The short answer
An annuity is a contract with an insurance company: you pay a lump sum or a series of payments, and the insurer credits interest or growth and can turn the money into guaranteed income, sometimes for life. Annuities can reduce the risk of outliving your savings, but they often limit access to your money for years and may carry surrender charges and fees.
The main types of annuities
| Type | How it grows | Market risk to principal | Typical use |
|---|---|---|---|
| Fixed (MYGA) | A declared interest rate for a set number of years | No | CD-like, tax-deferred growth |
| Fixed indexed | Interest linked to a market index, subject to caps or participation rates | No (but credited interest can be zero) | Growth potential with principal protection |
| Variable | Invested in subaccounts | Yes — value can go down | Growth with market exposure (a securities product) |
| Immediate / income | Converts a lump sum into payments that start right away | No | Turning savings into a paycheck |
What you should understand before buying
- Surrender period: withdrawing more than the free-withdrawal amount during the first several years usually triggers a surrender charge.
- Liquidity: money in an annuity is meant for the long term. Keep separate emergency savings.
- Fees and riders: income or death-benefit riders add cost. Ask what each one costs and what it guarantees.
- Guarantees: they depend on the financial strength and claims-paying ability of the issuing insurer.
- Taxes: growth is tax-deferred, but withdrawals of earnings are taxed as ordinary income, and withdrawals before age 59½ may face an additional IRS penalty.
- Free-look period: most states give you a window after purchase to cancel for a refund. Ask how long yours is.
Who annuities tend to fit
They are usually a poor fit for money you may need soon, or when the surrender schedule outlasts your time horizon.
- Pre-retirees and retirees who want part of their income guaranteed regardless of markets.
- People worried about outliving their savings.
- Savers who want tax-deferred growth and won't need the money for several years.
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Frequently asked questions
Can you lose money in an annuity?
In a fixed or fixed indexed annuity, your principal isn't exposed to market losses, but surrender charges can reduce what you receive if you withdraw early. In a variable annuity, the account value can fall with the market.
What is a surrender charge?
A fee for withdrawing more than the allowed amount during the surrender period, often several years. It typically declines each year until it reaches zero.
Are annuities FDIC insured?
No. Annuity guarantees are backed by the issuing insurance company's claims-paying ability. States also have guaranty associations that provide limited protection if an insurer fails.
Sources
This guide is general education, not individual insurance, investment, tax, or legal advice. Product features, availability, and underwriting vary by insurer and state. See our disclosures.