The short answer
An annuity is a contract with an insurance company: you put money in, and in return it can grow tax-deferred and later provide a stream of income, including income you can't outlive. Annuities aren't a Medicare product. They can help some retirees turn savings into predictable income, but they have surrender periods and aren't right for money you may need soon.
Written by Alan Roy, independent licensed insurance agent (FL #W937474) · Updated
How does an annuity work?
You fund an annuity with a lump sum or a series of payments. Depending on the type, your money earns a fixed or index-linked interest rate and grows tax-deferred. Later, you can take withdrawals or turn it into a guaranteed stream of income for a set period or for life.
What are the main types of annuities?
- Fixed annuity: earns a set interest rate for a set period, similar in concept to a CD
- Fixed indexed annuity: interest is linked to a market index with protection from market losses, within the contract's limits
- Immediate (income) annuity: turns a lump sum into income that starts right away
What should I know before buying an annuity?
- Most annuities have a surrender period, with charges if you withdraw more than the allowed amount early
- Guarantees are backed by the claims-paying ability of the issuing insurance company
- Annuities are not bank deposits and are not FDIC insured
- Withdrawals are taxed as income, and withdrawals before age 59½ may face an IRS penalty
- An annuity should fit your whole financial picture, including money you'll need for emergencies
Who it may fit
- You want part of your retirement income to be predictable
- You have savings you won't need to touch for several years
- You want protection from market losses on part of your money
- You're concerned about outliving your savings
How Alan helps
- Starts with your goals, income needs and timeline, not a product
- Explains surrender periods, fees and guarantees in plain English
- Compares options from the companies he represents
- Never pressures: you'll have time to review everything before deciding
Frequently asked questions
Is an annuity a Medicare product?
No. Annuities are retirement income products. If you'd like to talk about annuities, Alan schedules that as a separate conversation from any Medicare appointment.
Can I lose money in an annuity?
Fixed and fixed indexed annuities are designed to protect your principal from market losses, but surrender charges can apply if you take out more than allowed during the surrender period. Guarantees depend on the issuing insurance company.
How are annuities taxed?
Growth is tax-deferred, and withdrawals are generally taxed as ordinary income. Talk with a tax professional about your situation.
Annuities are long-term insurance contracts intended for retirement. Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Annuities are not FDIC insured and are not deposits of a bank. Surrender charges may apply to early withdrawals, and withdrawals before age 59½ may be subject to a 10% IRS penalty. This page is general information, not tax, legal or investment advice.
This product is not a Medicare plan and is not connected with or endorsed by the U.S. government or the federal Medicare program. Coverage is subject to the terms, conditions, limitations and exclusions of the policy, and availability varies by state.