3. Index Annuities (also know as "equity-indexed" annuities, fixed index annuities or fixed indexed annuities) are deferred fixed annuities but their interest rate is based upon the performance of a particular financial index, such as the S&P 500 stock index. You do have some downside protection, though, against bad markets. There is a guaranteed minimum interest rate that you receive regardless of the performance of the index.

While these aren't as bad as variable annuities, they're a bit too complicated for our tastes. You have to take a lot of factors into account to get a picture of whether the annuity is likely to be a good investment. These include:

• the possible future value of the index the annuity is tied to;
• the formula that translates the change in the value of the index into the interest rate that is credited to your contract;
• the guaranteed minimum interest rate;
• current and future surrender charges;
• your current and future marginal tax rates;
• the probability of the owner's or annuitant's death each year; and
• your current contract values, including the guaranteed minimum value, the value for each indexed account and your tax basis.

Dolan Smart Money Move: For investors concerned about future guaranteed income, which is the main reason you would invest in an annuity, we say stick with FIXED annuities!

Other than fixed, annuities, for the most part, are sold to too many people for all of the wrong reasons. In particular, insurance agents prey upon senior citizens, scaring them into believing annuities are the answer to every investment need. Many agents have attended seminars that teach them how to charm the money right out of this presumably gullible market. (We especially remember a story in The Wall Street Journal in 2002. It was called "Annuities 101: How to Sell to Senior Citizens," by Ellen E. Schultz and Jeff D. Opdyke.)

And yet, the high fees, the long-term nature of annuities, and the high taxes when the policyholder or his heirs take payouts make annuities particularly inappropriate for senior citizens.

As we said earlier, if you're looking for guaranteed income and are willing to leave the money where it is for five years or longer, you can consider a fixed annuity. Otherwise, tell the salesman thanks but no thanks.

For more very helpful information on indexed annuities, we recommend www.whatsmypolicyworth.com, run by Glenn Daily. He's a fee-based life insurance consultant, meaning his clients pay him for his advice. He does not receive commissions for steering people to certain policies.

Get more investing strategies here:

• Go For the Dividend
• Beware Bond Funds
• The Skinny on ETFs

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