An annuity is a contract with an insurance company. You give the company a sum of money, and in exchange the company makes a set of promises about growth, income, or both. That is the whole idea. Everything else is details — but the details matter a lot.
Fixed annuities (MYGA)
A multi-year guaranteed annuity credits a stated interest rate for a stated period, similar in spirit to a bank CD but issued by an insurance company. Interest is generally tax-deferred inside a non-qualified contract until you withdraw it.
Fixed indexed annuities
Interest crediting is linked to the performance of an external index, subject to caps, participation rates, or spreads set by the carrier. The contract typically includes a floor so that a negative index year does not credit negative interest. You are not invested in the index and you do not receive index dividends.
Immediate and deferred income annuities
These convert a lump sum into a stream of payments — either starting right away or at a future date you choose. This is the closest thing on the market to building your own pension.
The trade-offs nobody should hide from you
- Surrender charges: most deferred annuities limit how much you can withdraw during the surrender period without a charge
- Liquidity: annuity money should generally be money you do not need for near-term emergencies
- Caps and participation rates on indexed products can be changed by the carrier within contractual limits
- Riders that provide guaranteed lifetime income usually carry an annual fee
- Guarantees depend on the financial strength and claims-paying ability of the issuing insurance company
Questions to ask any agent
- What is the surrender charge schedule, year by year?
- How much can I withdraw each year without penalty?
- What exactly is guaranteed, and what is not?
- What are the annual fees, and what do they buy me?
- What is the carrier's financial strength rating?
- How are you compensated on this product?
My rule of thumb
An annuity should solve a specific problem — income you cannot outlive, protecting a portion of principal, or deferring taxes on money you do not need now. If we cannot name the problem it solves for you in one sentence, it is not the right product.
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We do not offer every plan available in your area. Any information we provide is limited to those plans we do offer in your area. Please contact Medicare.gov, 1-800-MEDICARE (TTY 1-877-486-2048), 24 hours a day / 7 days a week, or your local State Health Insurance Assistance Program (SHIP) to get information on all of your options.
Annuities are insurance products, not bank deposits. They are not FDIC or NCUA insured, are not obligations of or guaranteed by any bank or credit union, and all guarantees are backed solely by the claims-paying ability of the issuing insurance company. Product features, riders, and availability vary by carrier and by state and may involve surrender charges and other limitations. This material is for general educational purposes only and is not tax, legal, or investment advice.
This article is general education, not individualized advice, and does not describe the benefits of any specific plan or contract.