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, and some can pay income for as long as you live. Every guarantee depends on the claims-paying ability of the issuing insurance company.

Minimum premiums vary by product and insurance company. Many fixed indexed annuities require $10,000 to $25,000 to start, and multi-year guaranteed annuities (MYGAs) can start as low as $5,000 to $10,000. Some products also set a higher minimum for certain features or rate tiers, so check the specific contract.

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. When the index performs well, you earn interest up to a cap or participation rate. When the index declines, the interest credited for that period is zero rather than negative, so index losses are not subtracted from your account. Surrender charges, market value adjustments and optional rider fees can still reduce your account value, and the guarantees depend on the claims-paying ability of the issuing insurance company.

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, even if your account value runs out, subject to the claims-paying ability of the issuing insurance company. 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 vary by product and are usually charged each year as a percentage of the income base.

Fixed and fixed indexed annuities do not credit market losses to your account. You can still lose money: surrender charges and market value adjustments apply if you take out more than the free-withdrawal amount during the surrender period, optional rider fees reduce your account value, and every guarantee depends on the claims-paying ability of the issuing insurance company, which is why carrier financial strength matters.

There is no single right age; it depends on your goals. For deferred income, buying between ages 50 and 60 allows time for the income base to grow before you need income. For immediate income, payout rates rise with the age at which payments start. MYGAs can be purchased across a wide range of ages for a guaranteed rate. Annuities are most often used by people within 10 to 15 years of retirement or already retired.

Annuity rates, particularly MYGAs, often exceed bank CD rates. As of October 2026, top MYGA rates range from 6.08% to 6.45% for 3-5 year terms: see our rates page for today's full table. 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. Annuities are backed by the financial strength and claims-paying ability of the issuing insurance company, which state regulators require to hold reserves against every contract. This is why choosing a financially strong insurance company is critical.