Annuities Explained: Fixed, Indexed and Income Annuities in Plain English

The main types

They can be bought with money from a 401(k), IRA, TSP or 403(b), where they keep that account's tax treatment, or with savings.

Fixed annuity (MYGA)

A guaranteed interest rate for a set number of years, often 3 to 10. Simple and predictable, a little like a CD from an insurance company. Good for: safe growth on money you won't need for a few years.

Fixed indexed annuity

Interest is linked to a market index such as the S&P 500, up to a cap or participation rate, with a floor of zero, so a market drop never reduces your value. Often paired with an income rider. Good for: some growth potential without market losses.

Immediate income annuity

Pay a lump sum and start receiving guaranteed income within a year, for life or for a set period. Good for: covering the bills you can't skip, with a paycheck that never stops.

Deferred income annuity

Like an income annuity, but the income starts years from now, so each dollar buys more income. Good for: planning for your late 70s, 80s and beyond.

Variable annuity

Invested in market funds, so the value goes up and down with them, usually with higher yearly fees. Variable annuities are securities, sold by securities-licensed representatives. Good for: investors who want market exposure inside an annuity.

What you give up in exchange

Every guarantee has a price. These are the ones to understand before you sign anything.

Access to your money. Most deferred annuities have a surrender period, often 5 to 10 years. Take out more than the free amount (often 10% a year) during it, and a surrender charge applies.
Upside, in an indexed annuity. The floor protects you in bad years; the cap or participation rate limits what you're credited in good ones. Dividends aren't included, and the insurer can usually reset caps each year.
Rider fees. Optional benefits such as a guaranteed lifetime withdrawal cost a yearly fee, often around 1% of the benefit amount, which comes out of your value.
Taxes and penalties. Gains are taxed as ordinary income when you take them out, and before 59½ a 10% IRS penalty can apply to them.
The insurer's promise. Guarantees are only as strong as the insurance company behind them. State guaranty associations add protection up to limits that vary by state.

Questions to ask before you buy

Ask them of anyone recommending an annuity, including the professional we introduce you to.

How long is the surrender period, and what would it cost me to leave in year one, three and five?
How much can I take out each year without a charge, and are RMDs covered?
For an indexed annuity: what's the cap or participation rate today, and how has this insurer changed it on existing contracts?
Does it have a rider, what does it cost each year, and what do I actually get for it?
What's the insurance company's financial strength rating?
How are you paid if I buy this? (Most annuity sales pay a commission from the insurer.)

Annuity questions

Can I lose money in an annuity?

Not from a market drop, in a fixed or fixed indexed annuity. You can lose money by surrendering one early, when surrender charges apply, and optional rider fees reduce your value over time. A variable annuity can lose value with the market.

Do annuities have fees?

Fixed and fixed indexed annuities usually have no yearly management fee; the insurer's costs are built into the rate it credits. Optional riders charge a yearly fee. Variable annuities usually carry several yearly charges. Surrender charges apply to early withdrawals in all of them.

What happens if the insurance company fails?

Insurance companies are regulated by the states and must hold reserves against what they owe. If one fails, your state's guaranty association covers annuity benefits up to a limit that varies by state, and failed insurers' contracts are often taken over by another company.

Who sells annuities?

State-licensed insurance professionals sell fixed, indexed and income annuities; variable annuities also need a securities licence. Most are paid a commission by the insurance company, which is worth knowing and fair to ask about.

See which annuity options fit your savings

Five quick questions, about a minute. Then, if it's useful, a free income review with a state-licensed professional.

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