Every annuity contract, whatever the type, uses the same handful of parties, values and dates. This page defines them once so every other reference page can point here instead of starting over.
An annuity is a contract with an insurance company. You hand over money, and the carrier promises something in return: a guaranteed interest rate, interest linked to an index, or a stream of income for a period or for life. Everything else on this site is a variation on that promise.
Use this page when a word on a contract or an illustration stops you. Each entry opens with the question people actually ask us, gives a definition you can repeat to your spouse, and shows a worked example in round numbers.
- Who is who: the Owner controls the contract, the Annuitant is the measuring life, the Beneficiary gets what is left.
- What the numbers mean: Account value is what you have, Surrender value is what you can walk away with today.
- Which type is which: the “Types at a glance” group links each product to its own reference page.
Usually the wrong answer when
You may need the money back in full within a year or two, you have no emergency fund outside the annuity, or someone is pitching the contract as a way to “beat the market.” An annuity is a tool for guarantees, not growth at any cost, and it is the wrong tool for money you cannot leave alone.
Start here if the word “annuity” itself is fuzzy. These nine terms describe the two halves of every contract: the years money sits and grows, and the years it pays out.
What is an annuity, in one sentence?
DefinitionAn annuity is a contract with an insurance company that, in exchange for a premium, guarantees interest, income or both, backed by the carrier’s general account.
You pay a Premium once or over time. The carrier either credits interest to your Account value during the Accumulation phase, or converts the money into payments during the Payout phase, or does one and then the other.
Annuities come in several types. Fixed products guarantee a stated rate, index-linked products credit interest based on a market index with a floor, and immediate products start paying within a year. Each has its own reference page, linked under “Types at a glance” below.
Illustrative
A 64-year-old puts $100,000 into a five-year fixed annuity paying 5% a year. At the end of year five the contract is worth about $127,600, all of it guaranteed from day one. She can take the money, renew, or turn it into income.
Watch for
The word “annuity” covers products that behave very differently. A five-year MYGA and a 14-year Fixed index annuity with an income rider are both annuities, and almost nothing else about them is the same. Always ask which type before you compare anything.
Related: Insurance contract vs investment · Deferred annuity · Immediate annuity · Fixed annuity · Annuitization
Is an annuity an investment?
DefinitionA fixed or index annuity is an insurance contract, not a security: the carrier owns the underlying assets and promises you a result, rather than passing market gains and losses through to you.
With an investment, you own the asset and bear the gain or loss. With a fixed or index annuity, the Insurance carrier owns a portfolio of bonds and other assets and promises you a defined outcome from it. That is why your principal is protected from market loss and why your upside is limited.
Two exceptions blur the line. A Variable annuity holds securities in Subaccounts you own the risk on, and a RILA is also registered as a security. Both are sold with a prospectus and need a securities license.
Watch for
Because a fixed annuity is insurance, it is regulated by your state insurance department rather than the SEC. That changes your protections, your paperwork and who is allowed to sell it to you. See State insurance regulation.
Related: Annuity · Insurance carrier · Guaranteed vs non-guaranteed elements · Variable annuity
What happens to my money before I start taking income?
DefinitionThe accumulation phase is the period when your premium sits in the contract and earns interest, before any income payments begin.
During accumulation, the carrier credits interest to your Account value under whatever method the contract uses: a declared rate, an index formula or subaccount returns. Taxes on the growth are deferred until money comes out. See Tax deferral.
Withdrawals during this phase are allowed but may face a Surrender charge and, before age 59½, a federal penalty. Most contracts let you take a free withdrawal each year without charge.
Illustrative
$100,000 deposited at age 60 and left alone at 4% a year grows to about $148,000 by age 70. Nothing has been paid out and no tax has been due. That ten-year stretch is the accumulation phase.
Watch for
“Deferred” does not mean “locked away forever.” Many buyers never annuitize at all; they take withdrawals or simply let the contract mature. The accumulation phase can also be the whole life of the contract.
Related: Payout phase · Deferred annuity · Account value · Tax deferral
When does the annuity start paying me?
DefinitionThe payout phase, also called the distribution or income phase, is the period when the contract sends you regular payments instead of accumulating.
The payout phase begins when you annuitize, when you turn on an Income rider, or immediately if you bought a SPIA. Payments can run for a set number of years, for life, or for the longer of the two, depending on the payout option you choose.
Once income starts, your choices usually narrow. Annuitized contracts give up the lump sum entirely. Income riders keep the account value accessible, but withdrawals beyond the scheduled amount reduce future income.
Watch for
Ask whether the payout phase is reversible. With annuitization it is not. With an income rider it usually is, at a cost. The difference matters if your health or plans change.
Related: Accumulation phase · Annuitization · SPIA · Income rider
What does it mean to annuitize?
DefinitionAnnuitization is the irrevocable exchange of your contract’s value for a guaranteed series of payments, for a set period, for life, or both.
You pick a payout option, the carrier calculates a payment from your age, the option and current rates, and the lump sum is gone. In exchange you get Mortality credits: the pooling that lets a life payout exceed what the money alone could safely produce.
Annuitization is built into every deferred contract as an option at the Maturity date, and it is the whole product in an Immediate annuity.
Illustrative
A 70-year-old annuitizes $200,000 on a life-with-10-years-certain basis and receives roughly $1,200 a month for life. If he dies in year four, payments continue to his beneficiary through year ten, then stop.
Watch for
Carriers rarely push annuitization and most owners never do it, often because the income rider route feels more flexible. Compare the two with real numbers before deciding; the annuitized payment is sometimes meaningfully higher. See Income rider vs annuitization.
Related: Payout phase · Payout options · Exclusion ratio · Income rider vs annuitization · Irrevocability
What is a deferred annuity?
DefinitionA deferred annuity is any annuity in which income, if ever taken, starts more than a year after purchase; the money accumulates first.
Fixed, MYGA, fixed index, RILA and variable annuities are all deferred annuities. So is a Deferred income annuity, which defers payments but fixes them in advance.
The deferral is where the tax advantage lives: growth is not taxed until withdrawn. It is also where the Surrender period lives, so the money is meant to stay put for the term.
Watch for
“Deferred” describes when income starts, not how safe the product is. A deferred variable annuity can lose money; a deferred MYGA cannot. Ask which kind.
Related: Immediate annuity · Accumulation phase · Tax deferral · Surrender period
Can I buy an annuity that starts paying right away?
DefinitionAn immediate annuity converts a single premium into payments that begin within one year of purchase, usually within a month.
The common form is the single premium immediate annuity. You choose a payout option, the carrier quotes a payment, and the first check arrives on the schedule you pick. There is no accumulation phase and no account value to track.
Illustrative
$150,000 at age 68, life only, might produce about $950 a month for as long as the buyer lives. The quote depends on age, sex, current rates and the option chosen.
Watch for
An immediate annuity is a one-way door. The premium is spent on a promise and cannot be recovered except through the payments or a refund feature you chose at purchase. Read Irrevocability before signing.
Related: SPIA · Deferred annuity · Payout options · Irrevocability
Do I have to put it all in at once?
DefinitionA single premium contract accepts one deposit at issue and no further contributions.
Most MYGAs, FIAs and all SPIAs are single premium. The carrier prices the guarantee on that one amount. Some contracts allow additional deposits in the first 30 to 90 days so transfers from several accounts can land together.
Watch for
If you expect to add money later, ask about the window. Once it closes you would need a second contract, with its own Surrender period and paperwork.
Related: Flexible premium · Premium · Funding
Can I keep adding money over time?
DefinitionA flexible premium contract accepts additional deposits after issue, within limits set by the carrier.
Flexible premium deferred annuities are common for people still saving, and some deferred income annuities allow it too. Each deposit may start its own Surrender charge schedule and may earn a different rate from the first.
Watch for
Check whether new deposits reset the surrender clock. On some contracts every added dollar carries a fresh seven-year schedule, which can trap money you thought was nearly free.
Related: Single premium · Surrender charge schedule · Flexible premium DIA
Four roles appear on every application. Get them wrong and the contract may not do what you expect at death or when someone needs to act for you.
Who actually controls the annuity?
DefinitionThe owner is the person or entity who holds the contract rights: making withdrawals, changing beneficiaries, choosing payout options and surrendering.
The owner pays the Premium, receives the tax forms and makes every decision while alive. The owner is usually also the Annuitant, but need not be. A trust, a corporation or a custodian (for an IRA) can own a contract, with tax consequences covered in Non-natural owner rule.
Related: Annuitant · Joint owner · Beneficiary · Change of owner
What is an annuitant, and is that me?
DefinitionThe annuitant is the person whose age and life expectancy are used to calculate payments and, on many contracts, whose death triggers the death benefit.
Carriers price lifetime income on the annuitant’s life. On most individually owned contracts the owner names themselves as annuitant. If a trust owns the contract, a real person must still be the annuitant because a trust has no life expectancy.
Illustrative
A husband owns the contract and names his wife as annuitant. On an annuitant-driven contract, her death pays the death benefit even though he is alive and still the owner. On an owner-driven contract, it does not.
Watch for
Changing the annuitant is often prohibited or treated as a new contract. Decide this once, at application, and keep owner and annuitant the same unless a specific reason says otherwise.
Related: Owner · Joint annuitant · Owner-driven vs annuitant-driven contracts · Issue age
Should my spouse and I own the annuity together?
DefinitionA joint owner shares full contract rights with the owner; both signatures are needed for changes, and the death of either owner triggers the death benefit.
Joint ownership is allowed on non-qualified contracts, almost always for spouses. IRAs cannot have joint owners. The surviving joint owner is normally treated as the beneficiary, which lets a spouse use Spousal continuation.
Watch for
Joint ownership between non-spouses creates a tax problem: the first death forces the money out: the survivor must take it within five years or start life-expectancy payments within a year, and only a spouse can continue the contract. Spouses usually get the same result more cleanly by naming each other as sole Beneficiary.
Related: Owner · Joint annuitant · Spousal continuation · Beneficiary
What is a joint annuitant?
DefinitionA joint annuitant is a second measuring life, used so that income continues until both people have died.
Joint annuitants appear in Joint and survivor SPIA payouts and in joint income rider payouts. Because the payment must last for two lifetimes, the rate per dollar is lower than for one life.
Watch for
On some contracts a joint annuitant must also be a joint owner or the spouse. Ask before assuming an adult child can be named.
Related: Annuitant · Joint and survivor · Joint life payout · Joint owner
Who gets the money when I die?
DefinitionThe beneficiary is the person or entity named to receive the death benefit, outside of probate.
You name primary beneficiaries and, ideally, contingent beneficiaries. Shares are usually percentages. A spouse beneficiary can often continue the contract; others must take the money under the rules on the Inherited annuities page.
Illustrative
An owner names two children at 50% each. One child dies first. Whether that child’s children receive his half depends on the per stirpes or per capita election on the form.
Watch for
The beneficiary form overrides your will. An ex-spouse left on a form from 2009 will inherit. Review it at every Anniversary review and after every marriage, divorce, birth or death.
Related: Contingent beneficiary · Death benefit · Change of beneficiary · Inherited annuities
What happens if my beneficiary dies before me?
DefinitionA contingent beneficiary receives the death benefit only if no primary beneficiary is alive at the owner’s death.
Carriers pay primaries first. If every primary has died, the contingents take their listed shares. If there are no living beneficiaries at all, the benefit goes to the owner’s estate and through probate.
Watch for
Leaving the contingent line blank is the most common beneficiary mistake we see. It can send a $300,000 contract through probate for want of a second name.
Related: Beneficiary · Per stirpes vs per capita · Change of beneficiary
Who is actually guaranteeing my money?
DefinitionThe insurance carrier is the life insurance company that issues the contract and whose general account backs every guarantee in it.
Your agency and your agent sell and service the contract; the carrier owns the promise. Its ability to pay is what the ratings agencies grade. The Carrier strength and ratings page explains how to read AM Best and the others, and what we look at beyond the letter grade.
Related: Carrier strength and ratings · General account · What a rating measures · Splitting premium across carriers
Who is the person selling me this, and who do they work for?
DefinitionAn agent is licensed by the state to sell insurance; a broker or independent agent can place business with many carriers; an investment adviser is registered to give securities advice for a fee and may or may not also hold an insurance license.
Fixed and index annuities require a state life insurance license. Variable annuities and RILAs also require a securities registration; see Securities licensing. A captive agent represents one carrier, an independent agent many, and the difference shapes what you are shown. See Independent broker vs captive agent.
Titles are loosely regulated. Ask three questions: what licenses do you hold, how are you paid, and how many carriers can you quote?
Watch for
“Fee-only” planners cannot be paid a commission and so cannot sell most fixed annuities themselves. If one recommends a product, ask who places it and who gets paid.
Related: Independent broker vs captive agent · Commission · Securities licensing · IMO/FMO
What is an IMO, and why does my agent mention one?
DefinitionAn IMO or FMO (independent or field marketing organization) is a wholesaler that sits between carriers and independent agents, handling contracting, training and case support.
Carriers do not want to manage thousands of individual agents, so they appoint through IMOs. The IMO earns an override on each sale, paid by the carrier, not from your premium. A good IMO gives an agent access to many carriers and fast underwriting help.
Watch for
Some IMOs offer agents bonuses to favor certain products. That is a reason to ask your agent how many carriers were compared, not just which one won.
Related: Agent vs broker vs advisor · Commission · How annuities are sold
Whose death pays the death benefit, mine or the annuitant’s?
DefinitionAn owner-driven contract pays its death benefit when the owner dies; an annuitant-driven contract pays when the annuitant dies, even if the owner is still living.
Most modern contracts are owner-driven, which lines up with the tax law that forces distributions at an owner’s death. Older or annuitant-driven designs can pay a death benefit to the beneficiary while the owner is alive, which can create a taxable gift and an unexpected tax bill.
Illustrative
Mother owns, father is annuitant, daughter is beneficiary, on an annuitant-driven contract. Father dies. The carrier pays the daughter, mother loses the contract, and the gain can be taxed to mother even though the money went to her daughter. Ask a tax professional before setting a contract up this way.
Watch for
The simplest protection is to make owner and annuitant the same person. If they must differ, ask the carrier in writing which event drives the death benefit.
Related: Owner · Annuitant · Death benefit · Standard death benefit
A statement shows several numbers that look alike. These are the ones that matter on a fixed or index contract. Income-rider contracts add a Benefit base, which is not a value you can take and has its own page.
Is “premium” just what I paid in?
DefinitionPremium is the money you deposit into the contract; it is the base from which every other value starts.
Premium can be a single deposit or several (see Single premium and Flexible premium). It sets your rate band on a MYGA, the size of any Premium bonus on an FIA, and your Cost basis on a non-qualified contract.
Watch for
Commissions are not deducted from premium on fixed and index annuities. If you deposit $100,000, your day-one account value is $100,000 (plus any bonus). See Commission.
Related: Account value · Cost basis · Premium bands · Commission
What is my annuity actually worth right now?
DefinitionAccount value, also called accumulation value or contract value, is your premium plus credited interest minus withdrawals and fees; it is the real money in the contract.
Account value is the number interest is credited to and the number a death benefit is usually based on. It is not necessarily what you can take out today, because surrender charges and any Market value adjustment apply to it to produce the Surrender value.
Illustrative
$100,000 premium, two years of 5% interest, no withdrawals: account value is $110,250. With a 7% surrender charge still in force, surrender value is about $102,500.
Related: Surrender value · Premium · Benefit base vs account value · Death benefit
If I cashed out today, what would I actually get?
DefinitionSurrender value, or cash surrender value, is the account value minus any surrender charge and market value adjustment, and never less than the guaranteed minimum surrender value.
Carriers show this figure on your annual statement. During the Surrender period it is lower than account value; after the period ends the two converge. A negative MVA can push it lower still, a positive one can raise it.
Watch for
Many buyers see the account value grow and assume that is their liquid balance. Check the surrender value line before planning any large withdrawal.
Related: Account value · Surrender charge · Market value adjustment · Guaranteed minimum surrender value
Is there a floor under what I can get back?
DefinitionThe guaranteed minimum surrender value is the lowest amount a contract may ever pay on surrender, set by state nonforfeiture law as a percentage of premium grown at a minimum rate.
State law requires that a deferred annuity’s surrender value never fall below roughly 87.5% of premium accumulated at the contract’s Nonforfeiture rate, less withdrawals. In practice the regular surrender value is almost always higher, so the floor rarely binds.
Watch for
The floor is the reason a fixed annuity cannot lose more than roughly 12% of premium plus the interest you would have earned, even with a full surrender in year one. It is not a reason to plan on early surrender.
Related: Surrender value · Nonforfeiture rate · Surrender charge · Minimum guaranteed rate
What is this tiny guaranteed rate buried in my contract?
DefinitionThe nonforfeiture rate is the minimum interest rate state law requires a carrier to use when calculating the guaranteed minimum surrender value.
State nonforfeiture laws set the rate by formula from five-year Treasury yields, capped at 3%. Under the NAIC model as amended in 2020 the floor is 0.15% (it was 1% before), and states adopted that change on their own timelines, so older contracts and some states still use 1%. It applies only to the minimum-value calculation, not to the interest you are actually credited, which is usually far higher.
Watch for
Do not confuse this with the contract’s Minimum guaranteed rate for renewals. One protects your surrender value; the other sets the worst-case renewal rate after the initial guarantee ends.
Related: Guaranteed minimum surrender value · Minimum guaranteed rate · State insurance regulation
What does my family get if I die while the contract is in force?
DefinitionThe death benefit is the amount paid to the beneficiary at the death that triggers it, usually the full account value with no surrender charge.
Most fixed and index contracts pay the greater of account value or premium less withdrawals, with surrender charges waived. Some pay only surrender value in early years. Optional riders can raise the amount; see Enhanced death benefit rider. The contract-side details and payout choices live on the Contract provisions page.
Watch for
Confirm in writing whether the death benefit waives the surrender charge. Most do, a few do not, and the difference on a $200,000 contract in year two can exceed $15,000.
Related: Standard death benefit · Beneficiary · Death benefit payout options · Owner-driven vs annuitant-driven contracts
Dates, ages and definitions that control how the contract behaves over time.
How much of my money can I get to, and when?
DefinitionLiquidity is how quickly and cheaply you can turn contract value into cash; in an annuity it is limited by design in exchange for the guarantees.
Liquidity in an annuity comes from four places: the Free withdrawal provision, waivers for events like nursing home confinement, the end of the Surrender period, and the death benefit. Outside those, you pay a Surrender charge.
Watch for
Carriers price liquidity. A contract with a 10% free withdrawal and generous waivers will pay a slightly lower rate than one with none. Decide how much liquidity you need before chasing the top rate. See The liquidity trade-off.
Related: The liquidity trade-off · Free withdrawal provision · Surrender period · Waivers
When does “year one” start and end?
DefinitionA contract year runs twelve months from the issue date, not the calendar year; surrender charges, free withdrawals and crediting terms are all measured in contract years.
A contract issued March 14 has a first contract year ending the next March 13. Free withdrawals reset on that date, not January 1. Interest is usually credited on the Contract anniversary.
Watch for
Taking two “annual” free withdrawals in the same contract year, because one was in January and one in December, triggers a surrender charge on the second. Track the anniversary, not the calendar.
Related: Contract anniversary · Free withdrawal provision · Surrender charge schedule
Why does everything happen on my anniversary date?
DefinitionThe contract anniversary is the yearly date matching the issue date, when interest is credited, index gains are measured, fees are deducted and allocation changes take effect.
On an FIA the anniversary is the day the Annual point-to-point gain is locked in and new caps take effect. On a MYGA it is when a year’s interest posts. Your annual statement follows it.
Watch for
Surrendering an FIA a week before the anniversary forfeits that whole year’s index credit on most contracts. If you must exit, wait for the anniversary.
Related: Contract year · Interest crediting date · Reallocation at anniversary · Annual statement
Does my age matter when I buy?
DefinitionIssue age is the owner’s or annuitant’s age when the contract is issued; it sets eligibility, the surrender schedule allowed and, for income products, the payout rate.
Carriers set maximum issue ages, commonly 80 to 90 for fixed products and lower for long surrender schedules. Some states cap surrender charges for older buyers (Florida, for example, limits them for buyers 65 and older to 10% and ten years), and carriers set their own age cutoffs, so the longest contracts are often unavailable past 80.
Watch for
Some carriers use “age last birthday,” others “age nearest birthday.” Near a birthday that can change the payout percentage on an income product. Ask which rule applies before you set the issue date.
Related: Annuitant · Surrender period · Age bands · Suitability
What happens when the contract “matures”?
DefinitionThe maturity date, or annuity date, is the latest date by which a deferred contract must be annuitized or paid out, often tied to the annuitant reaching a set age such as 95 or 100.
On most contracts the maturity date is far enough out that it never arrives. On older contracts it can be age 85 or 90, and the carrier will send notices requiring an election. Options are usually to annuitize, take a lump sum, or extend if the carrier allows.
Related: Options at maturity · Annuitization · Guarantee period · Surrender period
What is an annuity illustration and can I trust it?
DefinitionAn illustration is a carrier-produced projection of how a specific contract might perform, showing guaranteed values alongside non-guaranteed scenarios.
MYGA illustrations are simple because everything is guaranteed. FIA and income-rider illustrations run to many pages, mixing a Guaranteed column with non-guaranteed projections based on historical index returns. The Reading an illustration group on the FIA page explains each column.
Watch for
The eye goes to the biggest number, which is always non-guaranteed. Read the guaranteed column first; it is the only one the carrier is bound to.
Related: Guaranteed vs non-guaranteed elements · Reading an illustration · Illustrated rate · Guaranteed column
Which parts of this contract can the carrier change?
DefinitionGuaranteed elements are fixed for the stated period by the contract; non-guaranteed elements, like renewal caps and rates, can be changed by the carrier within contract limits.
On a MYGA, the rate for the guarantee period is guaranteed. On an FIA, the floor, the surrender schedule and the minimum caps are guaranteed, while the actual caps and participation rates after year one are not. Income rider roll-ups and payout percentages are usually guaranteed once elected.
Illustrative
An FIA shows a 10% cap at issue with a 1% guaranteed minimum cap. The 10% is non-guaranteed and may fall at the next anniversary. The 1% is the only cap the contract promises.
Watch for
Ask for the carrier’s Rate history on renewals. A carrier’s past treatment of existing policyholders is the best available evidence of how non-guaranteed elements will behave.
Related: Illustration · Renewal caps and participation rates · Minimum guaranteed cap and participation · Rate history
Defined elsewhere
- Qualified vs non-qualified: whether the contract holds pre-tax retirement money (IRA, 401(k)) or already-taxed money; the full treatment is on the taxes page.
We would rather tell you no than sell you something that does not fit. These entries are the way we think it through.
When does an annuity make sense?
DefinitionAn annuity fits when you want a guarantee the rest of your portfolio cannot give you, on money you will not need in full for the length of the term.
Three common fits. You want a known yield on safe money for a set number of years and can beat the bank: a MYGA. You want to protect principal from a downturn while keeping some upside: a Fixed index annuity. You want a paycheck for life that does not depend on markets: a SPIA, DIA or Income rider.
In each case the test is the same. Does the guarantee solve a problem you actually have, and can the money stay for the term?
Watch for
“Fits” is about the money’s job, not your age. A 45-year-old laddering MYGAs for a known expense can be a better fit than a 70-year-old buying a 14-year contract with money he may need.
Related: When an annuity doesn’t fit · The liquidity trade-off · Annuity vs CD · MYGA ladder
When should I not buy an annuity?
DefinitionAn annuity is the wrong answer when you may need the full amount early, when it would hold most of your liquid savings, or when the goal is maximum growth rather than a guarantee.
Red flags we look for: no emergency fund outside the contract, a term longer than your realistic horizon, a pitch built on “market returns with no risk,” or an existing contract being replaced mainly to generate a new commission. See Replacement.
Money already in a Roth or a low-cost index fund with a 20-year horizon rarely benefits from an annuity’s tax deferral, and gives up growth for a guarantee it did not need.
Watch for
A suitable product sold to the wrong person is still a bad outcome. If the agent has not asked about your other assets, your liquidity needs and your health, stop.
Related: When an annuity fits · Suitability · Replacement · The liquidity trade-off
Why would I buy an annuity instead of a CD?
DefinitionA fixed annuity and a CD both pay a stated rate for a stated term; the annuity defers taxes and usually pays more, while the CD is FDIC-insured and more liquid.
Differences that matter: an annuity’s interest is not taxed until withdrawn, a CD’s is taxed every year. An annuity’s early exit cost is a Surrender charge, a CD’s is a few months’ interest. The CD is insured by the FDIC; the annuity is backed by the Insurance carrier.
The Fixed annuities page has the detailed MYGA vs CD comparison and an after-tax calculator.
Watch for
Compare after-tax, after-exit-cost yields over the same term, not headline rates. And never put money you may need next year into either one just for the rate.
Related: MYGA vs CD · Tax deferral · Surrender charge · MYGA
Could I just build a bond ladder instead?
DefinitionA bond ladder and a fixed annuity both produce predictable interest over a term; the ladder keeps you in control of the assets, the annuity adds principal guarantees, tax deferral and, if wanted, lifetime income.
Individual Treasuries held to maturity are as safe as anything and fully liquid at market price. The annuity wins on tax deferral, on the ability to convert to lifetime income with Mortality credits, and often on yield for the same credit quality. The ladder wins on liquidity and on avoiding carrier risk.
The SPIA vs bond ladder entry covers the income version of this comparison.
Watch for
A bond fund is not a bond ladder. Funds have no maturity date and can lose value when rates rise. Compare an annuity to individual bonds held to maturity, or to the fund with its risk acknowledged.
Related: SPIA vs bond ladder · MYGA vs Treasury · MYGA vs bond fund · Mortality credits
Does it make sense to hold an annuity in my IRA?
DefinitionAn annuity can be held inside an IRA or rolled over from a 401(k); the IRA already provides tax deferral, so the reason to do it is the guarantee, not the tax treatment.
Many of the contracts we place are IRA money, because that is where most retirement savings sit. The annuity’s guarantees (principal protection, lifetime income) work the same. What changes is the tax rules: everything that comes out is ordinary income, and RMDs apply. See RMDs from an annuity in an IRA.
Watch for
“You don’t need tax deferral in an IRA” is true and beside the point. The question is whether you want the guarantee. Where the objection does bite is a Variable annuity inside an IRA, where the extra fees buy deferral you already have.
Related: Qualified vs non-qualified · RMDs from an annuity in an IRA · RMD-friendly free withdrawals · QLAC
What am I really giving up when I buy an annuity?
DefinitionThe liquidity trade-off is the deal at the heart of every annuity: you accept limited access to your money for a set period, and the carrier pays you a higher guarantee than it could if you might leave at any time.
The carrier invests your premium in long bonds that match the term. It can do that only if it knows the money will stay, so the Surrender charge schedule is the price of the rate. Shorter terms, bigger free withdrawals and more waivers all cost a little yield.
Illustrative
Two MYGAs from similar carriers: one pays 5.4% with no free withdrawals and a 9% first-year surrender charge, the other 5.1% with 10% annual free withdrawals and a 7% charge. For $100,000, the first earns $300 more a year. Whether that is worth less access is the whole decision.
Watch for
Keep at least a year of expenses outside any annuity. The best rate in the market is a bad buy if an emergency forces an early surrender.
Related: Liquidity · Surrender charge schedule · Free withdrawal provision · When an annuity doesn’t fit
My Annuity Store is a licensed insurance agency. This reference is general education, not a recommendation for any product or carrier, and it is not tax or legal advice. Call 855-277-8088 or email info@myannuitystore.com with questions.
