(Dow Jones) Buying an annuity confronts families with a dilemma: Should a parent take smaller monthly payments so that their surviving spouse or children can get some sort of inheritance?

Most people opt for the smaller payment. But in some cases, there are better strategies to help the heirs come out ahead, including pairing an annuity with an insurance policy.

Annuities, the ugly ducklings of the investment world, are in the limelight. There are two main types, each usually starting with a lump-sum payment. With variable annuities, you invest in stocks or bonds with an insurance guarantee. There usually are surrender payments if you withdraw the money in the first few years.

With immediate fixed annuities, your client's lump sum buys regular payments from an insurer for the rest of their life. They are being hailed by everybody from financial planners to President Barack Obama as a way for Americans to stretch their retirement nest eggs.

But annuities come with complex features and fees that you won't often find in investments like mutual funds. Clients can purchase riders to guarantee payments for their heirs, for example, or to adjust their monthly payment for inflation. It takes careful analysis to figure out if an annuity makes sense for your client and, if so, which features to purchase.

When one spouse has health problems and the other could live a long time, variable annuities with guaranteed-minimum payments can pay off, despite annual fees that can top 3.5% of the invested amount.

That was the case for Genevieve Carlson, a 69-year-old retired teacher in Mankato, Minn., whose husband died last year from post-polio syndrome. The couple was drawing 6% a year from a variable annuity in which they had invested $300,000. The investment had lost half its value during the financial crisis, but Mrs. Carlson inherited the original amount invested because of a guarantee they had purchased. The money should still be there for her two daughters as well.

Immediate fixed annuities are simpler to understand and cheaper: You get a regular payment for life. But when your client dies, their family loses that payment unless the client paid extra for a rider returning at least some of the money invested. The rub is that such a rider will typically lower the monthly payment the client receives by anywhere from 2% to 15% or even more.

One approach is to figure out your client's basic expenses-utilities, food, taxes, insurance and so on. Purchase a plain-vanilla annuity to cover those costs. Then invest the rest of their savings to spend on vacations, cars or grandchildren. Anything left over can be their family's inheritance.

But if the client is early in retirement, who knows how much the basics will cost in 20 or 30 years? And what if their savings barely cover an annuity that will pay for those basics?

Another approach is pairing an immediate annuity with a life-insurance policy. Two weeks ago, David Buckwald, a certified financial planner in Cranford, N.J., advised an 80-year-old client to use the $266,000 value of a variable life-insurance policy to buy an immediate annuity, providing her with $2,500 a month for the rest of her life.

The mother is using $1,500 a month from that $2,500 payment to buy a guaranteed life-insurance policy worth $300,000. Now her son stands to inherit more than the annuity's cost.

What about inflation? Let's say you and your spouse have $1 million saved at age 65 from which you hope to pull 4% a year. You could spend $185,000 to buy a second-to-die permanent life-insurance policy with a $1 million guarantee that would eventually go to your children. With $800,000, you could get an immediate inflation-indexed annuity paying $40,750 the first year and continues to pay through both spouses' lifetimes, says Mark Cortazzo, a certified financial planner in Parsippany, N.J.

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