Fixed indexed annuities and lifetime income
An annuity turns part of your savings into income you can’t outlive. Here’s how each type works, what it costs, and when it doesn’t make sense.
The short answer
An annuity is a contract with an insurance company: you give it a sum of money, and it pays you back over time, often for life. You trade access to that money for guarantees.
The four main types
Annuity types compared
| Fixed (MYGA) | Fixed indexed | Variable | Immediate income | |
|---|---|---|---|---|
| How it grows | A set rate for a set number of years | Interest linked to an index, with a cap and a 0% floor | Invested in sub-accounts, like mutual funds | Doesn’t grow: pays income right away |
| Can you lose money to the market? | No | No | Yes | No |
| Typical fees | Built into the rate | Built in; income riders cost extra | Highest: insurance, fund and rider fees | Built into the payout |
| Access to your money | Surrender charges until term ends | Surrender charges, often 5 to 10 years | Surrender charges | Usually none: the lump sum is gone |
| Good for | A CD-like rate, tax-deferred | Growth without market losses, plus optional lifetime income | Investors comfortable with risk | Guaranteed income starting now |
We focus on fixed and fixed indexed annuities. [Confirm with the client whether they offer variable annuities]
Read this before you buy
How surrender charges work
If you take out more than the free withdrawal amount (often 10% a year) during the surrender period, the insurer keeps a percentage. The charge usually steps down each year until it reaches zero.
The chart shows a hypothetical 7-year schedule. Real schedules vary, so always check the contract.
When an annuity can make sense
- ✓Social Security and pensions won’t cover your basic bills
- ✓You’re worried about outliving your savings
- ✓You want growth without market losses for part of your money
- ✓You won’t need that money during the surrender period
When it usually doesn’t
- ✕It would hold your emergency fund
- ✕You’d put most of your savings into it
- ✕You’re buying it inside an IRA for the tax deferral: the IRA already gives you that
- ✕You’d have to surrender another annuity early to buy it
Questions to ask before you sign
- How long is the surrender period, and what’s the charge each year?
- How much can I withdraw each year without a charge?
- What does the income rider cost, and what does it guarantee?
- Can the insurer change the cap or rate after year one?
- What is the insurer’s financial strength rating?
- How does the California Life and Health Insurance Guarantee Association apply?
Annuity FAQ
How are annuities taxed?+
Growth is tax-deferred. When you take money out, the earnings are taxed as ordinary income, and withdrawals of earnings before 59½ can also have a 10% penalty. Annuities funded with IRA or 401(k) money are taxed like those accounts.
Can I roll my 401(k) into an annuity?+
Yes, through a direct rollover to an IRA annuity, which avoids taxes and withholding. See our guide to 401(k) rollovers after a job change.
What happens to my annuity when I die?+
It depends on the contract. Most deferred annuities pay the remaining value to your beneficiary. Some lifetime income options stop at death unless you chose a joint or period-certain option.
Plan income you can count on
We’ll compare annuities from several carriers and show every charge.
[Licensing and disclosure wording: to be added at client review]