Annuity basics

Four kinds of annuity, described the way a friend would describe them

An annuity is a contract with an insurance company: you give them money, and they promise something back — either interest for a set period or income for a set stretch of your life. Everything else is detail. Below is what separates the main varieties and what to look at before signing anything.

Fixed annuity

The insurer credits a set interest rate for a stated term. Your balance does not move with the market.

Where it helps: Predictability. You can see the exact rate and the exact term before you commit.
What to watch: Rates are locked for the term, so a long contract can leave you behind if rates rise later.

Fixed indexed annuity

Interest is tied to an index such as the S&P 500, with a floor that prevents losses and a cap or participation rate that limits gains.

Where it helps: Some market-linked upside without the risk of a losing year eating into principal.
What to watch: Caps, spreads, and participation rates can change. Read how crediting is calculated, not just the headline number.

Immediate income annuity

You hand over a lump sum and payments begin within about a year, often for the rest of your life.

Where it helps: Turns savings into a paycheck you cannot outlive, which is useful for covering fixed expenses.
What to watch: The money is generally no longer liquid. Inflation protection costs extra and lowers the starting payment.

Deferred income annuity

You buy income now that starts on a future date you choose, sometimes a decade or more out.

Where it helps: A relatively small premium today can produce a meaningful income later in retirement.
What to watch: You give up access to that money in the meantime, and a long wait carries inflation risk.

Terms worth knowing before a sales meeting

Surrender period: The years during which withdrawing more than the free amount triggers a charge.
Free withdrawal: The portion, often around 10% a year, you can take out without a surrender charge.
Cap rate: The maximum interest an indexed contract will credit in a given period.
Participation rate: The share of an index's gain that is used to calculate your credited interest.
Rider: An optional add-on, such as guaranteed lifetime income, that carries its own annual fee.
Annuitization: Converting the contract value into a stream of scheduled payments.
MVA: Market value adjustment — a plus or minus applied if you exit early while rates have moved.

Still deciding whether an annuity belongs in your plan? Get a free fit review — we will tell you plainly whether one helps, and which kind, at no cost.