You may be intimidated when you hear the word “annuity.”

Yes, these financial products can be complicated, but they’re also one of the few sources of retirement income that can be guaranteed for life. (Guarantees are based on the claims paying ability of the issuing company.)

An annuity is a contract issued by an insurance company. You make a lump-sum payment or a series of payments to buy an annuity. In return, the company issuing the annuity converts your payment or payments into a stream of income for you.

Some offer death benefit protection as well, but this can vary by the type of annuity purchased, or in certain types of annuities, it can vary depending upon the annuity option that is chosen within that annuity.

“They are designed for people who are nearing or entering retirement to provide a layer of security and protection,” says Todd Giesing, director of annuity research at LIMRA Secure Retirement Institute.

Annuities come in several types. So it’s important to understand what you’re buying and whether a particular annuity is the right for you.

The types of annuities

Here are the basic types of annuities most common in the market and how they work:

Deferred annuities

Deferred annuities are designed for long-term goals like retirement. They come in three main varieties:

Deferred fixed annuity

A deferred fixed annuity offers a guaranteed interest rate, tax-deferred* growth and principal protection. It earns interest at a rate that is set by the insurer, and the rate can change over the course of the contract. There is often a guaranteed minimum interest rate. Deferred fixed annuities are designed for conservative growth.

Deferred variable annuity

A deferred variable annuity offers tax-deferred growth potential, a range of investment choices, and the potential for loss in value. Keep in mind that purchasing a variable annuity involves risk. The value of your contract can go up or down, depending on the performance of the underlying investments.

Deferred fixed index annuity

A deferred fixed index annuity credits interest to an index account based in part on the performance of an index, such as the S&P 500 stock index**. These annuities offer tax-deferred growth and market loss protection. They can provide you with the potential for a higher interest rate than with a deferred fixed annuity, but it is also possible that there could be a year where you would receive zero interest. Interest is typically credited only once a year.

Income annuities

Income annuities provide guaranteed income from the day your premium is paid. They come in two main varieties:

Immediate income annuity

An immediate income annuity offers guaranteed income that begins within 12 months of contract issue. These annuities offer limited liquidity and are intended for immediate income needs. They may appeal to a person near retirement with a lump sum of money and rather than spend it all at once, you can purchase an income annuity to spread that money out into payments over time.

It’s important to note that once you pay into annuity, you can only access that money as it is paid to you from the annuity as income.

Deferred income annuity

A deferred income annuity offers flexible purchase payments, guaranteed income that usually begins no earlier than 13 months after contract issue, and in most instances offers no liquidity (you can’t access the money you use to buy the annuity, but will receive it as income payments from the annuity). It is intended for future income needs. Usually, the longer you wait to get a payout, the bigger it will be, Giesing says.

Innovations in deferred income annuities are giving people with aging parents peace of mind. AgeUp, a new kind of annuity product created by a team within Haven Life and issued by our parent company MassMutual, is designed to help protect families from the financial risk of loved ones living into their 90s and beyond.

How to know if an annuity is right for you

Annuities can be a valuable tool for people who are near or in retirement and want a guaranteed source of retirement income. But that doesn’t mean they are ideal for all retirees.

You’ll also want to consider the various fees and charges that apply to annuities.

This is a high level overview of common types of annuities. Because they can be complicated, it’s best to work with a financial professional to find out more and to see if they align with your retirement savings plan, Giesing says.