What Are Annuities?

5 min read April 13, 2026

Key Takeaways

Annuities are contracts with an insurance company that offer tax-deferred growth and, in some cases, optional life insurance.
They come in multiple forms — including fixed, fixed indexed, variable, registered index-linked (RILA), and income-focused annuities — each designed for different levels of market exposure, protection, or retirement income needs.
Some annuities prioritize safety and steady returns, while others offer market-linked growth potential.
Optional riders can add features like lifelong income, enhanced death benefits, or long-term-care-style protections.
Annuities can help diversify retirement income sources and provide stability during market volatility.

Annuities are long-term financial products issued by insurance companies that can help you grow savings, protect your money, and create reliable retirement income. They combine elements of protection and growth, offering options for guaranteed income or market participation depending on the type you choose.

Annuities are often used as part of a retirement strategy because they can provide predictable income and help manage longevity risk—the possibility of outliving your savings. But they’re not one-size-fits-all. Understanding how they work and the different types available is key to deciding whether they fit your financial goals.

How Annuities Work

An annuity begins with a contract between an individual and an insurance company. You pay the insurer either a lump sum or a series of premiums.

Annuities can be structured either as immediate or deferred. Immediate annuities begin making payments soon after purchase, while deferred annuities allow time for tax deferred growth before income starts.

In exchange, the insurer provides:

Accumulation Phase – Your contributions grow tax-deferred. Depending on the annuity type, growth may be fixed, linked to an index, or tied to market performance.
Payout Phase – You convert your balance into income payments, which can be guaranteed for life or a set period. Payments can be structured monthly, quarterly, or annually.

There are generally two ways to turn an annuity into income: annuitization (converting the account value into a stream of payments) or adding an income benefit rider (typically for a fee) that allows systematic withdrawals for life under the rider’s terms.

Many annuities offer optional riders for income guarantees, death benefits, or enhanced growth features. While these add flexibility, they often come with additional costs. Liquidity is limited during the surrender period, and early withdrawals may incur penalties.

Common Types of Annuities

Annuities aren’t one-size-fits-all. Each type offers a different balance of protection, growth potential, and complexity. Here’s a quick snapshot:

Type	Protection Level	Growth Potential	Complexity
Fixed	Full principal protection	Low (guaranteed rate)	Simple
Fixed Indexed (FIA)	Full protection	Moderate (index-linked with caps)	Moderate
Registered Index-Linked (RILA)	Partial protection (buffer/shield)	Higher (index-linked with more upside)	Complex
Variable	No protection	Highest (market-based)	Complex
Single Premium Immediate (SPIA)	N/A – income begins immediately	None (income focused)	Simple
Deferred Income (DIA)	N/A – income begins at future date	None (income focused)	Simple

Income Annuities (SPIAs & DIAs): For those focused primarily on guaranteed income rather than accumulation, single premium immediate annuities (SPIAs) and deferred income annuities (DIAs) convert a lump sum into a predictable income stream — either immediately or at a future date. These are available on the iCapital platform at select firms.

Benefits of Annuities

Income – Options for lifetime income or scheduled payouts.
Tax Deferral – Earnings grow tax-deferred until withdrawn.
Protection – Certain types offer principal guarantees.
Customization – Riders can add income guarantees or enhanced benefits.
Inflation Protection – Some annuities include features that help offset rising costs.
Portfolio Diversification – Can reduce sequence-of-returns risk and provide stability during volatile markets.
Estate Planning Benefits – Enhanced death benefits can support beneficiaries.

Implementation Insight:
Benefits like guaranteed income, tax deferral, and diversification can help stabilize retirement planning. For those concerned about inflation or legacy planning, annuities offer features that traditional investments often lack.

Key Risk Considerations

Liquidity Limits – Access is restricted during surrender periods; withdrawals beyond free allowances may incur charges.
Fees – Charges vary by product and optional features, especially in variable annuities and riders.
Complexity – Understanding crediting methods and riders is essential.
Market Risk – Applies to variable annuities and partially to RILAs.
Carrier Strength – Guarantees are backed by the issuing insurance company, not the government.

Implementation Insight:
Investors should weigh liquidity needs and fee structures carefully. Annuities can be valuable for long-term goals, but they require commitment and a clear understanding of associated costs and risks. A financial advisor can help evaluate whether the trade-offs align with your retirement objectives.

Annuities: Myth vs. Fact

Myth	Fact
Annuities are only for retirees	They can be used for long-term savings and income planning at any stage.
Annuities are too expensive	Costs vary; some types have low fees and simple structures.
You lose access to your money	Liquidity is limited, but most contracts allow partial withdrawals.
Annuities don’t offer growth	Indexed and variable annuities provide market-linked growth potential.

IMPORTANT INFORMATION

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ANNUITIES ARE CONSIDERED COMPLEX PRODUCTS AND MAY NOT BE SUITABLE FOR ALL INVESTORS. The information is not intended as investment advice and is not a recommendation about managing or investing retirement savings. Actual annuity contracts may differ materially from the general overview provided. Prior to making any decision with respect to an annuity contract, purchasers must review, as applicable, the offering document, the disclosure document, and the buyer's guide which contain detailed and additional information about the annuity. Any annuity contract is subject in its entirety is to the terms and conditions imposed by the carrier under the contract. Withdrawals or surrenders may be subject to surrender charges, and/or market value adjustments, which can reduce the owner's contract value or the actual withdrawal amount received. Withdrawals and distributions of taxable amounts are subject to ordinary income tax and, if made prior to age 59½, may be subject to an additional 10% federal income tax penalty. Annuities are not FDIC-insured. All references to guarantees arising under an annuity contract are subject to the financial strength and claims-paying ability of the carrier.

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