read report called Annuities De-Mystified. You’ll find our 8-point checklist to find out if an annuity is even right for you, our 9-point plan showing you what to look for when buying an annuity, and an important overview of the risks associated with annuities all within the pages of this timely, must-read report. Click here for your free copy today.

Dennis Miller is the author of “Retirement Reboot”, a book chronicling his own journey to save his retirement in a low yield, turbulent investing environment and providing readers with actionable ideas for getting their retirement finances back on track. He works with some of the country’s top investment managers, authors and analysts to tackle the financial challenges faced by today’s retirees. Working with analysts at Casey Research, Dennis created "Miller’s Money Forever," a newsletter that provides retirees, and those soon to be retired, with actionable recommendations on how to prepare and maintain a profitable retirement portfolio. Prior to retiring in 2008 Dennis ran a successful consulting business and authored several books on sales management. He was also a regular contributor to the American Management Association and an active international lecturer for 40 years. Find more of Dennis’ columns and latest special research reports at or contact him at dennis@millersmoney.

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