A falling stock market is not how most people lose money in a fixed or fixed indexed annuity. Both are built so a bad market year does not reduce your principal. The real ways to come out behind are quieter: leaving early and paying surrender charges, rider fees eating into the account, inflation, and, rarely, the insurer itself running into trouble.
Can you lose money in an annuity if the stock market crashes?
Not in a fixed annuity or a fixed indexed annuity, as long as you hold it the way it was designed to be held. A fixed annuity, including a MYGA (multi-year guaranteed annuity), credits a declared interest rate that the insurance company guarantees for the term. The stock market never touches it. A fixed indexed annuity (FIA) ties part of its interest to an index such as the S&P 500, but it has a 0% floor: in a year the index falls, you are credited zero rather than a loss.
That floor is the core promise of both products, and it is backed by the claims-paying ability of the issuing insurer. What it does not cover is everything else in this article. "Principal protected" describes market risk only. It is not the same as "you will never end up with less than you put in." If you want the mechanics first, our explainers on fixed annuities and fixed indexed annuities walk through how each one credits interest.
What are the ways you can actually lose money in an annuity?
There are five common ones, and only one of them has anything to do with markets. Here is how they compare.
| Way to lose money | Applies to | How it happens | How people limit it |
|---|---|---|---|
| Surrender charges | Fixed and FIA | Withdrawing more than the penalty-free amount during the surrender period | Match the term to when the money is needed |
| Market value adjustment (MVA) | Many fixed and FIA contracts | Interest rates rise and you surrender early | Stay within free withdrawals until the term ends |
| Rider fees | FIAs with optional riders | The fee is deducted even in a 0% year | Add a rider only if you plan to use it |
| Inflation | Every fixed-payout product | Fixed dollars buy less over time | Keep part of your savings in growth assets |
| Insurer failure | Every annuity | The carrier cannot meet its obligations | Favor financially strong carriers, spread large sums |
How do surrender charges make you lose money?
If you take out more than the contract allows during the surrender period, the insurer keeps a percentage of the withdrawal, and that can cut into your original deposit. Most fixed and fixed indexed annuities let you withdraw around 10% of the value each year without a charge. Go past that in the early years and a surrender charge applies, often starting in the high single digits and stepping down each year until it disappears.
On a new contract with little interest credited yet, a surrender charge can leave you with less than you deposited. That is the single most common way buyers lose money in a principal-protected annuity. The IRS adds its own layer: gains withdrawn before age 59½ can face a 10% additional tax on top of ordinary income tax. Our guide on withdrawing money from an annuity early covers the free-withdrawal rules and the common exceptions, and the surrender charges explainer shows how a typical schedule steps down.
What is a market value adjustment, and can it reduce your annuity?
A market value adjustment (MVA) changes your surrender value based on how interest rates have moved since you bought, and it can reduce what you receive if you leave early while rates are higher. The logic: the insurer bought bonds to back your guaranteed rate. If rates rise and you cash out, those bonds are worth less, and the MVA passes part of that cost to you. If rates fall, the MVA can work in your favor instead.
An MVA usually applies only to withdrawals above the penalty-free amount during the surrender period. Hold the contract to the end of the term and it never comes into play. Contracts also carry a minimum guaranteed surrender value, a floor set under state nonforfeiture law that limits how far charges and adjustments can push your value down. The contract disclosure shows exactly where that floor sits, and it is worth reading before you sign.
Can fees make your annuity value go down?
Yes, optional rider fees can shrink an FIA's account value in a year the index credits 0%. A basic MYGA usually has no annual fee at all, because the insurer's costs are built into the rate it pays. Many FIAs also carry no annual contract fee on the base product. The exception is optional riders, most often an income rider (a guaranteed lifetime withdrawal benefit), which typically charges an annual percentage of a benefit base.
That fee comes out regardless of index performance. In a flat or down year, the floor protects you from the index loss, but the rider fee still reduces your account value, and several weak years in a row can add up. If you pay for an income rider you never turn on, you are paying for insurance you never use. Our income riders explainer covers when a rider tends to earn its cost.
Can inflation make you lose money in an annuity?
Inflation does not reduce your account balance, but it reduces what that balance buys, which is a real loss of purchasing power. This matters most for annuities that pay a fixed income for life. A level payment that covers your bills comfortably at 65 may cover noticeably less at 85.
Some income annuities offer an optional annual payment increase in exchange for a lower starting payment. Another common approach is to place only part of your savings in fixed annuities and leave the rest in assets that can grow. A fixed annuity is a tool for guaranteed growth or guaranteed income, not a hedge against rising prices.
What happens if the insurance company goes bankrupt?
Annuity guarantees are only as strong as the insurer behind them, which is why the carrier's financial strength rating matters. Annuities are not bank deposits and are not FDIC-insured. They are backed by the issuing insurer's reserves and claims-paying ability, and insurers are regulated and examined by state insurance departments. Insurer failures are rare. When one happens, regulators typically step in to rehabilitate the company or transfer its contracts, but delays and reduced benefits are possible.
The practical defense is checking ratings before you buy. A.M. Best grades an insurer's financial strength, its ability to pay claims, on a letter scale:
| A.M. Best rating | A.M. Best category |
|---|---|
| A++ and A+ | Superior |
| A and A- | Excellent |
| B++ and B+ | Good |
| B and B- | Fair |
The recommendations in our comparison tools only include carriers rated B++ or better. The highest headline rates often come from weaker carriers, and a slightly higher rate is not worth a meaningfully weaker balance sheet behind your guarantee. Many buyers placing large sums also split them across more than one strong insurer.
Can you lose money if you die early with an annuity?
With some income annuities, yes: a life-only payout stops at death, so if you die early your heirs may receive nothing back. That is the tradeoff for the largest monthly check. Payout options such as cash refund, installment refund, or period certain make sure at least your premium, or a set number of payments, goes to your beneficiaries, in exchange for a smaller payment. Deferred fixed and fixed indexed annuities usually pass the account value to beneficiaries. See what happens to an annuity when you die for how each option treats heirs.
Is an annuity a good fit if you can't afford to lose money?
A fixed annuity or FIA can be a reasonable fit for money you want protected from market losses, provided you will not need more than the penalty-free amount before the surrender period ends. The protection is real, but it comes with conditions.
An annuity tends to fit when:
- The money is long-term savings you will not touch for the full term.
- You want a known rate, or market-linked growth with a 0% floor.
- You are comfortable with a strong, highly rated carrier holding the guarantee.
An annuity tends to be a poor fit when:
- The money is your emergency fund or you may need it within a few years.
- You expect to pay for a rider you will never use.
- You need your savings to keep pace with inflation over decades.
You can compare current guaranteed rates on our rates page, check how products stack up in our fixed annuity reviews, or run your own numbers with our free tools. If you want someone to walk through the surrender schedule and fees on a specific contract, a licensed advisor can do that with you on a call. Tax questions about early withdrawals belong with a tax professional.
Sources
- Internal Revenue Service, Publication 575, Pension and Annuity Income
- U.S. Securities and Exchange Commission, Investor Bulletin: Indexed Annuities
- FINRA, Investor Insights on fixed and indexed annuities
- National Association of Insurance Commissioners (NAIC), Annuity Buyer's Guide
- NAIC, Standard Nonforfeiture Law for Individual Deferred Annuities
- A.M. Best, Guide to Best's Financial Strength Ratings