An annuity is a contract with an insurance company: you hand over a sum of money, and in exchange the carrier guarantees something — a rate, an income, or both. That is the whole idea. Everything else is detail, and the detail is where people get lost.
The three you are most likely to be offered
1. MYGA — a multi-year guaranteed annuity
The closest thing to a bank CD. You deposit a lump sum, the carrier guarantees a fixed rate for a set term (commonly three to seven years), and the interest grows tax-deferred until you take it out. No market exposure at all.
Best for: money you will not touch for the term, where you want a known number and no surprises.
2. FIA — a fixed indexed annuity
Interest is credited based on an index such as the S&P 500, using the same cap-and-floor mechanics as an IUL: a 0% floor means a losing index year credits zero rather than a loss, and a cap limits how much of a strong year you keep.
Best for: people who want more upside than a MYGA but cannot afford a drawdown close to retirement.
3. SPIA — a single premium immediate annuity
You exchange a lump sum for a guaranteed cheque, starting now, for a set number of years or for the rest of your life. It is the simplest way to turn savings into a pension you cannot outlive.
Best for: covering fixed retirement expenses — the mortgage, utilities, insurance — with income that does not depend on the market.
What you give up
Be clear-eyed about the trade:
- Surrender charges. Take money out early and the carrier claws back a percentage, typically on a declining schedule over the term. Most contracts allow a 10% free withdrawal each year.
- Liquidity. This is long-term money. If there is any chance you will need it next year, it does not belong in an annuity.
- Caps and participation rates. On an FIA these can be changed by the carrier within contractual limits after the first year. Ask what the guaranteed minimum is, not just today's rate.
- Riders cost money. A guaranteed lifetime income rider usually carries an annual fee charged against the account value.
- Taxes. Withdrawals of gain are taxed as ordinary income, and before age 59½ there is generally a 10% penalty on top.
Five questions to ask before signing
- What is the surrender schedule, year by year, in dollars?
- What is the guaranteed minimum rate — not the illustrated one?
- If this is an FIA, what is the current cap, and what is the lowest cap the carrier may set?
- What does the income rider cost annually, and what does it guarantee?
- What happens to the money if I die before the term ends?
If the person selling it cannot answer all five without checking, get a second opinion.
Where an annuity fits
An annuity is not a growth engine and it is not a replacement for a diversified portfolio. It is a tool for the part of your money that must not lose value and must produce reliable income. Used for that job it is excellent. Used as a place to park everything, it is expensive.
We are independent and appointed with several A-rated carriers, so we can compare rates side by side before recommending anything — and we will tell you when a plain MYGA beats a complicated FIA for what you are trying to do.