Annuities, explained
A plain-English guide to fixed annuities and CDs for savers who want a guaranteed, better-than-bank rate — without the jargon or the pitch.
The short version
- "Annuity" covers four different products — most CD-shoppers want a fixed/MYGA.
- A MYGA locks a guaranteed rate for the term, grows tax-deferred, and protects principal.
- Surrender charges decline year by year to zero at the end of the term; the 59½ rule can stack a second penalty on qualified money.
- You name a beneficiary, so the balance passes directly to your heirs — outside probate.
- The right choice depends on the carrier's strength and your liquidity needs — not just the headline rate.
At its core, an annuity is a simple bargain with an insurance company: you give the carrier a sum of money, and in return it makes a written, contractual promise back to you. Depending on which kind you buy, that promise is either a fixed rate of growth for a set number of years or a stream of income that can last the rest of your life.
That's the whole concept. The reason annuities feel complicated is that one word is stretched across four products that behave very differently — some are about as simple as a bank CD, others are layered with caps, riders, and market exposure. Most of the confusion (and most of the bad advice) comes from blurring those four together.
This guide walks through what each type actually does, what a fixed rate really earns, how your money gets in and out, what happens to it when you're gone, how it's taxed, and the handful of questions worth asking before you commit a dollar.
The four types of annuities
These aren't steps or tiers — they're four separate products that happen to share a name. Knowing which one someone is talking about resolves most of the confusion:
Fixed / MYGA
A multi-year guaranteed annuity locks a fixed rate for a set term — 3, 5, or 7 years. It works almost exactly like a bank CD, except it's issued by an insurer and grows tax-deferred. If you're comparing an annuity to a CD, this is the one you actually mean.
Income (SPIA / DIA)
You hand over a lump sum and the carrier sends you a guaranteed paycheck — starting right away (immediate) or on a future date you choose (deferred). It's built to cover essential expenses for life, not to grow a balance you can later take back.
Fixed indexed
Interest is credited based on a market index, but with a cap on the upside and a floor (usually 0%) so a down market can't take your principal. More moving parts — the cap and participation rate are the numbers that decide whether it's a good deal.
Variable
Your money goes into subaccounts that rise and fall with the market, so principal is genuinely at risk and the fees are the highest of the four. It's an investment product wearing an annuity wrapper — not what this guide is about.
Side by side, the differences that actually matter are principal risk, how much market upside you get, and how complicated the contract is:
| Type | Your principal | Market upside | Complexity | Built for |
|---|---|---|---|---|
| Fixed / MYGA | Protected | Fixed rate | Low | CD-like guaranteed growth |
| Income (SPIA / DIA) | Protected | None — pays income | Low–medium | A paycheck for life |
| Fixed indexed | Protected (0% floor) | Capped / limited | High | Some upside, no down years |
| Variable | At risk | Full market | Highest | Growth, with real risk |
Where GetSure focuses
Fixed / MYGA contracts from A-rated carriers — the simplest, most CD-like option, with a guaranteed rate and no principal risk. Everything that follows is about getting that one decision right.
What rates look like right now
A MYGA's rate is the single most important number in the contract, and it's set the day you buy — it doesn't drift with the market afterward. Rates move week to week as carriers compete, and the spread between the best offer and the market average is wider than most savers expect. On a five-year term, the gap between the top rate and the average across the products we track is well over a full percentage point — shopping that difference is often worth more than an extra year of term.
Here's a snapshot of the fixed-annuity rates we track by term. These are illustrative and move often; live rates update weekly in the marketplace.
| Term | Top rate | Top A-rated | Market avg |
|---|---|---|---|
| 3-year | 6.00% | 5.45% | 4.65% |
| 5-year | 6.35% | 5.85% | 4.96% |
| 7-year | 6.25% | 6.05% | 4.94% |
"Top A-rated" is the best rate from a carrier with an A− or higher AM Best financial-strength rating — usually worth giving up a little yield for the added safety. The highest headline rate often comes from a smaller or lower-rated carrier.
What a fixed rate actually earns
Because the rate is locked, the outcome isn't a projection — it's arithmetic you can do up front. Interest compounds inside the contract and, unlike a CD, you don't pay tax on it each year; the growth is deferred until you take the money out. That deferral lets the full balance keep compounding instead of leaking a slice to taxes every April.
Take $100,000 in a 5-year MYGA at 5.85% — a recent top A-rated rate:
Illustrative, assuming the rate is fixed for the full term and interest compounds annually. Your principal is guaranteed by the carrier and the growth is deferred until you withdraw.
That deferral is worth real money. A taxable account earning the same rate would hand part of each year's interest to the IRS, leaving less to compound the next year. Run the after-tax comparison against a CD in CDs vs. fixed annuities.
Grow now, draw later — if you want to
Every deferred annuity has two possible phases. During accumulation, your money grows at the fixed rate, tax-deferred. When the term ends you have a real choice: take the cash, roll it into a new contract, or — and this is the part people miss — convert the balance into guaranteed income for life.
That conversion is optional. Most people who buy a MYGA simply renew or withdraw; turning on lifetime income is what the income annuities above are purpose-built for. The point is that the same contract can do either.
Getting your money out
A MYGA isn't a lockbox, but it isn't a checking account either. Two rules govern access: a yearly amount you can take freely, and a penalty for taking more than that before the term is up. The practical takeaway is to size the term to money you genuinely won't need to touch.
Free withdrawals
Most contracts let you take about 10% of the value each year with no penalty — useful if you might need some income along the way. A few don't allow any free withdrawal in the first year, so confirm the schedule before you buy.
Surrender charge
Pull out more than the free amount before the term ends and the carrier applies a penalty. It's highest in year one and steps down every year until it disappears entirely at the end of the schedule.
A real 7-year surrender scheduleThe penalty on early withdrawals starts at 9% and steps down about a point a year, then disappears entirely once the term ends.
The 59½ rule can stack a second penalty
If the money sits in an IRA or other qualified account and you withdraw before age 59½, the IRS can add a 10% early-distribution penalty on top of any surrender charge. Always confirm your account type before moving money.
The fine print worth knowing
A MYGA contract is short by insurance standards, but a few details decide how it actually behaves. None of these are dealbreakers — they're just the things worth knowing before you sign.
What it takes to open one
Minimums typically run around $25,000, though some A-rated carriers start as low as $1,000. There's no medical exam and no application fee — a MYGA has no annual fees skimmed off your balance, unlike a variable annuity.
The free-look window
Every contract comes with a free-look period — usually 10 to 30 days after it's issued — during which you can cancel for a full refund of your premium, no questions asked. It's a built-in safety net if you change your mind.
Market value adjustment (MVA)
About two in three contracts we track carry an MVA: if you surrender early and rates have moved, the adjustment nudges your payout up or down on top of the surrender charge. It only applies to early withdrawals. How an MVA works →
What happens at the end
When the term ends, many contracts will quietly roll into a new one at whatever rate is current unless you act. Mark the maturity date and decide deliberately — renew, withdraw, or move it. The renewal checklist →
What happens when you're gone
This is the part of an annuity that gets overlooked, and for a saver in their 60s it's often the most reassuring. When you open the contract you name a beneficiary — the same way you would on a retirement account.
The balance passes directly
If you die during the term, the carrier pays your beneficiary the full account value — principal plus the interest credited so far. Most contracts waive the surrender charge at death, so your heirs aren't penalized for the timing.
It skips probate
Because the money goes to a named beneficiary, it bypasses probate and transfers privately, usually within weeks of a claim — not the months a will can take. A surviving spouse can often continue the contract as their own.
Your beneficiary still owes income tax on the gain
Inheriting an annuity isn't tax-free. A non-qualified contract passes the original cost basis tax-free but taxes the growth as ordinary income; a qualified (IRA) annuity is fully taxable. How and when depends on who inherits — see qualified vs. non-qualified.
How annuities are taxed
How your gains are taxed depends entirely on where the money came from. The difference decides both what you'll owe later and whether the IRS forces withdrawals on a schedule. For a deeper look, see qualified vs non-qualified annuities.
Qualified (IRA / 401k)
Funded with pre-tax dollars, so the entire withdrawal is taxable as ordinary income. Required minimum distributions begin at age 73 (rising to 75 in 2033), whether you need the money or not.
Non-qualified (after-tax)
Funded with money you've already paid tax on, so only the growth is taxed when you withdraw — and it compounds tax-deferred until then. There are no required minimum distributions.
Where annuities fit your plan
An annuity isn't right for everyone, and it's rarely right for all of your money. It tends to earn its place when certainty matters more than upside. A few common situations:
Nearing retirement (late 50s–60s)
Locking a rate now de-risks money you'll need within a few years, before markets get a vote.
Already retired, need income
An income annuity can cover your fixed monthly expenses for life, so the rest of your portfolio can stay invested.
Worried about outliving savings
Guaranteed lifetime income takes the longevity guesswork off the table entirely.
Just want a safe, better-than-CD rate
A MYGA is the simplest fit — fixed, guaranteed, tax-deferred, no market risk.
What to ask before you buy
Most regret with annuities traces back to a question that didn't get asked. Before you sign anything, get clear answers to these six:
Is the rate guaranteed for the entire term, or does it reset after year one?
What's the carrier's financial-strength rating (AM Best)?
How much can I withdraw penalty-free each year, and does year one allow any?
Does the contract carry a market value adjustment, and what's the full surrender schedule?
What happens at the end of the term — does it auto-renew if I do nothing?
Is this qualified or non-qualified money, and who's the named beneficiary?
Frequently asked questions
Is my money safe in a fixed annuity?
Your principal is guaranteed by the issuing carrier and backed further by your state's guaranty association up to its limit. There's no market risk to principal in a fixed/MYGA contract. See how that protection compares to FDIC.
How is a MYGA different from a CD?
Both lock a fixed rate for a term. A MYGA is issued by an insurer (not a bank), grows tax-deferred, and often pays a higher rate — but uses surrender charges instead of a CD's early-withdrawal penalty. Full comparison here.
Can I lose money?
Not from market movement in a fixed/MYGA contract. The main way to lose value is surrendering early and paying a surrender charge — and, if the contract has one, a market value adjustment — before the schedule runs out.
How much do I need to open one?
Minimums are commonly around $25,000, though some A-rated carriers start as low as $1,000. There's no medical exam, and a MYGA has no annual fee deducted from your balance.
What happens if the insurance company fails?
Annuities aren't FDIC-insured, but every state runs a guaranty association that steps in if a member insurer becomes insolvent, up to a per-contract limit that varies by state. Buying from a financially strong, highly rated carrier is the first line of defense. See your state's limit.
Can I add more money later?
Usually no. A MYGA is funded with a single premium at issue, so to add money you typically open a new contract at the current rate. You can, however, move an existing annuity into a new one without triggering tax through a 1035 exchange.
What if I change my mind after signing?
Every contract includes a free-look period — generally 10 to 30 days after it's issued — during which you can cancel and get your full premium back, no penalty and no questions asked.
Not sure if it’s the right move?
Get a free, no-pitch Savings Review — we’ll check what you’re considering against the live market and send you a plain written take. You decide what to do with it.
Get a free Savings Review →