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Annuities

Written by Jovan Johnson, Esq., Structured Settlement & Annuity Specialist

Updated August 31, 2026

As people look for financial security amid market uncertainty, you might hear the word “annuity” come up a lot. But what is an annuity, and how does it actually work? Are annuities good investments — and if so, for whom, and under what conditions?

Put simply, an annuity is a contract — generally with an insurance company — that provides regular payments to a recipient, known as an “annuitant.” It’s a trade-off: you make an investment upfront and, in exchange, receive a regular source of income for a specified period.

Annuities have grown more common as a retirement-planning tool over the past couple of decades, driven partly by declining access to traditional pensions and ongoing uncertainty about Social Security’s long-term financing — the 2026 Social Security Trustees report projects the OASI trust fund will be depleted in late 2032, with the combined trust funds lasting until 2034, after which incoming payroll taxes would still cover a majority of scheduled benefits, not zero. The SECURE Act (2019) and SECURE 2.0 (2022) both encouraged wider use of annuities, including inside employer retirement plans, by easing rules that previously discouraged employers from offering them.

If you purchase an annuity, you can generally select an arrangement that pays out over 10 years, 15 years, or the rest of your life. The shorter the period, the higher your payments; the longer the period, the more protection against outliving your money. Annuities can also cover more than one person’s lifetime — benefits can transfer to a spouse or child if the annuitant dies, and many contracts include a death benefit if the owner passes away while the account still has value.

Seven Basic Types of Annuities

Annuities can be classified based on three factors: their financial structure, when payments begin, and how long payments last. Depending on your retirement plans and risk tolerance, different combinations of these features will fit better than others.

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By Financial Structure

  • Fixed annuities — the simplest option. See our dedicated page on fixed annuities for the full breakdown, but in short: they pay a guaranteed interest rate that can’t move unless your contract allows for it, with no maintenance fees, but a more modest rate of return. Choose this if security is your top priority.
  • Variable annuities — your money goes into mutual funds, so returns rise and fall with the market. You’ll pay management fees, and your annuity could lose value — but you also have more upside potential. If market uncertainty makes you wary, some contracts let you add a rider that locks in a minimum income level even in a down market.
  • Fixed-indexed annuities — (also called hybrid or equity-indexed annuities) work like fixed annuities but offer an interest rate equal to the greater of a guaranteed minimum return or a return tied to a stock market index like the Dow Jones Industrial Average or S&P 500, reduced by certain fees and formulas.

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By When Payments Begin

  • Immediate annuities — generally purchased by people already at or near retirement. Payments usually start within one to twelve months of your investment — essentially a life insurance policy in reverse: instead of paying premiums for a future lump sum, you pay a lump sum now for regular income later. There’s usually no death benefit, so if you die before the money is used up, your heirs typically don’t have access to what’s left.
  • Deferred annuities — sometimes called longevity annuities, more often chosen by younger buyers. Payments are delayed to a future date — generally two to thirty years out — giving your investment time to grow tax-deferred. You can fund one with a lump sum or several deposits, and most include a death benefit for your beneficiary.

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By Payment Duration

  • Lifetime annuities — pay income for the rest of your life (or yours and your spouse’s, together). The amount depends on how much you invested and when payments start. The core benefit: you can’t outlive this income.
  • Fixed-period (period-certain) annuities — pay income for a set period, like 10 or 15 years, regardless of your age when payments start.

The Pros and Cons of Different Annuities

Annuities aren’t all the same, so it’s worth being careful about generalizing — but some broadly recognized pros and cons apply across most types.

Pros of Annuities

  • Stability — predictable, guaranteed minimum interest rates, and (with a lifetime option) income you can’t outlive — a real advantage compared to investments that can shrink quickly in a down market or under unexpected expenses.
  • Simple structure — a fixed annuity in particular can be a “set it and forget it” product, since your funds are locked in and don’t require daily market monitoring.
  • Solid, tax-deferred returns — annuity returns can exceed CD or Treasury rates, and growth compounds tax-deferred until withdrawal. In some states, annuities also receive some protection from creditors and lawsuits, unlike CDs — this varies significantly by state, so check your state’s specific rules and talk to a financial advisor about how it applies to you.
  • Tax deferral — you don’t pay tax on growth until you withdraw, and you have some control over timing — leaving funds in a deferred annuity longer can reduce taxable income (and potentially Social Security taxation) in years you don’t need the money.

Cons of Annuities

  • Dependence on the issuer — your protection is only as strong as the insurance company behind the contract. Check the issuer’s financial strength rating and consult a financial advisor before committing.
  • No liquidity — your money isn’t easily accessible. Early withdrawal typically triggers surrender fees and, before age 59½, a tax penalty.
  • Not FDIC-insured — annuities are backed by the issuing insurer and (up to state-specific limits) your state’s guaranty association, not the federal government.
  • Lower ceiling — insurer fees and hedges generally mean lower returns than investing directly in the market, especially the more “safety” features are built into your contract.
  • Fees — annuities often carry more fees than mutual funds or CDs, particularly when a broker’s commission is involved. Some fees, like optional riders, are within your control.
  • Inflation risk — fixed payouts lose purchasing power over time. This isn’t just a theoretical risk: U.S. inflation spiked to roughly 9% in 2022, the highest level in four decades, before gradually cooling in subsequent years. An inflation-protection rider on an immediate annuity can help, but it comes at a real cost — commonly reducing your initial payout by a meaningful percentage, so it’s worth running the numbers with your advisor.

Important Factors to Consider

Spousal Coverage

A Joint and Survivor Annuity guarantees income to both spouses. If one dies, the survivor keeps receiving payments, typically at a reduced rate (often half to two-thirds of the original amount). Covering two lifetimes generally means smaller payments than covering one.

Death Benefits and Beneficiaries

Beneficiaries generally have three options:

  • A lump-sum payment — simplest, but if the annuity was held outside an IRA, all the appreciation is taxed as regular income at once, which can push you into a higher bracket.
  • Payments over a period up to the beneficiary’s life expectancy — a longer wait, but fewer tax consequences at once.
  • Withdrawals over five years — a middle ground that spreads out the tax impact.

A spouse-beneficiary can typically take over the contract entirely through spousal continuation, assuming the same rights and terms as the original annuitant. A non-spouse beneficiary, like a child, generally can’t change the contract’s terms and only has access to funds as originally specified.

Qualified vs. Nonqualified Funds

Qualified funds haven’t been taxed yet — money from an IRA or 401(k) falls here. Your entire payout, principal and interest, is taxed as income on withdrawal, and required withdrawals generally begin at a certain age. Nonqualified funds are already-taxed money; only the interest they earn is taxable when withdrawn.

Single Premium vs. Flexible Premium

A single premium is a lump-sum investment that starts accumulating interest immediately — often funded by the sale of a major asset or another windfall. A flexible premium lets you contribute over time, in amounts and on a schedule you can adjust; smaller or less frequent contributions mean less accumulated growth.

Ratchet Annuities (Equity-Indexed)

A ratchet annuity is a fixed-indexed annuity that locks in each year’s market gains and can only move up, never down — you never lose principal to a market downturn. The trade-off is a cap: gains might be capped at a level like 9%, so if the market rises 18% in a given year, you’d only capture the capped amount, not the full gain.

Participation Rate

With fixed-indexed annuities, the participation rate sets the maximum percentage of index growth your contract captures — for example, an 80% participation rate on a 10% index gain would credit your contract with roughly 8%. Insurers set this rate partly to manage their own exposure to market volatility.

Annuities FAQ

How safe are annuities?

Annuities are contracts with an insurance company, so they’re relatively safe, but only as safe as the company behind them. If an issuer becomes insolvent, your state’s guaranty association provides a backstop — typically up to $250,000 in present value of annuity benefits in most states, with some states going as high as $500,000 and a few lower. Check NOLHGA.com for your state’s specific figure.

Do your homework on any insurer you’re considering: check its financial strength rating from A.M. Best, Fitch, Moody’s, or Standard & Poor’s, and confirm any broker selling you a variable annuity is registered (variable annuities are considered securities) using the free search tool at Investor.gov. Some buyers choose to split a large purchase across more than one insurer as an added layer of protection.

What fees and charges are involved with an annuity?

Common costs include:

  • Commissions — what the broker earns for selling the annuity, generally built into the contract rather than billed separately. Ask directly what the commission is and how it affects your quote — some annuities can be purchased direct from the insurer to avoid this layer entirely.
  • Riders — optional customized features, like death benefits or minimum payout guarantees, each adding to the annual cost.
  • Administrative fees — cover record-keeping and account administration, often a small flat fee or a modest percentage of contract value.
  • Mortality/expense risk charges — compensate the insurer for the risk it takes on in guaranteeing your contract.
  • Underlying fund expenses — cover the administration of the mutual funds inside a variable annuity.
  • Surrender charges — apply if you withdraw too early or before a specified age, and typically decline the longer you hold the contract.

Can you fund an annuity with IRA dollars?

Yes — you can roll over IRA or 401(k) funds into a qualified annuity without immediate tax consequences, but the full amount (principal and growth) becomes taxable on withdrawal, since it was never taxed going in. Moving funds the other way, from an annuity back into an IRA, generally only works with qualified variable annuities funded by pre-tax dollars.

Can you sell an annuity if the need comes up?

Yes, though it’s worth understanding the potential costs first. Withdrawing before age 59½ generally triggers a 10% IRS early-withdrawal fee, on top of any surrender charges your insurer applies if you’re still within the contract’s surrender period — often several years, sometimes longer, with the penalty typically shrinking each year. There’s usually no penalty if you become disabled or pass away.

You can also explore selling some or all of your future annuity payments to a buyer, rather than withdrawing directly from the insurer — this is a different transaction with its own considerations, and it’s worth comparing more than one offer and talking to your financial advisor before deciding. This applies whether your payments come from a fixed annuity or other life-contingent payments.

Will the insurance company keep all your money if you die early?

It depends on your contract. With a named beneficiary, payments (or a lump sum) generally continue to that person, sometimes at extra cost for the death-benefit provision. Without one, the remaining balance stays with the insurer, which pools it with other policyholders’ funds — part of how insurers are able to guarantee lifetime income for people who live longer than expected in the first place.

Conclusion

An annuity can be a useful option if you want steady retirement income, don’t need to access the money in the near term, and want to manage your tax timing by spreading out income. If you’re likely to need the money sooner, other investment vehicles may be a better fit. Whatever you decide, research the issuing company’s reputation and financial strength, and talk it over with a financial advisor before committing.

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About the Author: Jovan Johnson, Esq. is a structured settlement & annuity specialist with 12 years of experience, based in California. He has also practiced as an attorney in consumer and small business bankruptcy and debt settlement. Annuity Freedom has been helping clients sell annuity payments since 2017.

Disclaimer: This article is for informational purposes only and isn’t a substitute for advice from a licensed financial advisor about your specific situation. If you’re ever curious what an annuity or structured settlement payment stream would be worth if sold, you can get a free quote — no obligation.