Glossary

Annuity

A contract with a life insurer that grows savings tax-deferred, turns them into guaranteed income, or both, in exchange for one or more payments.

An annuity is a contract sold by a life insurance company. You pay a premium, either all at once or over time, and the insurer promises growth, income or both. Where life insurance protects against dying too soon, an annuity protects against living longer than your savings last.

Annuities are sorted along two lines. By timing: an immediate annuity starts paying income within about a year, while a deferred annuity builds value first. By how value grows: a fixed annuity credits a declared rate, an indexed annuity ties credits to a market index within caps and floors, and a variable annuity invests in subaccounts that can lose value. Hypothetical example: a 65-year-old could put $150,000 into an immediate annuity for monthly lifetime income, or into a multi-year guaranteed annuity that credits a fixed rate for five years.

Earnings grow tax-deferred and are taxed as ordinary income when withdrawn, and taking earnings before age 59½ usually adds a 10% federal penalty. Most deferred annuities have surrender charges for several years, and fees on variable and rider-heavy contracts can be substantial. Guarantees depend on the insurer's claims-paying ability, backed by state guaranty associations up to set limits. Start with what is an annuity and how does it work? and are annuities a good idea? for the trade-offs.

Last reviewed October 4, 2026

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Related terms

Deferred annuity An annuity that grows tax-deferred for years before income begins, used to build retirement savings or lock in future lifetime payments. Immediate annuity An annuity bought with a lump sum that starts paying income within about a year, for life or a set period, in exchange for giving up access to the money. Fixed annuity An annuity that credits a rate set by the insurer, with principal protected from market losses, either deferring growth or paying fixed income. Variable annuity An annuity whose value is invested in market subaccounts, so it can grow or lose money, with optional riders that guarantee income or a death benefit. Indexed annuity A fixed annuity whose interest is tied to a market index's gains, limited by caps or participation rates, with a floor that shields it from index losses. Annuitization Converting an annuity's account value into a stream of guaranteed payments for life or a set period, usually giving up access to the lump sum.

Related guides

Annuity beneficiaries and inherited annuity options What a beneficiary can do with an inherited annuity: lump sum, spousal continuation, 5-year or stretch payouts for non-qualified, 10-year rule for qualified. Best interest rules for annuity sales What the NAIC annuity best interest model (#275) requires of agents and insurers, how states adopted it, how Reg BI and New York differ, and what to ask. What happens to an annuity when you die How death benefits work before and after payouts begin, what beneficiaries receive, how the money is taxed, and which payout options leave nothing behind. Building an annuity ladder How laddering MYGAs or income annuities spreads interest-rate and longevity risk across staggered maturities, with a hypothetical example and the trade-offs. Annuity sales abuses targeting seniors How misleading annuity sales to older buyers work, the warning signs, what best interest rules require, and what to do if you were sold the wrong one. Why annuity sales hit records U.S. annuity sales topped $461 billion in 2025 per LIMRA. What drove the run of records, which products grew, and what record sales mean for buyers.

Related insurers

TIAA The nonprofit-owned retirement giant for teachers and academics. Its life unit stopped selling new policies in 2019 and merged into TIAA at the end of 2025.