Annuities are complex. Understanding how they work, whether they are right for you and what type you should purchase is hard. Here is a quick primer to cutting through the complex tasks that come with annuities.

An annuity is a retirement-planning tool. It has two phases: the accumulation phase and the annuitization phase. During the accumulation phase, you are paying money to an insurance or investment company. You can do this over time or in a lump sum. Your money earns a rate of return.

During the annuitization phase, you begin to withdraw regular payments from your contract until you pass away.

Annuities have death benefits, although they are vastly different from life insurance policies. If you pass away before you annuitize, your beneficiary will receive either the current value of your annuity or the amount you have paid in - whichever is greater. For example, if you die while your investments are performing poorly and your account value is less than what you paid in, your beneficiary will receive the amount you paid in. If you pass while your investments are doing well, your beneficiary will receive your account value.

Once you begin the annuitization phase and are receiving monthly payments, you no longer have a death benefit on your contract. If you pass away after receiving monthly payments, the insurance company keeps the money remaining in your contract.

You can purchase "term certain" annuities, which guarantee that your beneficiary will receive your payments for a certain period of time. For example, if you die after receiving three years of payments from a 15-year term certain annuity, your beneficiary will receive the payments for the next 12 years.

The money in your annuity will grow tax-deferred, which means that the money is not taxed until you receive payments from your annuity. Once you begin receiving payments, your gains will be taxed at your ordinary income tax rate. If you pass away before you annuitize, your beneficiary will pay taxes on the benefit received. The recipient is taxed at his or her ordinary tax rate. 

It is ideal to purchase an annuity when you are 55 years of age or older. Annuities are less attractive to younger investors. There is a 10% penalty tax if you withdraw money from an annuity before the age of 59 1/2. However, there are many retired people who need annuity income right away and skip the accumulation phase and begin to receive payments as soon as they invest in the annuity.

If you have already contributed the maximum amount to your existing tax-deferred retirement plan, such as your 401(k) or IRA, you should consider an annuity. You should probably fully contribute to those plans first, as they usually have lower fees than annuities.