Risk is the possibility of loss. There are risks in the kinds of investments you choose, risk in choosing which company to invest with, and there is even risk in trying to avoid risk.

Market risk and volatility
Investments fluctuate in value, and at any time may be worth more or less than what you originally paid. If you need to sell an investment when it is worth less than what you paid, you will lose money. This is called market risk. The rising and falling in the value of an investment is called volatility. Greater volatility means greater market risk. Stocks are generally more volatile than bonds.

A variable annuity has market risk because your money is invested, through subaccounts, in investments that fluctuate in value. A fixed annuity has no market risk because the company guarantees your interest rate and assumes the risk for you.

Inflation risk
This is the risk that your money will buy less each year. If you choose investments solely on the basis of safety, you may run this risk. If your investments don't outpace inflation, in the future you may not be able to afford the standard of living you enjoy today. Even a 4% annual rate of inflation can reduce your purchasing power by half in just 18 years.

Because fixed annuity owners earn an annual fixed rate, they could lose ground to inflation over time. Variable annuities also carry this risk, but offer more potential to outpace inflation.

Company risk
This is the risk that a company from which you've bought your annuity will have cash flow or credit problems. Remember that your annuity purchase is not FDIC insured. Annuity purchasers should research an insurance company's financial position thoroughly because a guarantee is only as strong as the company offering it.

Bond risks

• Credit risk- Risk based on the inability of a bond issuer to repay the principal and interest on time or at all. This is not a factor with a fixed annuity.
• Interest-rate risk- Risk based on the behavior of interest rates. When interest rates rise, bond prices tend to fall, and when rates fall, bond prices tend to rise. This risk also applies to dividend-paying stocks. This is not a factor with a short term fixed annuity.