What Is an Annuity?
An annuity is a contract with an insurance company: you hand over money now, it hands you payments later. Here is how the deal works, who it suits, and what it costs.
An annuity converts a lump sum into a stream of payments, either starting now (immediate) or later (deferred), for a set period or for life. It is longevity insurance: the payments continue no matter how long you live, in exchange for fees and capped growth.
The basic deal
You pay an insurer a lump sum or a series of premiums. In return, the insurer promises payments on a schedule you choose: monthly checks for 10 or 20 years, or for the rest of your life. The insurer pools thousands of buyers and uses mortality math to price the promise.
The core appeal is certainty. Markets can crash and you can live to 95; the contracted payments arrive anyway. The core cost is also certainty: your upside is capped, your money is locked up with surrender charges, and inflation quietly shrinks fixed payments.
The four main types
Fixed annuities pay a guaranteed rate, like a CD from an insurer. Variable annuities invest in market subaccounts with upside and downside. Indexed annuities track a market index with caps and floors. Immediate annuities start paying within a year; deferred annuities wait.
For guaranteed retirement income, fixed immediate or deferred income annuities are the straightforward choice. Variable and indexed versions add complexity and fees that mainly benefit the seller.
Who annuities suit
Retirees who have covered basics with Social Security but want one more guaranteed check, people without pensions who want pension-like income, and anyone whose biggest fear is outliving savings rather than missing market gains.
Who should skip them: young accumulators who need growth, anyone who might need the lump sum back soon, and people already over-weighted in conservative assets. An annuity is a slice of a plan, rarely the whole plan.
Skip the arithmetic
Price a payout stream with the free annuity calculator.
Annuity basics questions
Is an annuity an investment?
Fixed annuities behave like conservative savings with an insurer guarantee. Variable annuities do invest in markets, but fees of 2 to 4 percent yearly drag returns below what the same investments would earn unwrapped. Buy annuities for guaranteed income, buy index funds for growth.
What happens to an annuity when you die?
A life-only annuity pays the most per month because payments stop at death, which is the mortality credit at work. Period-certain options guarantee payments for at least 10 or 20 years to your heirs. Joint-and-survivor options cover two lives at a lower monthly amount.