Annuities explained

What is an annuity?

An annuity is a contract issued by a life insurance company. You pay premium (often as a lump sum, sometimes over time), and the insurer promises future benefits spelled out in the policy—commonly growth during an accumulation phase, guaranteed income later, or both, depending on the design.

People often use annuities to convert savings into predictable cash flow in retirement, to defer taxes on non-qualified money while it grows, or to add a layer of principal or income guarantees that purely market-driven portfolios do not carry. Guarantees are subject to the claims-paying ability of the insurer; annuities are not FDIC- or NCUA-insured bank products.

Types of annuities

Fixed annuities

Multi-year guaranteed annuities (MYGAs)

A MYGA credits a declared fixed rate for a stated number of years. During the initial rate guarantee period you know the annual growth assumption; after the term, the contract may offer a renewal rate, a new guarantee period, or other options described in the policy. MYGAs fit savers who want predictable, stated growth without equity exposure and are comfortable with insurer and surrender-period tradeoffs spelled out in the contract.

Fixed index annuities (FIAs)

FIAs tie potential credited interest to the performance of an external index (for example the S&P 500) using formulas defined in the contract—caps, participation rates, or spreads—not direct investment in the index. When the index is flat or down in a given period, many designs credit zero rather than a negative return, which is where “floor” language comes from—though fees, riders, and later-year terms still matter. FIAs aim for a middle path: some upside linkage with no direct investment in the market, at the cost of rule complexity you must read carefully.

Income annuities

Immediate annuities

With an immediate (or “income start soon”) design, you pay premium and income payments begin on a schedule you select—often within the first contract year. This can be a straightforward way to turn a lump sum into scheduled payments, with the tradeoff that liquidity is limited once you commit.

Longevity annuities (deferred income annuities)

A longevity or deferred income annuity starts payments later in life—for example in your 70s or 80s—so you are buying future income today. That can help hedge living longer than you planned; the tradeoff is inflation and the irreversibility of many designs unless you buy optional features.

Qualified longevity annuity contracts (QLACs)

A QLAC is a qualifying deferred income annuity held inside certain tax-qualified accounts, subject to IRS premium and age limits. The appeal is the potential to defer required minimum distributions (RMDs) on the premium used to buy the QLAC to as late as age 85 under current rules—reducing taxable RMDs in the bridge years for some households. Rules change; confirm with a tax professional.

The four families at a glance

Simplified overview. Features, riders, and availability vary by carrier and state. This guide focuses most on MYGAs — the fixed, CD-like option. See how a MYGA compares to a bank CD →

Annuities in workplace retirement plans

Some 401(k) and similar plans offer annuities as a plan investment or distribution option so participants can convert part of their balance to lifetime income at separation. Employer menus, fiduciary disclosures, and insurance features vary. If you see an annuity inside your plan, read the fee and income disclosures and compare them to rolling assets to an IRA or taking periodic withdrawals—those are different paths with different flexibilities.

Annuities vs. life insurance

Both are issued by insurers, but the economic purpose differs.

Annuities

Annuities primarily address income and savings behavior while you are alive—growth, guarantees, or scheduled payouts in retirement. Death benefits can exist as policy features, but the central story is lifetime or period certain living benefits.

Life insurance

Life insurance is built around a death benefit for beneficiaries you name, plus cash-value designs in some products. The headline use case is protecting others from the financial loss of your death, not funding your own retirement income (though advanced planning can blend strategies).

In short: annuities lean toward your cash flow and longevity; life insurance leans toward their protection after you die. Many plans use both, but for different jobs.

Pros and cons

Pros of fixed annuities (MYGAs and FIAs)

• Stated or rules-based growth: MYGAs publish a guarantee for the initial period; FIAs define how index-linked credits are calculated.
• Principal protection emphasis: FIAs generally avoid direct equity losses in the indexed crediting formula; MYGAs grow at the fixed rate, not market beta.
• Income options: Many contracts can later annuitize or add riders (often for a charge) if you want systematic payouts.

Cons of fixed annuities (MYGAs and FIAs)

• Capped upside: MYGA growth is fixed; FIA upside is limited by caps, spreads, or participation rates—not full index returns.
• Complexity on FIAs: Renewal terms, crediting method changes, and riders require careful reading.
• Surrender charges and insurer risk: Early withdrawals can trigger penalties; guarantees depend on the carrier’s financial strength.

Pros of income annuities (immediate, longevity, QLACs)

• Hedging longevity: Payments can continue for life or a chosen period, reducing the worry of outliving a lump sum.
• Simplicity at payout: Once income starts, there is little to “manage” month to month unless you add variable features.
• QLAC tax angle: For qualifying buyers, deferring RMDs on QLAC premium can matter for tax planning (rules-bound; get advice).

Cons of income annuities

• Limited liquidity: Many designs are largely irrevocable after issue; you cannot treat the premium like a brokerage balance.
• Inflation risk: Level payments may lose purchasing power unless you buy inflation adjustments (often at a cost).
• Opportunity cost: Premium committed to guaranteed income is not available for other investments.

How annuities can help if you are nearing retirement

As you approach retirement, sequence-of-returns and income timing matter more. A portion of savings in a MYGA or FIA can be a way to segment money you cannot afford to subject to equity volatility while you finalize Social Security, pension, and withdrawal plans. Income annuities purchased before retirement can lock in future payouts you will turn on later—useful if you want a clean mental model: “this amount starts at age 80.”

Annuities in retirement

If you are already retired, immediate income annuities can turn a slice of cash into floor income alongside Social Security. Longevity and QLAC structures can back-fill income in very late years so the rest of the portfolio can support the front years of retirement. Fixed annuities can also remain in deferral if you do not need income yet—subject to RMDs on qualified dollars. For how IRA and plan money differs from after-tax premium on taxes and RMDs, see qualified vs non-qualified annuities.

Explore options with GetSure

GetSure helps savers compare bank CDs and fixed annuities with a rating floor and transparent carrier data, and we offer tools so you can see how guaranteed-rate products fit next to your other savings. When you are ready to apply, our online application collects the information carriers need; for how money moves after you sign, see funding your annuity.