Annuities Explained: Types, Rates, Pros & Cons
An annuity is an insurance contract that converts a lump sum into guaranteed growth or income. The four main types: fixed/MYGA (CD-like guaranteed rate — recently roughly 4.5%–5.5% for multi-year terms), fixed indexed (market-linked upside with floors), variable (market exposure, highest fees), and income annuities (SPIA/DIA — lifetime paychecks). Best fit: retirees wanting guaranteed income or tax-deferred fixed growth. Watch surrender periods (3–10 years) and, on variable products, all-in fees that can exceed 2–3% annually.
The Four Types, Plainly
| Type | What it does | Watch for |
|---|---|---|
| Fixed / MYGA | Guaranteed rate for a set term; tax-deferred CD analog | Surrender charges for early exit |
| Fixed indexed (FIA) | Returns tied to an index with a floor (often 0%) | Caps/participation rates limit upside; complexity |
| Variable | Invested in subaccounts; market risk and reward | Layered fees frequently 2–3%+ per year |
| Income (SPIA/DIA) | Lump sum becomes a guaranteed lifetime paycheck | Irrevocable; inflation erodes fixed payments |
Where Rates Have Been
Multi-year guaranteed annuities (MYGAs) have recently offered roughly 4.5%–5.5% on 3–7 year terms from A-rated insurers — generally above comparable CD rates, with tax deferral, but without FDIC insurance. Rates change constantly; compare live quotes.
Legitimate Uses
- Covering essential retirement expenses with guaranteed lifetime income (SPIA), often alongside Social Security
- Tax-deferred fixed growth for savers already maxing IRAs/401(k)s
- Longevity insurance: a deferred annuity starting at 80–85 protects against outliving savings — pair with a longevity estimate
Cautions
- Guarantees rest on the insurer, not the FDIC. Check AM Best ratings (A or better) and your state guaranty association limits.
- Surrender periods of 3–10 years with charges up to ~10% punish early exits.
- Commissions differ wildly — complex indexed/variable products often pay sellers most, which explains aggressive pitches. "Free annuity review" dinners are sales events.
- Money already in an IRA gains no extra tax deferral from being wrapped in an annuity — a common sales blur.
Fee-only fiduciary advisors and direct-to-consumer platforms now offer lower-cost annuities; get multiple quotes before signing anything. Related: retirement money makeover.
Recommended Partners
We may earn a commission if you open an account through these links. Disclosure
Gainbridge
Direct-to-consumer fixed (MYGA) annuities with guaranteed multi-year rates, bought online without an agent.
View Gainbridge annuity rates →GoldenCare
One of the largest LTC brokerages — compares long-term care policies from Mutual of Omaha, Nationwide, and other carriers, plus annuities.
Get long-term care quotes →Frequently Asked Questions
What does an annuity pay right now?
Multi-year guaranteed annuities (MYGAs) from highly rated insurers have recently paid roughly 4.5%–5.5% on 3–7 year terms, and lifetime-income annuity payout rates depend on age and gender — a 70-year-old typically receives materially higher payout percentages than a 60-year-old. Always compare live quotes.
Are annuities safe?
Fixed annuity guarantees are backed by the issuing insurer's claims-paying ability plus state guaranty associations (limits vary by state, commonly $250,000) — not FDIC insurance. Stick to insurers rated A or better by AM Best.
What are the downsides of annuities?
Illiquidity (surrender charges for 3–10 years), complexity and caps in indexed products, high layered fees in variable products, taxation of gains as ordinary income, and inflation erosion on fixed lifetime payments.
Who should not buy an annuity?
People who may need the money during the surrender period, those who haven't yet used cheaper tax shelters (401(k)s/IRAs), and anyone who doesn't fully understand the contract they're being sold.