Frequently asked questions about annuities

An annuity is a financial contract between you and an insurance company. You make a lump-sum payment or series of payments, and in return, the insurer provides regular disbursements beginning either immediately or at some point in the future. Annuities are primarily used as a retirement income tool to provide guaranteed income that you cannot outlive.

Minimum investment amounts vary by product and insurance company. Most fixed indexed annuities require a minimum of $10,000 to $25,000. Multi-year guaranteed annuities (MYGAs) can start as low as $5,000 to $10,000. Variable annuities typically require $10,000 to $25,000. For optimal income generation, financial advisors often recommend investing $100,000 or more in an annuity.

A fixed indexed annuity is a type of annuity that earns interest based on the performance of a market index, such as the S&P 500, without directly investing in the market. Your principal is protected from market losses — you can never lose money due to market downturns. When the index performs well, you earn interest up to a cap or participation rate. When the index declines, your account value stays the same. FIAs are popular for their combination of growth potential and downside protection.

Annuity earnings grow tax-deferred, meaning you don't pay taxes on gains until you withdraw money. When you take withdrawals, the earnings portion is taxed as ordinary income (not capital gains). If you purchased the annuity with after-tax dollars (non-qualified), only the earnings are taxed. If purchased with pre-tax dollars (qualified, such as from an IRA), the entire withdrawal is taxable. Withdrawals before age 59½ may also incur a 10% IRS early withdrawal penalty.

Surrender charges are fees imposed by the insurance company if you withdraw more than the allowed free amount during the surrender period (typically 5-10 years). These charges usually start at 7-10% in the first year and decline annually until they reach 0%. Most annuities allow you to withdraw up to 10% of your account value each year without surrender charges. Understanding the surrender schedule is crucial before purchasing an annuity.

A lifetime income rider is an optional benefit you can add to a deferred annuity that guarantees you a stream of income for life, regardless of how long you live or how your account performs. The rider typically has a rollup rate that grows your income base during the deferral period, and a payout rate based on your age when you begin taking income. Rider fees typically range from 0.75% to 1.25% annually.

With fixed and fixed indexed annuities, your principal is protected by the insurance company — you cannot lose money due to market declines. However, you could face losses from surrender charges if you withdraw early, or if the insurance company becomes insolvent (though state guaranty associations provide some protection). Variable annuities do carry market risk, and your account value can decrease if your investment sub-accounts lose value.

The ideal age to purchase an annuity depends on your goals. For deferred income annuities, buying between ages 50-60 allows time for the income base to grow before you need income. For immediate income, ages 65-75 typically offer the best payout rates. MYGAs can be purchased at any age for guaranteed returns. Generally, annuities make the most sense for people within 10-15 years of retirement or already retired who want guaranteed income.

Annuity rates, particularly MYGAs, often exceed bank CD rates by 0.50% to 1.50% or more. As of 2025, top MYGA rates range from 5.00% to 5.75% for 3-5 year terms, while comparable bank CDs typically offer 4.00% to 5.00%. The key difference is that annuity earnings grow tax-deferred, while CD interest is taxed annually. However, annuities have surrender periods while CDs may offer more liquidity.

No, annuities are not FDIC insured because they are insurance products, not bank products. Instead, annuities are backed by the financial strength of the issuing insurance company and are protected by state guaranty associations. Each state has a guaranty association that provides coverage (typically $250,000 to $500,000 per owner per insurance company) if an insurer becomes insolvent. This is why choosing a financially strong insurance company is critical.