Introduction
An annuity is a contract with an insurance company. You hand over a lump sum or a series of payments, and the insurer promises income now or later. Whether that trade makes sense depends on your goals, timeline, risk tolerance, cash needs, and the insurer behind the contract.
Pre-retirees and retirees tend to worry about the same things: outliving savings, market drops, unpredictable withdrawals, taxes, and access to money.
U.S. insurers sold a preliminary $461.3 billion of annuities in 2025, according to LIMRA, so plenty of people are weighing this decision. Sales volume says nothing about suitability, though.
This guide covers how annuities work, benefits, types, costs, risks, and a practical way to evaluate one.
Key Takeaways
- Annuities are retirement income and risk-management tools, not bank deposits or ordinary investment accounts.
- Fixed, indexed, variable, RILA, immediate and deferred contracts split income timing and market risk differently.
- Check surrender terms, fees, inflation exposure, taxes and insurer strength before committing.
- Treat an annuity as one piece of a plan that includes cash reserves, Social Security and investments.
What Is an Annuity and How Does Investing in One Work?
An annuity is a contract with an insurance company. You pay a premium, name an annuitant and beneficiaries, and receive account growth, withdrawals, or scheduled income as the contract specifies.
Accumulation and Payout Phases
During accumulation, money goes in and may grow. During the payout phase, you take withdrawals or convert the contract into periodic income.
- Immediate annuities typically begin paying within a year.
- Deferred annuities accumulate first and pay later.
- Annuitization generally trades control of the money for contractual income and is usually irrevocable.
- Ordinary withdrawals keep control but don't guarantee lifetime income.
What Determines the Payment?
Payments depend on:
- Premium size and age
- Payout start date
- Single-life, joint-life, or period-certain features
- Interest rates and contract terms
Joint-and-survivor and period-certain options lower the starting payment compared with straight life for the same premium.
Hypothetical example only, not a quote: two buyers put in the same premium. One picks single-life income, the other picks joint-life with a 10-year guarantee. The second receives a smaller monthly check in exchange for more protection for a spouse or heirs. Ask for a personalized illustration to see real numbers.
Guarantees Versus Investment Performance
Fixed guarantees rest on the insurer's claims-paying ability. Variable annuity values rise and fall with the investment options you choose. Index-linked products use caps, buffers, floors, or participation rates to define gains and losses.
The contract, plus guidance from the SEC's Investor.gov, FINRA, and the NAIC, explains how each product works.
Why Consider Investing in Annuities?
Income That Can Last
Longevity risk is real. The SSA's 2023 life table shows a 65-year-old man can expect about 18 more years and a woman about 21 years, and many live longer.
FINRA notes that annuitizing transfers the risk of outliving that money to the insurer. Lifetime income can cover essential expenses and reduce the need to sell investments during a downturn.
Managing Volatility and Sequence Risk
Withdrawals during early market declines compound losses. A fixed or protected-income annuity can create a more predictable income floor. Protection, liquidity, and growth potential vary widely by contract type.
Using Tax Deferral Carefully
In a nonqualified annuity, earnings generally aren't taxed until withdrawn. An IRA or employer plan is already tax-advantaged, so an annuity inside one adds no extra deferral. Judge it on its other features, and check current IRS guidance (Publications 575 and 590-B).
Spouses and Beneficiaries
Options include joint-life income, survivor provisions, death benefits, guaranteed periods, and inflation riders. Each can raise costs, reduce cash value, or lower the initial payment.
Who May Benefit, and Who May Not
Consider an annuity if you:
- Want dependable lifetime income
- Already hold adequate emergency reserves
- Expect a long retirement
- Have low tolerance for market losses
It is a poor fit if you:
- Need cash in the near term
- Carry high-interest debt
- Already have enough guaranteed income
- Want unrestricted access to growth
Which Type of Annuity May Fit Your Goals?
Fixed and Fixed-Indexed
Fixed annuities credit insurer-set interest with a contractual minimum. Fixed-indexed annuities (FIAs) credit interest based on an index using caps, participation rates, or spreads. They are not direct stock-market investments, and negative index performance doesn't create negative credited interest. These often fit goals that prioritize principal protection over market upside.
Variable and Registered Index-Linked
Variable annuities invest in subaccounts, so value can fall. Registered index-linked annuities (RILAs) offer index-based gains and losses with limits:
- A buffer absorbs the first slice of losses. With a 10% buffer, a 15% index drop means a 5% loss.
- A floor caps total loss. With a 10% floor, a 25% drop means a 10% loss.
- Caps limit upside.
Losses beyond the protection level are yours, and fees apply. These may fit if you want market-linked growth and can accept defined downside risk.
Immediate Versus Deferred
Match the payout start to when you need income. An immediate annuity suits someone who needs payments now. A deferred contract fits a future income gap, and a deferred income annuity can address later-life longevity risk.
Risks, Costs and Trade-Offs to Evaluate
Liquidity and Surrender Charges
The SEC cites surrender periods of six to ten years as an example, and charges apply to early withdrawals. Market value adjustments can raise or lower withdrawal value. Keep emergency and near-term money outside restrictive contracts.
Fees and Compensation
Variable contracts can carry:
- Mortality and expense charges (the SEC illustrates 1.25% annually)
- Administrative charges
- Underlying investment expenses
- Rider costs
- Surrender charges
Commissions and advisory fees are separate from contract expenses, though part of an M&E charge can fund commissions. Ask how every party is paid.
At Lewis & Associates Capital Advisors, advisory clients pay a monthly asset-based fee, while insurance products pay a commission. That pay structure can create a conflict you should understand before you buy.
Inflation and Opportunity Cost
Level payments lose purchasing power over time. BLS reported CPI up 3.7% over the 12 months ending September 2026. Cost-of-living riders exist, but they cost more or reduce initial income. Overallocating to annuities also limits access to growth assets.
Insurer Strength and Protection Limits
Guarantees depend on the insurer, not the stock market. Annuities are not FDIC-insured, even when sold through a bank. State guaranty associations step in after insolvency within limits.
The NAIC model benchmark is $250,000, while North Carolina's association cites $300,000 per owner per insurer. Check your own state's limit, and review ratings from AM Best, S&P, Moody's and Fitch.
Taxes, Rollovers and Transfers
- Taxable earnings are ordinary income.
- A 10% additional tax generally applies before age 59½, with exceptions.
- Required minimum distributions start at 73 now, 75 for those born in 1960 or later.
- A Section 1035 exchange can move one annuity to another tax-free, but only as a direct exchange. It doesn't erase new surrender charges.
Verify current rules with a tax professional before moving money.
How to Evaluate and Add an Annuity to Your Retirement Plan
Start With Income and Liquidity
Map out:
- Essential expenses
- Social Security and pension income
- Portfolio withdrawals
- Emergency reserves and healthcare costs
- Legacy goals
- Money you can lock up long term
Social Security matters here: per the SSA, 39% of men and 44% of women 65 and older got at least half their income from it (2015 data).
Compare Contracts, Not Just Rates
Use this checklist:
- Insurer financial strength
- Guaranteed versus projected values
- Crediting formula
- Income start date
- Surrender schedule and liquidity provisions
- Fees and rider costs
- Beneficiary treatment
- Inflation options
- Consequences of changing or canceling
Then compare against alternatives based on your objective: CDs, Treasuries, TIPS, bonds, managed portfolios or life insurance. None of these replaces lifetime income insurance, and an annuity won't match their liquidity. Yield alone misleads.
Implement and Review
- Confirm beneficiary designations.
- Use direct transfers, never a check you cash yourself.
- Use the free-look period, typically 10 to 30 days, to read the contract.
- Keep liquid assets outside the contract.
- Review as goals, tax law and family needs change.
An independent fiduciary advisor can help fit an annuity into the broader portfolio. Lewis & Associates Capital Advisors, LLC provides personalized retirement planning and commission-free investment services as a fiduciary. Not every annuity is commission-free, and not every annuity suits every reader.
Frequently Asked Questions
How much will an annuity pay per month?
It depends on premium, age, payout type, start date, interest rates, insurer and features. Request a personalized illustration rather than relying on an online average.
How does an annuity plan work?
You exchange premiums for contract growth, withdrawals or scheduled income. Immediate annuities pay soon after purchase, while deferred annuities grow first.
Should a 70-year-old buy an annuity?
Age alone doesn't decide it. Weigh health, longevity expectations, income needs, liquidity, existing guaranteed income, fees and the specific contract.
Where do I purchase an annuity?
Through a licensed insurance professional, financial adviser or insurer. Verify licensing and compare multiple contracts first.
What happens to annuities if the market crashes?
Fixed annuities follow contractual interest guarantees. FIAs don't credit negative interest, but variable annuity values can fall. RILAs absorb losses according to the buffer or floor.
Are annuities covered by insurance?
Annuities are issued by insurers, so guarantees depend on their claims-paying ability. State guaranty associations offer limited backing, and annuities are not FDIC-insured.
