Annuity Basics
Aug 9, 2026
insurance
retirement
Annuity Basics
An annuity is a contract with an insurance company: you pay a premium, and in return the insurer promises a stream of payments — potentially for the rest of your life. Annuities are the main financial product that can insure against outliving your money.
The main types
- Immediate annuities (SPIA): you pay a lump sum and payments begin right away, typically for life.
- Deferred income annuities: purchased now, payments start at a future date you choose.
- Fixed annuities: earn a declared interest rate during accumulation, like a CD issued by an insurer.
- Variable annuities: value fluctuates with underlying investment subaccounts.
- Fixed indexed annuities: returns linked to an index with caps and floors.
The simpler income-focused types (SPIA, deferred income) solve a clear problem; the more complex accumulation types deserve extra scrutiny of costs and terms.
How annuities are taxed
- Inside a taxable purchase, growth is tax-deferred; a portion of each payout is a tax-free return of principal.
- Inside an IRA, an annuity adds no extra tax deferral — the reason to use one there is the income guarantee, not taxes.
- Withdrawals of earnings before age 59½ generally face a 10% penalty on top of ordinary income tax.
What to scrutinize before buying
- Fees: mortality and expense charges, rider fees, and fund costs can stack up in variable products.
- Surrender periods: exiting early can cost several percent for 5–10 years.
- Insurer strength: guarantees are only as good as the company behind them; check financial strength ratings.
- Inflation: a fixed lifetime payment loses purchasing power over decades unless you add (and pay for) inflation adjustment.
Key takeaways
- Annuities convert savings into guaranteed income — insurance against longevity risk.
- Simple income annuities are easier to evaluate than complex accumulation products.
- Fees, surrender terms, and insurer strength determine whether a contract is worth it.
This article is for educational purposes only and is not investment or insurance advice. Consult your advisor about your specific situation.