Annuity Basics Explained: Decide If They’re Right for You

Learn how annuities work, compare the types, weigh the pros and cons, and see if they fit your retirement plan

Why You Should Care About Annuities

Your retirement savings could run dry by the time you reach 85 or 95. Annuities exist to solve that problem by providing contractually guaranteed income for life. But they’re not for everyone. Some lock up your money. Some are fee-heavy. Some shine as safe income tools. This guide breaks it all down so you can shop and compare quotes confidently—and avoid costly mistakes.

This guide breaks down the basics so you can:

• Understand how annuities really work
• Compare the major types side by side
• See the pros and cons clearly
• Decide if an annuity fits your goals—or if you’re better off without one

By the end, you’ll know whether an annuity should play a role in your retirement plan and what to ask before buying.

Annuity Fit and Fundamentals: Questions That Reveal Whether the Contract Fits

What an Annuity Is (And Isn’t)

An annuity is a legal contract with an insurance company. You pay in, either as a lump sum or through ongoing contributions, and in return, you get income now or later. Annuities aren’t FDIC insured, and they aren’t short-term savings tools. They are long-term insurance products that protect against one risk: outliving your money.

But annuities can do more than provide income. They can grow your money tax-deferred, offer principal protection, and in some cases provide benefits for long-term care or legacy planning.

Annuities can be funded with a lump sum, such as cash, a rollover, or a transfer from a retirement plan, or through ongoing contributions, much like regular retirement savings. Once funded, the income can be distributed as either a lump sum or a series of payments, depending on the contract chosen.

Annuity Type	Payment Start Date
Immediate Annuity	Payments start right away
Deferred Annuity	Payments start at a future date

To avoid confusion, the income from an annuity can be paid to the annuitant in a lump sum or a series of payments, depending on the type of contract.

This flexibility lets you align an annuity with your retirement timeline and financial needs. For many retirees, annuities serve as a form of insurance against uncertainty, providing a contractually guaranteed source of income regardless of market conditions or lifespan.

Key Takeaways

• Annuities are insurance contracts that offer a reliable income stream for retirement purposes.
• Annuities can provide income benefits such as guaranteed lifetime withdrawals and other features that help ensure financial security during retirement.
• They come in different types: immediate or deferred, fixed or variable.
• Annuities provide tax deferral on investment earnings and protection from creditors.
• Investors can choose between lump-sum payments or monthly premiums to fund annuities.
• Annuities can provide your spouse with financial support in the event of your passing.
• Understanding the features, benefits, and considerations of annuities is crucial for effective retirement planning.

What Does “Annuity” Mean?

Essentially, “annuity” refers to these systematic payments, helping individuals manage the risk of outliving their savings by ensuring a consistent income stream—different annuity types suit varying financial strategies and risk levels.

Common Examples Of Annuities

An example of an annuity is lottery winnings. If a winner chooses the payout option, the lottery uses an annuity to distribute the payments over time, typically 30 years. Annuities offer various payout options, including lump sum or periodic payments, allowing recipients to select the structure that best suits their needs. Another example is a court settlement resulting from a lawsuit win. Finally, the most common example is the monthly benefit from a pension retirement plan.

Helpful Resource: Check out our glossary of key terms and definitions

How Long Have Annuities Been Around?

Annuities have existed for centuries, with roots dating back to ancient Rome, where citizens would pay a lump sum in exchange for lifetime payments. By the 17th century, formal annuity markets were established in Europe, often used to fund governments and provide a reliable income.

In Perspective

• Annuities: Origin in ancient Rome, formalized in the 1600s
• The IRA was created in 1974.
• The 401(k) was created in 1978.
• The Roth IRA was created in 1997.

Annuities have been around far longer than most retirement accounts Americans rely on today.

How Annuities Work: Two Key Phases

Annuities move through two distinct stages: the accumulation phase, when your money grows tax-deferred, and the payout (annuitization) phase, when the annuity begins paying you income. Understanding both is essential before adding an annuity to your retirement plan.

Basically, you pay premiums to an insurance company. In return, the insurer agrees to either:

• Grow your money on a tax-deferred basis, and/or
• Pay you income on a schedule you choose (lifetime, 10-year period, etc.)

The Accumulation Phase

During the accumulation phase, you fund the annuity with either a lump sum (cash, rollover, or transfer) or regular premium payments. The money grows on a tax-deferred basis, meaning you don’t pay income tax on gains until you make withdrawals. This favorable tax treatment allows savings to compound faster compared to taxable accounts.

Growth depends on the annuity type:

• Fixed annuities earn a set interest rate.
• Indexed annuities credit interest based on a market index, with downside protection.
• Variable annuities invest in subaccounts like mutual funds, stocks, and bonds, which carry market risk but also growth potential.

This phase is all about building retirement income using annuities, without the drag of annual taxes. By diversifying their investments, investors can potentially increase their chances of achieving higher returns.

The Payout (Annuitization) Phase

When you’re ready, you can convert your annuity into income payments. These can be structured for:

• A fixed number of years (e.g., 10 or 20) – Period Certain Annuity Payouts
• For life (guaranteed as long as you live)
• Joint life (covering you and a spouse)

Payments may be fixed (predictable) or variable (based on market performance).

Important note: Annuitization is optional in most contracts. Many people instead choose to add a lifetime income rider (GLWB), which provides guaranteed income for life without permanently giving up control of the account. Riders often add flexibility, death benefits, and liquidity that pure annuitization does not.

Lifetime Income Without Annuitization: Why GLWBs Matter

Many modern annuities include a Guaranteed Lifetime Withdrawal Benefit (GLWB) rider. This feature allows you to receive income for life without permanently handing over your account value through annuitization.

With a GLWB:

• You can start, pause, or adjust income payments as needed.
• If your account balance runs out, the insurer still guarantees lifetime payments.
• Your remaining principal and benefits stay accessible for heirs, unlike traditional annuitization.

Because GLWBs preserve flexibility and protect beneficiaries, we rarely recommend annuitization unless there is no other option.

The Three Key Parties in an Annuity Contract

Every annuity contract involves three main parties, each with a distinct role: the owner, the annuitant, and the beneficiary.

1. Owner: The owner is the person or entity that purchases and funds the annuity. They control the contract—choosing beneficiaries, deciding when payments start, and making adjustments such as payout schedules or ownership transfers.
2. Annuitant: The annuitant is the individual whose life expectancy determines how long payments last. Often, the owner and annuitant are the same, but they don’t have to be. Payment amounts and durations are tied to the annuitant’s age and lifespan.
3. Beneficiary: The beneficiary is the person or entity who receives any remaining value if the annuitant (or owner) dies before the contract ends. This payment may be made as a lump sum or in installments, depending on the contract terms.

Structure Warning: Setting up a contract incorrectly can lead to massive tax penalties. To learn the rules for joint accounts, spouses, and trusts, read our complete guide to annuity ownership structures.

The Main Types of Annuities

Annuities come in several forms, each designed to meet different retirement needs. The right choice depends on your goals, risk tolerance, and when you want to start receiving income. Some offer immediate payments, while others prioritize growth and future income.

Retirement Strategy: Knowing the types is one thing; seeing the actual performance is another. You can compare current annuity rates across all categories—fixed, indexed, and immediate—to see which products are currently offering the most competitive yields in today’s market.

Fixed Annuity

A fixed annuity pays a guaranteed interest rate for a set period, making it ideal for conservative investors who want stability and predictable returns. Your principal is protected, and the rate isn’t tied to stock market swings.

There are two main variations:

• Traditional fixed annuities guarantee the same interest rate throughout the contract.
• Fixed indexed annuities (FIAs) offer two ways to earn interest: a declared fixed rate that resets annually, or index-linked interest tied to the performance of a market index such as the S&P 500. Regardless of market performance, FIAs include a floor that protects your principal from losses. This combination provides the potential for higher growth than a traditional fixed annuity, while still ensuring your money is protected.

Both types are often compared to CDs or Bonds, but they usually offer higher yields, tax-deferred growth, and the option for guaranteed income in retirement.

Our Expert Advice: If you are looking for a safe-money alternative to bank CDs, fixed annuities often provide higher yields with the same principal protection. View today’s best fixed annuity rates to see the top-rated 3, 5, and 10-year contracts from A-rated insurers.

Variable Annuity

Variable annuities let you invest in subaccounts similar to mutual funds, including stocks, bonds, and money markets. Your returns rise or fall with the performance of these investments, giving you the potential for higher growth but also exposing you to market losses. Because values fluctuate, variable annuities are best suited for investors who are comfortable with risk and focused on long-term growth. They often include optional riders, such as lifetime income or death benefits, though these come with additional fees.

Immediate Annuity

Immediate annuities convert a lump sum of money into a guaranteed income stream that begins right away—usually within 30 days to one year of purchase. They’re often chosen by retirees who want to convert savings into a predictable monthly paycheck.

The trade-off is that the decision is generally irrevocable: once purchased, you can’t add more money to the contract or access the lump sum invested.

An alternative is adding a Guaranteed Lifetime Withdrawal Benefit (GLWB) rider to a deferred annuity. A GLWB can also provide immediate income, but with added flexibility—allowing you to maintain control over your account value and leave money to your beneficiaries.

Deferred Annuity

Deferred annuities delay income payments until a future date, giving your money time to grow on a tax-deferred basis. This taxation strategy makes them a popular choice for retirement planning, since earnings compound without being reduced by annual taxes.

You can fund a deferred annuity with either a lump sum or flexible contributions over time, and then choose how and when to start withdrawals—either as a lump sum or as ongoing payments. This flexibility makes deferred annuities well-suited for people who want to build future income but don’t need immediate payouts.

Comparison of Different Types of Annuities

Type	Why You Buy It	Market Risk	Flexibility
Fixed Annuity	You want a guaranteed interest rate for a specific term	None	Moderate – allows annual free withdrawals, limited change options
Fixed Indexed Annuity (FIA)	You want principal protection with index-linked growth potential	None	Moderate to High – optional income and LTC riders, flexible income timing
Variable Annuity	You want market exposure with optional income or death benefit guarantees	High	High – broad investment choices, optional riders, income control
Immediate Annuity	Moderate – access varies by contract; riders may increase control	None	Very Low – income is fixed and cannot be changed after annuitization
Deferred Annuity	You want to grow savings tax-deferred and delay income until a future date	Varies by type	You want to leverage annuity assets to cover future long-term care costs tax-free.
Multi-Year Guaranteed Annuity (MYGA)	You want a CD alternative with a guaranteed fixed return for several years	None	Low – generally limited to annual penalty-free withdrawals
Qualified Longevity Annuity Contract (QLAC)	You want to delay income to later life (e.g., age 85) and reduce RMDs	None	Very Low – no access to principal after purchase
Long-Term Care Annuity	You want to leverage annuity assets to cover future long-term care costs tax-free	None	Moderate – restricted by LTC rider terms but more flexible than traditional LTC insurance

How You Can Fund an Annuity

Annuities can be purchased with several types of money, and the funding source will determine how the contract is taxed and whether specific rules apply:

• IRA or Roth IRA – Transfer or rollover retirement savings directly into an annuity.
• 401(k), 403(b), or 457 plans – Roll over employer-sponsored plans after separation from service.
• Non-qualified (after-tax) money – Use personal savings for additional retirement income planning.
• Inherited IRAs – Can be used with restrictions under IRS rules.
• Savings accounts or CDs – Transfer funds for higher growth potential and tax deferral.

Your funding choice affects taxation, liquidity, and suitability, so it’s essential to compare options before committing.

What Happens After the Annuity’s Term Ends?

When your deferred annuity’s term ends—typically 2 to 10 years, depending on the type—you face several important decisions:

1. Keep the Annuity:
Some contracts allow you to leave your money in place and continue earning interest at a renewal rate set by the carrier. Be cautious: renewal rates are usually lower than the original guaranteed rate.

2. Start Taking Income (If Not Already):
If you haven’t already activated income through a Guaranteed Lifetime Withdrawal Benefit (GLWB) or annuitization, this may be the right time—especially if you’re reaching retirement age or need a steady income.

3. Transfer the Funds (1035 Exchange):
You can transfer your funds to a new annuity using a 1035 exchange without incurring taxes. This option is best if:

• Your renewal rate is unattractive
• You want to add features such as a GLWB rider
• You prefer a stronger or higher-rated carrier

4. Withdraw the Money:
At maturity, you may withdraw your funds without surrender penalties. Keep in mind:

• Withdrawals from traditional IRAs and non-qualified annuities are taxed as ordinary income on the gains.
• Roth-funded annuities can provide tax-free withdrawals if IRS rules are met.

Important: If you do nothing, many annuities automatically renew into a new term with lower rates and new surrender charges. Always review your renewal options before the maturity date.

What Happens To An Annuity At Death?

• If the annuity is not annuitized, any remaining value is paid directly to your beneficiaries, often as a lump sum or continued payments.
• With a GLWB rider, beneficiaries also receive any unused account value in addition to the lifetime income you enjoyed.
• If the annuity is annuitized without refund options, payments stop at death, and the insurer may keep the remaining balance, which is why we recommend GLWBs over traditional annuitization.

Key Annuity Features to Understand

When evaluating annuities, it’s critical to know how contract features and riders affect your investment. Optional benefits can enhance growth or income security, but they often come with added fees. Understanding these features helps you weigh whether the value they provide is worth the cost—and how they fit into your overall retirement strategy.

Tax Deferral

Earnings inside an annuity grow tax-deferred, meaning you don’t pay taxes until you withdraw the money. This taxation allows your savings to compound more quickly than in a taxable account, which can significantly enhance your long-term retirement income.

Protection from Creditors

In many states, annuities provide asset protection from creditors. This protection means that in the event of bankruptcy or a lawsuit, your annuity funds may be shielded. The level of protection varies by state and annuity type, so check your state laws or consult with a financial advisor.

Investment Options and Tax-Free Transfers

Some annuities (like variable and indexed) allow you to choose among different investment options—stocks, bonds, or index-linked strategies—based on your risk tolerance and goals. Many contracts also allow tax-free transfers between these options, so you can adjust your strategy over time without triggering taxes. This flexibility makes annuities a dynamic tool for both growth and income planning.

Contract Features	Benefits
Tax Deferral	Allows for potential growth without immediate taxation
Protection from Creditors	Provides some level of asset protection
Investment Options	Allows for customization of investment strategy
Tax-Free Transfers	Provides flexibility in asset allocation
No contribution limits	There are no limitations on how much you can contribute

Understanding these contract features is key to deciding whether an annuity belongs in your retirement plan. Because fees, guarantees, and benefits vary widely between insurers, it’s critical to review the fine print and compare options side by side. The smartest move is to work with a professional who can shop multiple carriers for you. Contact The Annuity Expert for free quotes and guidance—we’ll help you find the right annuity at the best value for your retirement goals.

Benefits and Considerations

Annuities can play an important role in retirement planning, but it’s critical to weigh both their advantages and limitations. They are often used to cover essential living expenses—like food, housing, and healthcare—by converting savings into a reliable income stream. Certain annuities are explicitly designed to provide a consistent cash flow, creating financial stability throughout retirement.

Lifetime Income:

One of the most valuable benefits of annuities is the promise of income you cannot outlive. By insuring against longevity risk, annuities provide retirees with peace of mind, knowing they’ll continue to receive regular payments for as long as they live. This feature is especially valuable for individuals without a pension or those concerned about depleting their savings.

Benefits to Heirs:

Most annuities allow you to name one or more beneficiaries, ensuring that any remaining value doesn’t stay with the insurance company after your death. Depending on the contract, your heirs may receive a lump sum payment or continue to receive scheduled payments. This legacy benefit ensures that your savings support loved ones financially and are passed on according to your wishes, rather than going through the probate process.

Tax Implications:

Annuities grow on a tax-deferred basis, meaning you won’t owe taxes on earnings until you withdraw funds. When payments begin, withdrawals are generally taxed as ordinary income. If you take money out before age 59½, the IRS may also impose a 10% early withdrawal penalty in addition to income tax. Because tax treatment varies based on how the annuity is funded (IRA, Roth, or after-tax dollars), it’s best to consult a tax advisor to understand the impact on your situation.

Surrender Fees:

Most annuities include a surrender period—typically ranging from 2 to 10 years—during which withdrawals exceeding the free withdrawal amount incur penalties. These fees can reduce your liquidity and limit access to funds if your needs change unexpectedly. Before purchasing, carefully review the surrender schedule and ensure the annuity fits your financial flexibility needs.

Annuities vs. Life Insurance

Annuities and life insurance are both sold by life insurance companies, but they serve very different purposes in a financial plan. Together, they address two significant risks: longevity risk (outliving your money) and mortality risk (dying too soon). Understanding how they differ can help you decide which—or both—fit your needs.

Annuities: Managing Longevity Risk

Annuities are designed to provide income you can’t outlive. By converting savings into guaranteed payments, they help ensure a steady cash flow throughout retirement. This reason makes them a valuable tool for covering essential living expenses and protecting against the uncertainty of a long life.

Life Insurance: Protecting Against Mortality Risk

Life insurance provides financial protection for your loved ones after your death. By paying premiums, you secure a death benefit that goes to your beneficiaries—helping cover funeral costs, debts, and ongoing living expenses. It ensures your family is cared for in your absence.

Putting It Together

While annuities protect your future income, life insurance protects your family’s financial security if you pass away. Many people use both as part of a balanced retirement and estate plan. A financial professional (like The Annuity Expert) can help determine the right mix based on your goals, family needs, and risk tolerance.

Aspect	Annuities	Life Insurance
Primary Purpose	Address longevity risk by providing a guaranteed income stream throughout retirement.	Provide financial protection for loved ones in the event of the policyholder’s death.
Payments	Regular income payments for as long as the annuitant lives or for a fixed period.	Multiple policy options and riders are available to tailor coverage.
Risk Coverage	This policy covers the financial needs of beneficiaries after the policyholder’s death.	Various types are available, allowing customization to individual needs and goals.
Tax Treatment	Generally offers tax-deferred growth on investment earnings.	Death benefits are generally tax-free for beneficiaries.
Flexibility	Various types available, allowing customization to individual needs and goals.	Various types are available, allowing customization to individual needs and goals.

Annuity Regulations and Suitability

Annuities are highly regulated financial products, with oversight designed to protect consumers and ensure they are sold appropriately.

Regulatory Oversight

• The Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) regulate variable annuities due to their investment components.
• State insurance departments oversee fixed and fixed indexed annuities.
• Agents and brokers must hold a state-issued life insurance license, and in the case of variable annuities, a securities license as well. These requirements ensure sellers have the knowledge and authority to advise consumers responsibly.

Pro Tip: Because annuities are complex and highly regulated, you shouldn’t have to navigate the fine print alone. An independent annuity broker works for you, not the insurance company, scanning over 50 carriers to ensure the product you choose meets strict suitability standards and fits your unique financial goals.

Insurer Strength Matters

The claims-paying ability of the issuing insurance company backs all guarantees provided by annuities. The financial strength and credit rating of the insurer are critical factors when choosing a provider.

Additionally, every state has a State Guaranty Association (SGA), which serves as a safety net in the event an insurer becomes insolvent. SGAs typically cover annuity owners up to certain limits (which vary by state). While not a substitute for selecting a strong carrier, SGAs provide an additional layer of consumer protection.

Suitability Standards

Annuities must meet suitability requirements, meaning an agent or broker must evaluate whether the product is suitable for the buyer’s financial situation, age, income, investment objectives, and time horizon. This rule helps prevent the sale of complex or high-fee products to consumers for whom they are not appropriate.

Why Suitability Is Critical

Because annuities can have long surrender periods, fees, and varying features, not every product is suitable for every investor. Suitability standards are designed to align the annuity with the consumer’s retirement goals, ensuring informed decisions and reducing the risk of regret.

Bottom Line

Regulation and suitability requirements exist to protect consumers and hold insurers and agents accountable. By working with licensed professionals and comparing options across carriers, you can choose an annuity that aligns with your retirement strategy and financial objectives.

Benefits of Annuity Regulations and Suitability	Considerations
Protection for consumers	Potential limitations in investment options
Professionalism and accountability in the industry	Additional time and effort to assess suitability
Prevention of unsuitable annuity sales	Complexity of annuity features and fees
Increased consumer knowledge and awareness	Need for ongoing review and evaluation

Why Do People Buy Annuities?

Having covered the basics of what annuities are, it’s worth exploring how they actually work in real life. As an annuity broker and trainer since 2009, I’ve spent over a decade helping clients understand and utilize annuities to address real financial challenges—not just retirement income needs.

Annuities can be powerful tools for tax-deferred savings, allowing money to grow more efficiently by postponing taxes until withdrawals. Some contracts even offer market-linked growth or investment options, allowing investors to benefit from favorable market conditions while still protecting their principal.

In my experience, annuities are far more versatile than many people realize. They can create guaranteed income, preserve wealth, and provide financial security in ways that extend well beyond retirement planning. Let’s take a closer look at the diverse—and often overlooked—ways annuities can enhance both flexibility and peace of mind.

• Long-term savings account for retirement
• CD-alternative
• Safe investing vehicle
• Life insurance alternative
• Personal pension plan
• Hedge against inflation
• Long-term care insurance alternative
• Asset protector for Medicaid
• Settlement payments from court cases.
• Reduce Retirement Taxes
• Retire Tax-free
• Minimize taxes at death
• Delay required minimum distributions (RMDS)
• Avoid Creditors And Bankruptcy

Next Step: Decided to move forward? Don’t go in blind. Follow our step-by-step roadmap on how to purchase an annuity safely, from choosing a broker to funding the contract.

The Biggest Myth About Annuities

One of the most common criticisms about annuities is that you lose control of your money. That’s not true. Most contracts let you access your investment and earnings at the end of the term—either as a lump sum or as a stream of payments. Many also include liquidity features, such as annual penalty-free withdrawals.

Here are other misconceptions worth clearing up:

• “Annuities are too complex.” They can be detailed because of their flexibility, but a licensed financial professional can help explain the options in plain language.
• “They’re not for high-net-worth investors.” In reality, wealthy individuals often purchase annuities to secure a guaranteed income, hedge against longevity risk, and add tax deferral to their portfolios.
• “One size fits all.” There are many types—fixed, indexed, variable, immediate, and deferred—each with different rules, features, and riders. Variation allows customization based on your goals.
• Only for“Only retirees need them.” While retirees benefit most from lifetime guarantees, younger investors also use deferred annuities to build tax-deferred savings for future income.
• “They don’t adjust for inflation.” Some contracts include riders or payout options that increase income over time to keep pace with rising costs.
• “There’s no emergency access.” While full access is limited during the surrender period, most annuities allow penalty-free withdrawals of a set percentage each year.
• “They’re too expensive.” Fixed and indexed annuities often have no direct fees. Variable annuities and rider options may incur additional costs. Still, these fees fund valuable benefits, such as extra guarantees—such as death benefits and guaranteed lifetime income—that traditional investments typically don’t provide.

Every Annuity Disadvantage You Should Know Before You Buy

1. Surrender Charges Lock Up Your Money

Annuities typically have surrender periods ranging from 5 to 10 years. Withdrawing more than the penalty-free amount can significantly reduce your cash value.

• Who it affects: People who may need access to large sums unexpectedly.
• Alternative: Use shorter-term MYGAs or contracts with higher free-withdrawal limits.

2. Limited Liquidity

Most contracts allow only 10% penalty-free withdrawals per year. Larger withdrawals may trigger surrender fees and IRS penalties before 59½.

• Who it affects: Younger buyers or retirees needing significant withdrawals.
• Alternative: Maintain a cash reserve or brokerage account outside your annuity.

3. Income May Not Keep Up With Inflation

Fixed and immediate annuities often pay a level income, which loses purchasing power over time.

• Who it affects: Retirees relying on fixed income for decades.
• Alternative: Consider COLA options or FIAs with increasing income riders.

4. High Fees in Some Contracts

Variable annuities and riders can carry annual fees of 1–4%+, reducing net returns.

• Who it affects: Buyers of variable annuities or fee-heavy riders.
• Alternative: Look for no-fee FIAs or low-fee GLWB riders.

5. Complex Contracts

Annuities are filled with jargon (e.g., benefit base, MVA) that can overwhelm buyers.

• Who it affects: Anyone buying without expert guidance.
• Alternative: Work with an independent broker who can clearly explain and compare contracts.

6. Limited Growth Potential

Caps, spreads, and participation rates can restrict returns. Fixed annuities and some FIAs may underperform other investments.

• Who it affects: Growth-oriented investors.
• Alternative: Choose FIAs with participation-only strategies or variable annuities if you accept market risk.

7. Annuitization Is Irrevocable

Once you annuitize, you give up control of your principal. Payments can’t be paused or reversed, and heirs may get nothing without refund options.

• Who it affects: SPIA buyers and those considering annuitization.
• Alternative: Use GLWBs for lifetime income without losing flexibility.

8. Death Benefits Can Be Misunderstood

Beneficiaries may receive less than expected—or nothing if the contract was annuitized without refund options.

• Who it affects: People prioritizing legacy planning.
• Alternative: Pair annuities with life insurance to maximize estate value.

9. “Benefit Base” Values Aren’t Walk-Away Money

GLWB benefit bases are used solely to calculate income, not for lump-sum withdrawals.

• Who it affects: Buyers who think they can cash out on the “income base.”
• Alternative: Focus on the account value, which is the only walk-away amount.

10. Unfavorable Tax Treatment

Non-qualified annuities use last-in, first-out taxation, meaning earnings are taxed first at ordinary income rates. Withdrawals from IRAs (qualified annuities) are also taxed as ordinary income.

• Who it affects: High-income retirees seeking tax efficiency.
• Alternative: Consider Roth IRA annuities or life insurance for tax-free income.

11. Renewal Rates and Terms Often Drop

After the initial guarantee, renewal caps, participation rates, and fixed rates may decline significantly.

• Who it affects: Anyone who lets a contract roll over automatically.
• Alternative: Shop new rates at maturity or use a 1035 exchange.

12. Rider Costs Without Use

GLWB riders cost money each year, even if you never take income.

• Who it affects: Buyers who value flexibility more than guaranteed income.
• Alternative: Only add riders when there’s a clear income plan, or buy an annuity that includes an income rider at no additional cost.

13. Engineered Indexes With No Track Record

Some FIAs utilize proprietary indexes that lack a long-term performance history and may not yield real-world results.

• Who it affects: Growth-focused buyers expecting market-like returns.
• Alternative: Stick with traditional indexes, such as the S&P 500, or real-asset indexes, like gold or real estate.

14. Market Value Adjustments (MVAs) Can Hurt

In some MYGAs and fixed annuities, MVAs reduce payouts if you withdraw early in a rising-rate environment.

• Who it affects: Buyers who withdraw during a period of rising interest rates.
• Alternative: Understand the MVA formula or choose a contract without it.

15. Not FDIC-Insured

Insurers, not the federal government, guarantee annuities. State guaranty associations offer limited protection, which varies from state to state.

• Who it affects: Anyone comparing annuities to CDs or Treasuries.
• Alternative: Choose carriers rated A- or better by AM Best with strong Comdex scores.

Helpful Tip: Now that you know the mechanics, you need a strategy. Read our guide on common annuity mistakes to avoid to ensure you don’t lock up money you might need for long-term care.

Who Needs an Annuity and Who Doesn’t?

Who Needs It

• Pre-retirees and retirees seeking a personal pension with a lifetime income.
• High-income earners looking for additional tax-deferred growth beyond 401(k)s or IRAs.
• Business owners using SEP or SIMPLE IRAs for retirement funding.
• People who are concerned about the risk of living too long and outliving their savings are often advised to plan accordingly.
• Individuals planning for long-term care costs who want their income to be earmarked for health needs.
• Families focused on estate planning, probate avoidance, and death benefits.
• People who need Medicaid-compliant planning tools to protect assets.
• Anyone seeking income stability in uncertain or volatile markets should consider this.

Reality Check: Is an annuity right for me? Use our decision checklist to validate your choice before you sign anything.

Who Doesn’t Need It

• People with serious health concerns who expect a shorter life span and don’t wish to protect heirs.
• Younger investors (under 40) with long horizons and high risk tolerance who prefer growth assets.
• Anyone needing full liquidity within 5–10 years.
• People who haven’t maximized other retirement accounts (401(k), IRA, HSA).
• Investors who are uncomfortable with surrender charges, fees, or insurance products.

Why Compare Quotes First

Insurance companies compete—but they won’t show you every option. Renewal rates change, surrender charges vary, and riders can differ widely in cost and value. Brokers shop across carriers to get the best annuity for your goals and save you thousands over time.

Final Thoughts: Are Annuities Right for You?

Annuities can provide lifetime income, protect your savings, and offer peace of mind in retirement—but they’re not one-size-fits-all. For some people, they’re the missing piece of financial security. For others, the fees, restrictions, or lack of growth potential outweigh the benefits.

The real question is whether an annuity is a suitable fit for your situation. That depends on your age, income needs, other retirement savings, and the level of flexibility you want with your money.

The most effective way to make a decision is to compare quotes and options across multiple top-rated insurers before purchasing. Companies all offer different features, and a side-by-side review can save you thousands in the long run.

Next step: The best way to move from “learning” to “planning” is to see real-world numbers tailored to your zip code and age. Request a personalized annuity quote to receive a side-by-side comparison of the top-performing contracts available to you right now.

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