- An annuity is a contract with an insurance company that converts a lump sum or series of payments into guaranteed income — for a set period or for life.
- There are seven main types, each designed for different goals: growth, income, or both.
- Fixed annuities and MYGAs have zero annual fees and currently offer rates above 6.5% for 5-year terms.
- Annuity earnings grow tax-deferred, which can produce better after-tax returns than comparable bank CDs.
- Annuities are not ideal for everyone — they trade liquidity for guarantees, and some types carry high fees.
- What Is an Annuity?
- How Annuities Work
- The 7 Types of Annuities
- Side-by-Side Comparison
- Pros and Cons
- What Do Annuities Cost?
- How Annuities Are Taxed
- Annuities vs. CDs
- Who Should Consider an Annuity?
- Who Should NOT Buy an Annuity?
- How to Buy an Annuity
- Frequently Asked Questions
What Is an Annuity?
An annuity is a contract between you and an insurance company. You make a payment — either a lump sum or a series of contributions — and in return, the insurance company guarantees you regular income payments, either immediately or at a future date. Those payments can last for a set number of years or for the rest of your life, regardless of how long you live.
Think of an annuity as the mirror image of life insurance. Life insurance protects your family if you die too soon. An annuity protects you if you live longer than expected, ensuring you don’t outlive your savings. This is why financial professionals often describe annuities as “longevity insurance.”
Annuities are issued exclusively by insurance companies and regulated at the state level. They are not bank products (not FDIC insured), though they are regulated by state insurance departments. In 2024, Americans purchased a record $432 billion in annuities, driven by higher interest rates and growing concern about retirement income security.
How Annuities Work
Every annuity moves through two phases:
The Accumulation Phase
This is when you fund the annuity. You contribute money — either as a single premium or through multiple payments — and the insurance company grows your balance through interest credits or investment returns. During this phase, your earnings grow tax-deferred, meaning you owe no income tax on gains until you take money out. This tax advantage allows your money to compound faster than it would in a taxable account like a brokerage or savings account.
The Distribution Phase (Annuitization)
This is when the annuity starts paying you. You can receive income as a lump sum, as systematic withdrawals, or by annuitizing the contract — converting it into a stream of guaranteed payments. The size of your payments depends on your account value, your age, the payout option you choose, and current interest rates at the time of annuitization.
Some annuities (like immediate annuities) skip the accumulation phase entirely — you deposit money and start receiving income within 30 days. Others (like MYGAs) are designed primarily for accumulation, growing your savings at a guaranteed rate before you decide what to do next.
The 7 Types of Annuities
Not all annuities are the same. The seven main types differ in how your money grows, when you receive income, and how much risk you take on. Here’s what you need to know about each:
1. Fixed Annuities
A fixed annuity pays a guaranteed interest rate for a set period, similar to a bank CD. Your principal is protected from market losses when held to maturity. Fixed annuities have no annual management fees, making them one of the simplest and most cost-effective retirement savings products available. They’re best suited for conservative savers who want predictable growth without market risk.
2. Multi-Year Guaranteed Annuities (MYGAs)
A MYGA is a type of fixed annuity that locks in a specific interest rate for your entire term — typically 2 to 10 years. MYGAs are the closest annuity equivalent to a bank CD, but with tax-deferred growth and often higher rates. As of early 2026, the best 5-year MYGA rates exceed 6.5% APY, and 10-year rates reach above 7.5%. MYGAs have no annual fees and are among the most popular annuity types sold today.
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3. Fixed Indexed Annuities (FIAs)
A fixed indexed annuity ties your interest credits to the performance of a market index — most commonly the S&P 500 — while providing that your principal is protected from market declines when held to maturity. In good years, you earn a portion of the index’s gains (subject to a cap rate or participation rate). In bad years, your account simply earns zero — never negative. FIAs are designed for people who want some market upside without the risk of market losses.
4. Variable Annuities
A variable annuity invests your money in underlying “subaccounts” — essentially mutual funds — giving you direct market exposure. This means your account value can go up or down depending on investment performance. Variable annuities offer the highest growth potential of any annuity type, but also the highest risk and typically the highest fees (often 2–3% annually). Optional riders can add guarantees — like a guaranteed minimum income benefit — but at additional cost.
5. Single Premium Immediate Annuities (SPIAs)
A SPIA converts a lump-sum deposit into immediate income payments that typically begin within 30 days. You choose a payout option — life only, life with a period certain, or joint life — and the insurance company sends you a check every month for the duration you selected. SPIAs are the purest form of guaranteed lifetime income and are most commonly purchased by people at or near retirement who need predictable monthly cash flow.
6. Deferred Income Annuities (DIAs)
A DIA works like a SPIA but with a waiting period. You deposit a lump sum today, and income payments begin at a future date you choose — typically 2 to 30 years later. Because the insurance company has more time to invest your premium, DIA payouts are significantly higher than SPIA payouts for the same deposit. DIAs are ideal for people in their 50s or early 60s who want to lock in future income starting at age 70 or 75.
7. Qualified Longevity Annuity Contracts (QLACs)
A QLAC is a special type of deferred income annuity that can be purchased inside a qualified retirement account (IRA or 401k). The key benefit: money placed in a QLAC is exempt from required minimum distributions (RMDs) until payments begin, up to a maximum of $200,000. QLACs allow you to defer some retirement income to age 85, reducing your tax burden in earlier retirement years while ensuring income in advanced age.
Side-by-Side Comparison
Type: Fixed | Risk Level: Very low | Typical Fees: None | Best For: Safe, predictable growth | Minimum: $5K–$25K
Type: MYGA | Risk Level: Very low | Typical Fees: None | Best For: CD alternative, tax-deferred savings | Minimum: $10K–$25K
Type: Fixed Indexed (FIA) | Risk Level: Low–Medium | Typical Fees: 0–1% | Best For: Market upside with downside protection | Minimum: $10K–$50K
Type: Variable | Risk Level: Medium–High | Typical Fees: 2–3%+ | Best For: Maximum growth potential | Minimum: $5K–$25K
Type: SPIA | Risk Level: Very low | Typical Fees: None (built into rate) | Best For: Immediate guaranteed income | Minimum: $25K–$100K
Type: DIA | Risk Level: Very low | Typical Fees: None (built into rate) | Best For: Future income at higher payout | Minimum: $25K–$100K
Type: QLAC | Risk Level: Very low | Typical Fees: None (built into rate) | Best For: RMD reduction + late-life income | Minimum: $25K–$200K
Pros and Cons of Annuities
Every financial product involves trade-offs. Annuities trade liquidity and simplicity for guarantees and income security. Here’s an honest look at both sides:
- Guaranteed income for life — the only financial product that can promise payments for as long as you live
- Tax-deferred growth — no annual taxes on interest or gains until withdrawal
- Principal protection — with fixed, MYGA, and indexed annuities, your principal is protected from market declines when held to maturity
- No contribution limits — unlike IRAs and 401(k)s, you can contribute any amount
- Death benefits — most contracts pass remaining value to beneficiaries
- Customizable — riders can add long-term care benefits, inflation adjustments, and enhanced death benefits
- Creditor protection — annuity assets are protected from creditors in many states
- Limited liquidity — surrender charges apply if you withdraw early (typically 3–10 years)
- High fees on some types — variable annuities can charge 2–3%+ annually
- Complexity — contracts can be long and difficult to understand
- Earnings taxed as ordinary income — not at the lower capital gains rate
- 10% IRS penalty — withdrawals before age 59½ incur a penalty
- Not FDIC insured — backed solely by insurer’s financial strength and claims-paying ability
- Inflation risk — fixed payments may lose purchasing power unless an inflation rider is added
What Do Annuities Cost?
Annuity costs vary dramatically by product type, which is one reason the products are often misunderstood. Here’s a realistic breakdown:
Fixed annuities and MYGAs typically have zero explicit fees. The insurance company earns its profit from the “spread” — the difference between what it earns investing your premium and the rate it guarantees you. This makes them among the most cost-effective retirement products available.
Fixed indexed annuities may have no direct annual fee, but their costs are embedded in the cap rates, participation rates, and spreads that limit your upside. Some newer indexed products do charge an explicit annual fee (typically 0.5–1.5%) in exchange for higher caps. Optional income riders typically cost an additional 0.5–1.25% per year.
Variable annuities carry the highest costs. Expect mortality and expense (M&E) charges of 1–1.5%, investment management fees of 0.5–1%, and administrative fees of 0.1–0.15%. Optional riders add another 0.5–1.5%. Total annual costs of 2.5–3.5% are common.
Surrender charges apply to nearly all annuity types if you withdraw more than the free-withdrawal allowance (typically 10% per year) during the surrender period. These charges usually start at 6–8% in year one and decline to zero over 5–10 years.
How Annuities Are Taxed
Tax Disclaimer: The following is general educational information only and does not constitute tax advice. Tax treatment varies by individual circumstance. Consult a qualified tax professional before making decisions based on tax considerations.
Non-qualified annuities (purchased with after-tax money) grow tax-deferred. When you take withdrawals, only the earnings portion is taxed as ordinary income. Your original premium comes back to you tax-free. If you annuitize, each payment is split between taxable earnings and non-taxable return of premium using an “exclusion ratio.”
Qualified annuities (purchased inside an IRA, 401(k), or other retirement account) follow the same tax rules as those accounts. The entire withdrawal is taxed as ordinary income, since the money went in pre-tax.
Annuity earnings are always taxed as ordinary income, not at the lower long-term capital gains rate. For someone in a high tax bracket, this can be a meaningful disadvantage compared to holding equities in a taxable brokerage account. However, the tax-deferral benefit can offset this for people who expect to be in a lower bracket in retirement.
Withdrawals before age 59½ are subject to a 10% IRS early withdrawal penalty on the earnings portion, in addition to ordinary income tax. There are limited exceptions, including disability and substantially equal periodic payments (SEPP/72t).
Annuities vs. CDs: A Practical Comparison
MYGAs and bank CDs both offer guaranteed interest rates with principal protection. They are the most commonly compared retirement savings products. Here’s how they differ:
Feature: Current top 5-year rate | MYGA: 6.65% | Bank CD: 4.50%
Feature: Tax treatment | MYGA: Tax-deferred until withdrawal | Bank CD: Interest taxed annually
Feature: Safety | MYGA: Backed by insurer’s financial strength and claims-paying ability | Bank CD: FDIC insured up to $250K
Feature: Annual fees | MYGA: None | Bank CD: None
Feature: Early withdrawal | MYGA: Surrender charge (declining), typically 10%/yr free | Bank CD: Early withdrawal penalty (3–12 months interest)
Feature: Can convert to income | MYGA: Yes (annuitize or 1035 exchange to SPIA) | Bank CD: No
Feature: Probate | MYGA: Avoids probate (beneficiary designation) | Bank CD: May go through probate
For someone who does not need immediate access to the funds and wants to maximize after-tax growth, a MYGA frequently outperforms a comparable CD — especially when the rate differential is as wide as it is in the current market.
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Who Should Consider an Annuity?
Annuities are most valuable for people who face at least one of these situations:
You’re worried about outliving your savings. If you’re healthy, have a family history of longevity, or simply want the peace of mind that comes from knowing a check will arrive every month for life, a lifetime income annuity directly solves this problem. No other financial product can make this guarantee.
You want guaranteed growth without market risk. If you have savings you want to protect from market downturns while earning a competitive return, a MYGA or fixed annuity offers principal protection with rates that currently exceed bank CDs.
You’ve maxed out other tax-advantaged accounts. Unlike IRAs and 401(k)s, annuities have no contribution limits. If you’ve already maximized your 401(k), IRA, and HSA contributions and want additional tax-deferred growth, a non-qualified annuity provides that option.
You need to replace a pension. Fewer than 15% of private-sector workers now have access to a traditional pension. An annuity can serve as a “personal pension,” converting retirement savings into the kind of guaranteed monthly income that pensions once provided.
You want to reduce RMD-related taxes. A QLAC allows you to shelter up to $200,000 of IRA assets from required minimum distributions, potentially keeping you in a lower tax bracket during your 70s and early 80s.
Who Should NOT Buy an Annuity?
Being transparent about who annuities are not right for is just as important. We believe editorial honesty builds more trust than sales pressure. An annuity is probably not the right choice if:
You need liquidity. If you might need access to the full amount within the next 3–5 years, an annuity’s surrender charges make it a poor fit. Keep those funds in a savings account, money market, or short-term CD.
You can’t afford to lock up the money. An annuity should never be funded with your emergency reserve. Financial advisors typically recommend having 6–12 months of living expenses in liquid savings before committing to an annuity.
You’re in a high tax bracket and have a long time horizon. If you’re decades from retirement and already in a high tax bracket, holding equities in a taxable account (taxed at long-term capital gains rates) may produce better after-tax results than an annuity (taxed as ordinary income on withdrawal).
You don’t understand the product. Annuity contracts can be complex. If you don’t understand the surrender schedule, fees, and payout structure, don’t buy it. A trustworthy advisor will explain everything clearly and never pressure you into a decision.
Someone is pressuring you. If an agent is pushing you to buy an annuity — especially through high-pressure tactics, free dinner seminars, or by suggesting you take out a reverse mortgage to fund one — walk away. Legitimate annuity purchases are made thoughtfully, not impulsively.
How to Buy an Annuity
Determine your goal. Are you looking for growth (MYGA), income now (SPIA), income later (DIA/QLAC), or a combination? Your goal determines which type of annuity is right for you.
Understand how much to allocate. Most financial planners recommend putting no more than 25–50% of your retirement savings into annuities, depending on your income needs and other assets. The rest should remain in diversified investments for growth and liquidity.
Compare products from multiple carriers. Annuity rates and features vary significantly between carriers. An independent agent or advisor who works with multiple insurance companies — not just one — can show you the full range of options. At Annuity.com, we compare products from 60+ top-rated carriers and more than 2,400 products.
Check the carrier’s financial strength. Because your annuity is backed by the insurance company’s claims-paying ability, you want a carrier with strong financial ratings. Look for an A.M. Best rating of A- (“Excellent”) or better.
Review the contract carefully. Before signing, understand the guaranteed rate, surrender schedule, free-withdrawal provisions, death benefit, and any optional riders. If anything is unclear, ask your advisor to explain it — or get a second opinion.
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Are annuities safe?
How much does an annuity cost?
Fixed annuities and MYGAs
Variable annuities
Indexed annuities
What is the minimum amount needed?
$10,000–$25,000
How are annuities taxed?
tax-deferred
10% IRS penalty
Can I lose money in an annuity?
fixed annuities and MYGAs
variable annuities
Indexed annuities
What happens to my annuity when I die?
death benefit
Are annuities better than CDs?
tax-deferred
FDIC insured
When should I buy an annuity?
50 and 75
About This Guide
This guide was written by the Annuity.com editorial team and reviewed for accuracy by Bart Catmull, CPA, NACD.DC, our Advisory Board Chairman. Mr. Catmull brings more than 22 years of experience at major life insurance companies, including service as President of Sagicor Life Insurance Company and EVP & Chief Strategy & Risk Officer at Security Mutual Life Insurance Company.
Annuity.com is editorially independent. No insurance carrier has input on our content, ratings, or recommendations. Our editorial process is described in full on our Editorial Oversight page.
Last reviewed and updated: February 14, 2026. We review all pillar content quarterly and after any significant regulatory or market change.
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