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Will I ever stop getting e-mails like these?

"I just lost a friend of 20 years when I tried to tell her the truth about her variable annuity," a reader wrote. She believes her $400,000 investment is guaranteed to be worth $800,000 in 10 years.

"I said she didn’t understand how it works and she said I insulted her lawyer, her ex-husband, who somehow approved of the annuity, and the financial planner who sold it to her. Friendship…gone!"

Another e-mail:

"I had $100,000 in my account three years ago and wanted to preserve that money. My broker said he had the ‘perfect product’ and told me about a variable annuity that invests in mutual funds and would ‘lock in’ my principal and still give me a chance for growth if the market rose. On his advice, I transferred everything into this annuity. Subsequently, my broker quit his firm.

"This year, I commented to my new broker that I was glad I’d chosen this annuity because it locked in my $100,000. He looked at me funny, got the annuity company on the phone and they explained my account was now worth $55,000, not $100,000. I was told I was ‘lucky’ I had this annuity because I could withdraw $5,000 to $6,000 a year for the rest of my life."

Sadly, I’ve received dozens of e-mails and letters with similar tales. They show that many readers violate a cardinal rule by investing in things they don’t understand — and sound too good to be true. Their advisers may not understand the products themselves, particularly variable annuities with guaranteed minimum withdrawal or income benefits.

These annuities come in many variations and flavors. Some, in exchange for an annual fee, do guarantee a return of the investor’s original principal, but only after 10 years or so have passed.

But for the most part, the basic idea is that, for an annual fee, the insurance companies issuing these annuities guarantee that purchasers will receive a minimum lifetime income regardless of the actual value of their account.

That’s where the confusion comes in. Insurance companies base the minimum guaranteed payouts of these annuities on an amount known as the "protected withdrawal value" or some other similar name.

Typically, this "protected" amount equals at least the original principal and may also increase by a set percentage each year. Some annuities guarantee that, if there are no withdrawals, the protected withdrawal value will be at least double the original principal after 10 years, even if the actual account value has tanked.

But this "protected" value is not cash you can take with you. It is simply a number used to calculate withdrawals. To keep the minimum income guarantee, you may withdraw only a small percentage of the protected value each year, such as 5 percent, For example, if you invest $400,000 and the protected value doubles to $800,000 in 10 years, you could start withdrawing $40,000 a year then. But you couldn’t withdraw $800,000 at once — unless your actual account value was $800,000 or more.

Ultimately, you must decide whether the fees that annuities charge for these guarantees are worth it to you (they may be if they provide a safety net to invest in the market and ultimately reap higher returns). If all you want is the minimum guaranteed income, however, you’d get a higher payout by investing in plain-vanilla immediate annuities in which you surrender your principal — and thus give up any possibility of gains — in exchange for lifetime income.

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