Quick Answer: An annuity is a contract with an insurance company that can provide guaranteed income, tax-deferred growth, or both. Different annuities carry different levels of risk. Fixed and fixed indexed annuities can protect your principal from market losses, while variable and RILA annuities can have more market risk. Annuities can be useful for retirement income, but they also come with fees, surrender charges, and less flexibility.
This agency only offers annuity types with no risk to your invested principal. We put safety first, prioritizing security with no downside. Yet there are annuities for every risk tolerance.
What Is an Annuity?
An annuity is a contract with an insurance company: you hand over a lump sum (or a series of payments), and in return the insurer promises steady income, growth or both. They are more popular than ever. Americans bought a record $461.3 billion of individual annuities in 2025, up 6% from 2024, according to LIMRA.
While annuities may be popular but does not mean they are right for everyone. An annuity can be a smart piece of a retirement plan or an expensive mistake, depending on who buys it and why.
How Do Different Types of Annuities Work?
Annuities differ in how your money grows and how much risk you take with your principal. The main types include fixed, fixed indexed, registered index-linked, and variable annuities.
Fixed Annuities
A fixed annuity provides a guaranteed interest rate for a set period. Your principal is not directly exposed to market losses, making this type a more predictable option. It can work as a CD alternative for people who want tax-deferred growth.
Fixed Indexed Annuities
A fixed indexed annuity ties interest growth to the performance of a market index. It generally includes a 0% floor, so you do not lose money because of a negative index return. However, caps or other limits can reduce your potential gains.
Registered Index-Linked Annuities
A registered index-linked annuity (RILA) connects growth to a market index while offering some protection through a buffer or floor. You may take losses if the market falls beyond the level of protection. This can offer more growth potential than a fixed indexed annuity, but with more risk.
Variable Annuities
A variable annuity invests your money in investment options such as mutual-fund-like subaccounts. Your account value can rise or fall with the market, so you take the full investment risk. This type may be used by people seeking long-term growth with tax-deferred benefits.
When Will Annuity Payments Start?
Annuities can also be classified by when you want to start receiving income. The two main options are immediate and deferred income annuities.
Immediate Annuities
An immediate annuity converts a lump sum into income payments that typically begin soon after you purchase the annuity. It can be useful for someone who wants to turn savings into a steady retirement paycheck now.
Deferred Income Annuities
A deferred income annuity starts payments at a future date you choose. It can help provide income later in retirement and may be useful for someone who wants protection against outliving their savings.
Who can benefit from annuities?
Annuities tend to fit people who value certainty over flexibility and have their other financial planning in place. You may be a good candidate if you:
Are near or in retirement (roughly 50 to 75). You're shifting from building wealth to drawing on it, and a predictable income stream matters more than maximum growth.
Worry about outliving your savings. Good health, long-lived parents, or a spouse who may live in their 90s all raise the value of income that lasts for life.
Lack a pension. Social Security alone may not cover essential expenses. An income annuity can fill the gap and act like a private pension.
Have already maxed out 401(k)s and IRAs. Annuities have no IRS contribution limit, so they offer extra tax-deferred room for high savers.
Are conservative investors. Fixed and fixed indexed annuities protect principal from market drops, which suits people who lose sleep over volatility.
Have a solid emergency fund and other liquid assets. Money in annuity should be money you won't need for years.
When would an Annuity be a poor fit?
Younger investors with decades to grow money in low-cost index funds, 401(k)s, or IRAs.
Anyone who may need the money soon, for a home, business, medical bills, or emergencies.
People with limited savings, where tying up a large share in one illiquid product, leave no cushion.
Those buying an annuity inside an IRA or 401(k) only for tax deferral. Those accounts are already tax-deferred, so you pay annuity fees for a benefit you already have.
People in poor health considering a life-only income annuity, since payments stop at death.
The Benefits of Annuities
The core appeal of an annuity is that it shifts risk from you to an insurance company. Here's what you buy.
Guaranteed income for life. An income annuity, or a deferred annuity with an income rider, can pay you every month no matter how long you live. That turns a pile of savings into something closer to a paycheck.
Protection against longevity risk. Nobody knows how long they'll live. An annuity pools that risk across many people, so the insurer, not you, bears the cost of a long life.
Tax-deferred growth. Earnings aren't taxed until you withdraw them. Over many years, compounding without an annual tax bill can add up.
No contribution limits. Unlike IRAs and 401(k)s, you can put as much into a non-qualified annuity as the insurer will accept.
Principal protection. Fixed and fixed indexed annuities guarantee you won't lose your initial investment to a market downturn.
Predictability and peace of mind. Covering essential bills with guaranteed income can make it easier to leave the rest of your portfolio invested through market swings.
Optional death benefits. Many contracts pass remaining value to beneficiaries, and some offer enhanced death benefits for an added cost. Annuities with named beneficiaries usually skip probate.
The risks, costs, and restrictions of Annuities
Every guarantee has a price, and with annuities that price often shows up as fees, lost flexibility, and complexity.
Fees can be high. Variable annuities typically charge a mortality and expense risk fee of about 1.25% a year, on top of administrative fees and the costs of the underlying funds (source). Optional riders, such as guaranteed income or enhanced death benefits, often add more. All-in costs of 2% to 3% a year are not unusual, and that drags compounds.
Surrender charges lock up your money. Withdraw more than the free amount (often 10% a year) during the surrender period, typically six to eight years, and you'll pay a penalty that usually starts around 7% and steps down each year.
Limited liquidity. Once you annuitize, many income annuities can't be undone. That lump sum is no longer available for emergencies or opportunities.
Capped upside. Fixed indexed annuities limit your gains through caps, participation rates, or spreads. You avoid losses, but you also miss part of strong market years.
Inflation erodes fixed payments. A $2,000 monthly payment buys less every year. Inflation-adjusted options exist but start with a lower payment.
Taxed as ordinary income. Gains come out at your ordinary income tax rate, not the lower capital gains rate. Heirs also don't get a step-up on a cost basis, as they would with stocks or funds.
Early withdrawal penalty. Taking gains out before age 59½ generally triggers a 10% IRS penalty on top of income tax.
Complexity and sales pressure. Contracts can run over 100 pages, and agents often earn sizable commissions. Be wary of anyone pushing you to swap an existing annuity for a new one, since that can restart the surrender clock.
Insurer risk. Guarantees are only as strong as the company behind them. State guaranty associations provide a backstop, but coverage limits vary by state.
Questions to ask before you buy
What problem am I solving: guaranteed income, principal protection, or tax deferral?
What are the total annual fees, including every rider?
How long is the surrender period, and what does it cost to get out each year?
How much can I withdraw each year without a penalty?
What is the insurer's financial strength rating (AM Best, S&P, Moody's)?
How does the agent or advisor get paid for this sale?
How long is the "free look" period to cancel for a full refund?
The Bottom Line
An annuity works best as one tool in a retirement plan, not the whole plan. For a retiree who wants a reliable income floor and has other money set aside, it can be a real need. For someone who needs flexibility or is still decades from retirement, the fit may not be right.
Sources
US annuity sales hit record $461 billion as indexed products surge – LIMRA (Insurance Business)
Variable Annuities: A Basic Guide (Missouri Secretary of State, Securities Division)
Frequently Asked Questions
1. What is annuity?
An annuity is a contract with an insurance company that can provide income, growth, or both in exchange for a lump sum or a series of payments.
2. Are annuities safe?
The level of risk depends on the type of annuity. Fixed and fixed indexed annuities can protect against direct market losses, while variable and RILA annuities can involve market risk. Guarantees depend on the insurance company's claims-paying ability and the contract terms.
3. Who should consider an annuity?
Annuities may be worth considering for people nearing or in retirement who want predictable income, protection from certain market risks, or help managing the risk of outliving their savings.
4. What are the disadvantages of annuities?
Potential disadvantages include fees, surrender charges, limited liquidity, taxes on withdrawals, limited growth potential for some products, and complex contract terms.
5. Can you lose money in annuity?
It depends on the type of annuity and the contract. Fixed annuities may protect principal from market losses, while variable and RILA annuities can expose you to investment losses. Contract fees, withdrawals, and surrender charges can also reduce the amount you receive.
