When it comes to annuities, there are pros, cons and certain levels of risk

An insurance agent recently shared a story with me: In 2012, a “dear client” called and said he wanted to make sure his 84-year-old mother with $800,000 in the bank had enough to live on the rest of her life.

The son wanted to lock up a good chunk of that cash in a guaranteed stream of income to ensure that mom wouldn't starve. So he took $150,000 and bought an annuity with a reputable insurance company. It paid out $1,590 a month until her death 88 months later at the age of 91.

The annuity payment and Social Security helped cover the costs of the quality assisted living facility where she lived out her days.

Her monthly payments came to $140,000, and the insurer kept the rest. That is the deal you make with annuities: Guaranteed checks every month — known as guaranteed lifetime income annuity. The insurance company makes a profit if the payouts add up to less than what you paid, but it might lose money if the collective payouts exceed the purchase price.

“She didn't get all her money back, but the son was comforted knowing that no matter how long his mother lived, her annuity and Social Security would provide her with guaranteed paychecks,” said Robert Graves, co-owner of Belikove & Graves Insurance & Financial Services, a Gaithersburg, Maryland, agency.

Graves contacted me a few weeks ago after I wrote a column about the decisions that people in my age bracket (I am almost 64) are facing as they try to figure out how to turn their nest eggs into income that lasts the rest of their lives.

Graves is 68 years old, personable and a successful Washington-area insurance agent and salesperson who wanted to stick up for annuities. He wants people to recognize them as another vehicle to diversify retirement savings and guarantee income — and peace of mind.

Couple of things: This column is not an endorsement of annuities. Neither is it a warning to avoid them. They have pros and cons. Some annuities are taxed and some are not, depending on the source of the money.

Annuities come in many shapes and sizes. Like any financial vehicle, annuities can have annual fees, upfront costs, fine-print clauses and questionable guarantees.

They can be simple or complicated. Like any insurance, they involve lots of number-crunching.

Annuities are timely. Congress is looking at legislation that would make it easier to create a lifetime paycheck out of workplace retirement plans such as a 401(k) and a 403(b).

The above example, and the one I am about to explain, are known as Single Premium Immediate Annuities (SPIA). You pay the money and start collecting right away. As annuities go, they are fairly straightforward and easy to comprehend.

“The SPIA is the simplest version,” said Dan Keady, chief financial planning strategist at TIAA, which has more than $1 trillion under management and is one of the biggest annuity providers in the United States. “Others tend to be complex and even very complex. There's many types of annuities that can be used for various goals. But ultimately, they are the only product that can be turned into lifetime income.”

The following example differs from the first because it gives leftover money to survivors instead of the insurance company.

“Let's say we are a 65-year-old couple and put $250,000 into a SPIA,” Graves said. “That would pay $1,103 every month for the rest of the couple's lives. That comes to $13,242 per year for the two of them.”

Under a joint-life annuity, the payments last until the death of the surviving spouse.

“We call them ‘paychecks for life,' “ Graves said.

If both die after collecting $200,000 (that's 15 years), the remaining $50,000 on the annuity goes to their survivors. This is what is known as a cash refund option (commonly known as a death benefit).

In the meantime, the company that issued the annuity has invested the $250,000 and presumably made money on it. It uses that money to make a profit and to fund other annuities (that's a subject for another story).

That's what insurers do. There are all kinds of calculation factors with names like “risk pools” and “mortality credits” that go into these products. Age is also a big factor.

“The older you are when you purchase the SPIA, the higher the income,” Graves said. “A 75-year-old couple will receive more each month than a 65-year-old couple.”

If you took that $250,000 and instead bought a stock paying a 4 percent annual dividend, you would collect $10,000 a year. The $250,000, plus or minus how the stock performed, would still be in your portfolio. There are some risks to buying a stock: The company could reduce the dividend, for example. The company could fail.

Something to consider: Do you want to live with the stock market risk or hand it off to an insurer and forgo the upside? (Insurance companies and financial services firms can fail too. So you want to research the company from which you are buying.)

My wife, Polly, and I have been wrestling with whether to purchase an annuity as a diversification move. Right now is a tempting time with the stock market at all-time highs. You take some chips off the table and give the risk to someone else.

We are still trying to figure it out even as our financial adviser has gently been pitching the idea for a few years. We are sitting down with him later this year to revisit the question.

This is important stuff. If you elect to buy an annuity, you could be handing over a big check to someone else.

As someone who wrote a fat check a couple of years ago for long-term care insurance (also a subject for another day), I can tell you that forking over a big sum of cash for risk reduction can be painful.

My wife and I are fortunate enough to have small pensions, yet we still ask ourselves, “Can we stomach a 40 percent slide in our portfolio when the crash comes?”

Other questions include: Will Social Security last in its current form? Will the government find a new tax to punish stockholders? Could that include added taxes on my IRA and 401(k)?

“Retirement is a risky business,” Graves said. “There's market risk, withdrawal rate risk, inflation risk, deflation risk, long-term care need risk, change in tax-code risk, regulatory risk and, of course, longevity risk. That's a lot of stuff to worry about.”

The biggest worry is outliving your money.

The dumbed-down definition of an annuity — the one I am most comfortable with — is a fixed amount of money paid to someone each month. You typically purchase an annuity from a financial services company, and the firm guarantees income the rest of your life.

Buying an annuity is buying insurance. You pay a company to give you a guaranteed paycheck instead of paying yourself from assets that are exposed to the whims of the stock market. How well or poorly the annuity-issuer invests the money, or the condition of the stock market, is not your problem. You get your fixed payment whatever happens.

Graves, born and raised near Washington, D.C., joined his father's insurance agency right after graduation from Wake Forest University in 1973.

Selling insurance and advice is a commission business. A $250,000 annuity for a 65-year-old couple pays his firm a one-time, 3 percent fee. That's $7,500.

He said most clients who purchase annuities limit the investment to no more than a third of their portfolio.

Not surprisingly, Graves is a big believer in insurance.

“I buy my own products,” he said. “I have more than enough insurance.”

He is well-versed in the business, sprinkling the conversation with references to famed British novelist Jane Austen and to annuity industry advocates such as Tom Hegna.

Graves was refreshingly candid. While singing the praises of his industry and annuities in particular, he added, “I'm just repeating things. There is not an original thought here.”

“Remember what Jane Austen said in ‘Sense and Sensibility,'” Graves said, paraphrasing. “She said, ‘Buy an annuity. You will live longer.'”

I haven't read Jane Austen. Maybe I will tackle her when I retire.