An annuity is a contract with an insurance company: you pay a lump sum or a series of payments, and the insurer promises growth, income or both. Annuities are popular with people approaching retirement who want income they cannot outlive. LIMRA estimates, published by the Insurance Information Institute, put total US annuity sales at about $464 billion in 2025, with fixed products making up roughly two-thirds.
Two decisions: when payments start and how money grows
Every annuity combines a timing choice with a growth design.
Immediate vs. deferred
- Immediate annuity: you pay a lump sum and income starts right away, as FINRA describes it. A single premium immediate annuity is the purest form of longevity insurance.
- Deferred annuity: money accumulates for years, tax-deferred, before you take withdrawals or convert it to income. Many deferred annuities offer optional income riders.
Fixed, indexed and variable
| Type | How it grows | Risk to principal | Regulated by |
|---|---|---|---|
| Fixed | Guaranteed interest rate for a set period | None from markets (backed by insurer) | State insurance departments |
| Fixed indexed | Credits linked to an index, limited by caps or participation rates, with a floor | Protected from index losses | State insurance departments |
| Registered index-linked (RILA) | Index-linked with a buffer or floor that absorbs only part of losses | Partial | States, plus SEC and FINRA |
| Variable | Invested in subaccounts similar to mutual funds | Yes, value can fall | States, plus SEC and FINRA |
FINRA notes that all annuities are overseen by state insurance regulators, while variable annuities and RILAs are also securities regulated by the SEC and FINRA.
Payout options
- Life only: the highest payment, but it stops at death.
- Joint and survivor: continues for a spouse.
- Period certain: guaranteed for a set number of years even if you die early.
- Cash refund or installment refund: returns unpaid premium to beneficiaries.
Costs and restrictions
FINRA warns that annuities come with a variety of fees: surrender charges, mortality and expense charges, administrative fees, investment management fees in variable products, and extra charges for riders. Surrender periods can be long; FINRA notes that variable annuities can have surrender periods of eight years or more. Most contracts allow a limited penalty-free withdrawal each year. Ask for the total annual cost in dollars and the full surrender schedule before signing.
Taxes
Earnings grow tax-deferred and are taxed as ordinary income when withdrawn, not at capital gains rates. The IRS imposes a 10 percent additional tax on early distributions from deferred annuity contracts before age 59½, with some exceptions. Annuities held inside an IRA or 401(k) gain no extra tax deferral, so the reason to buy one there should be the guarantees, not the tax treatment.
What protects your money
Annuity guarantees depend on the insurer's ability to pay. Check its financial strength rating; our guide to choosing an insurance company explains the AM Best scale. State guaranty associations offer a backstop: NOLHGA states that most protect at least $250,000 in present value of annuity benefits per insurer, and some states set different levels.
Who annuities suit
- Retirees who want a predictable paycheck to cover essential expenses alongside Social Security.
- Savers who have maxed out 401(k) and IRA contributions and want more tax-deferred growth.
- People worried about outliving their savings or about market losses near retirement.
They are a poor fit for money you may need soon, for emergency savings, or for buyers who do not understand the contract.
Questions to ask before you buy
- What is the guaranteed minimum value and income, separate from projected values?
- What are all fees and the surrender schedule?
- For indexed products, can the insurer change caps and participation rates?
- What happens to the money if I die early?
- How long is the free-look period in my state?
Learn more on our annuities page, compare with permanent life insurance, or request a consultation. This guide is general information, not tax or investment advice; consult a licensed professional about your situation.