One of the unnerving aspects of retiring is no longer having income from a job and needing to live on investments and Social Security.

With fewer companies offering pensions, one option for guaranteed income is an annuity. These products can be good for retirees who want some reassurance for monthly income, but financial advisors say investors need to know what they’re buying.

“Annuities are extremely valuable, for the right people,” says Melody Juge, founder and managing director of Life Income Management in North Carolina.

But annuities are complex and need to be researched closely, says Dean Hedeker, owner and principal of Hedeker Wealth in suburban Chicago. Both he and Juge point out annuities are contracts with insurance companies and are subject to insurance law.

[See: 13 Tips for Singles Nearing Retirement.]

Below are five tips annuity buyers need to know before signing on the dotted line.

Why do you need it? Dylan Huang, senior managing director, head of retail annuities at New York Life in New York, says people need to look at how much money they need in retirement, which includes looking at basic expenses and lifestyle wants.

“Ask what are the must-haves, what are the nice-to-haves, then start to do some math,” Huang says.

Worries about portfolio mismanagement are one of the reasons some people turn to annuities, he says.

Juge says annuities are a support tool for income and can give retirees the comfort of some guaranteed monthly money. She says some of her clients use annuities as a part of their larger portfolio so they’re not necessarily relying on the ups and downs of the financial markets.

“It’s a different mindset when you’re older,” she says. “There’s a difference between investments and retirement planning.”

Amanda Etheridge, financial consultant at Citizens Investment Services in Boston, says if an advisor or insurance agent is recommending one, it’s important to ask the person why.

“Annuities can fill a variety of needs — income, tax deferral, wealth transfer — so it is important to not only ask questions, but to also share your goals and aspirations,” she says. “Ask a lot of questions. And, if the answer doesn’t make sense to you, ask your advisor to explain it to you until it does.”

Know the type of annuity. The Financial Industry Regulatory Authority is a good starting place to read about the different types, breaking them down between fixed, indexed and variable. In a fixed annuity, the buyer’s guaranteed rate of return and payout are based on your age, life expectancy and prevailing interest rates, among other factors. Indexed annuities have a mix of guaranteed income and equity exposure, while variable annuities are investment products with insurance features, FINRA says.

[See: 20 Awesome Dividend Stocks for Guaranteed Income.]

All annuities have some sort of complexity to them, with the indexed and variable annuities extremely complex, Etheridge says.

“It is important that clients understand the benefits and risk associated with each option, which is why I work closely with my clients to educate them, understand their needs and ultimately help them make a decision with which they are comfortable,” she says.

Read the contract closely. The worst thing people can do is just read the sales literature and not the contract, Hedeker and Juge say, especially for people who attend seminars or free dinners to learn about annuities.

“People want a free dinner and getting excited for the bells and whistles. People need to take responsibility for themselves. Before they make the purchase, they should request a copy of the contract. It’s going to take them two days to go through it. Read it paragraph by paragraph, and wherever they have a problem understanding it, circle the section and ask the insurance agent,” Juge says. “You need to plan for these.”

Look for terms like surrender charges and withdrawal rates, Juge and Hedeker say. Annuity owners can face high surrender charges if they want to get out of the plan early, and how much a person can withdrawal annually can be limited. It all depends on the contract.

“If you’re planning on taking the annuity at 70 and plan to keep it for the rest of your life, you don’t care what the surrender charges are. But if you’re 70 and want to get your money out a few years later, my question is, why did you buy it in the first place,” Juge says.

Not guaranteed. Although fixed and indexed annuities are marketed as guaranteed to never lose money, Hedeker says that’s not entirely true.

“You’re guaranteed as long as the insurance company doesn’t go out of business,” he says, which is why it’s important to feel confident about the health of the company selling the annuity.

Hedeker says he uses standard fixed annuities for a certain part of the portfolio for clients who want peace of mind.

“If someone is going to by a standard fixed annuity because they’re a CD (certificate of deposit) investor, and as long as they understand that this is like a CD with the insurance company, that it’s not guaranteed, and they’re willing to hold it for whatever the period or term is, there I think you’re fine,” he says.

Make them just a part, not all, of a portfolio. Huang, Juge and Hedeker say fixed annuities work best as part of a larger portfolio rather than being the only option.

“The biggest mistake is people roll a 401(k) in an annuity. You need some growth in a retirement portfolio. It’s true if your money is in the market we could experience a horrible crash. That’s why you need to plan very, very carefully,” Juge says.

[Read: Should a Part-Time Job Be Part of a Retirement Plan?]

“We live in a speculative world,” she adds. “Say you have $500,000 in the market. You have the opportunity to double that in 10 years. But what if it’s not in the right investment? Instead, have $200,000 in an annuity to pay a lifetime of income, $300,000 in the market and whatever you receive from Social Security, and if you have an emergency fund of $100,000, you have less to worry about as a retiree.”

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5 Things to Know When Buying an Annuity originally appeared on usnews.com