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Annuities 101
An annuity is a contract with an insurance company. You hand over a sum of money, and in exchange the company promises something specific in writing — growth with a floor, an income stream for life, or both.
Most of the confusion around annuities comes from treating them as one product. They are a category, and the four common shapes below behave very differently. Reading the contract language — not the brochure — is how you tell them apart.
Fixed annuity
The insurer credits a stated rate for a stated term, similar in spirit to a bank CD but issued by an insurance company rather than a bank, and without FDIC coverage. Simple to understand, and usually the right comparison point when someone shows you something more complicated.
Fixed indexed annuity
Interest is linked to the performance of a market index, subject to a cap, participation rate, or spread set by the insurer. The defining feature is the floor: in a year when the index falls, the credited interest is zero rather than negative. You give up some of the upside in exchange for not participating in the downside.
Immediate annuity
You exchange a lump sum for an income stream that begins right away and can be structured to last for life. It is the most direct answer to "how do I turn savings into a paycheck," and also the least flexible — that money is generally no longer available as a lump sum.
Deferred annuity
Money grows tax-deferred now, and income starts on a future date you choose. This is the shape most often used to bridge the years between when you stop working and when other income sources begin.
What to look at before you sign
The surrender schedule and how long your money is committed. Any rider fees and what they actually buy. Whether growth figures are contractual or hypothetical. How the contract is taxed on withdrawal. And whether the same job could be done more simply by something you already own.
This page is educational and is not financial, tax, or legal advice. Annuities are insurance contracts; any guarantees are subject to the claims-paying ability of the issuing insurance company, and features and availability vary by state and issuer.