Annuities
Guaranteed income for life — fixed, indexed, and immediate options to convert savings into a paycheck.
What is an annuity?
A contract with a life insurance carrier that converts money — a lump sum or a series of premiums — into guaranteed income, often for as long as you live. It is the only financial product that can contractually guarantee lifetime income, which is why annuities exist: not to beat the market, but to make sure you cannot outlive your paycheck.
How do annuities work?
Two phases. Accumulation: your money grows tax-deferred inside the contract — at a fixed rate, an index-linked crediting rate, or market subaccounts, depending on type. Payout: the carrier converts the balance into income. An immediate annuity skips accumulation and starts paying within a year of purchase; a deferred annuity grows first and pays later. That timing difference is the main distinction between the two.
How are annuities taxed?
Growth is tax-deferred under IRC §72 — no annual tax bill while gains compound. Withdrawals of gains are taxed as ordinary income, not capital gains. From a qualified annuity (IRA/401(k) money) every dollar out is taxable and RMD rules apply. From a non-qualified annuity (after-tax money) only the gains are taxed — gains come out first under LIFO on withdrawals, while annuitized payments split each check between taxable gain and tax-free return of principal via the exclusion ratio. Withdrawing gains before 59½ generally adds a 10% IRS penalty.
What is the difference between qualified and non-qualified annuities?
The money that funded them. Qualified annuities hold pre-tax retirement money — they follow IRA rules: fully taxable withdrawals and required minimum distributions. Non-qualified annuities hold after-tax dollars — no RMDs during your lifetime, no IRS contribution limit, and only the growth is ever taxed. That combination is why non-qualified annuities appeal to savers who have maxed every other tax-advantaged bucket.
What is a fixed indexed annuity (FIA)?
An annuity whose crediting is tied to a market index like the S&P 500, with a contractual floor — typically 0% — so index losses never reduce your principal, and a cap or participation rate that limits gains. Your premium is not invested in the market; it sits in the carrier’s general account, which funds the guarantees. Add a lifetime income rider and an FIA becomes a private pension: protected accumulation now, guaranteed income later. This is the annuity type we design with most.
Why do some advisors call annuities a bad investment?
Because annuities sold as growth investments usually are bad ones. The real criticisms — long surrender schedules, rider fees that stack, complexity used to hide commissions, variable products that layer market risk on top of costs — describe mis-sold contracts. An annuity is not a growth vehicle; it is an income guarantee. Judged as insurance against outliving your money, the right contract does a job nothing else can. Judged as a stock-market substitute, it will always lose. If you already own one you are unsure about, the review is free — and sometimes the answer is keep it.
How much does a $100,000 annuity pay per month?
Depends on age, gender, payout type, and the rate environment when you buy. At recent rates, a 65-year-old converting $100,000 to lifetime income typically lands in the mid-$500s to mid-$600s per month for life — more if payments start later or cover a shorter guarantee, less with joint-life or inflation features. Treat any specific figure as directional: real numbers come from a current carrier illustration on your actual age and options.
Do annuities have death benefits and beneficiaries — can they be inherited?
Yes. You name beneficiaries directly, and the contract passes to them outside probate. Most deferred annuities pay at least the remaining account value at death; optional riders can enhance that. The tax note heirs should know: inherited gains are taxed to the beneficiary as ordinary income — annuities do not receive the step-up in basis that stocks and real estate get. A surviving spouse can usually continue the contract instead.
Can you cash out an annuity — and what does it cost?
Yes, but sequence matters. Most contracts allow a free-withdrawal corridor (commonly 10% a year) without charges; beyond that, surrender charges apply on a declining schedule, plus ordinary income tax on gains and a 10% IRS penalty on gains before 59½. If the real problem is a bad contract rather than a need for cash, a 1035 exchange moves the value to a better annuity tax-free — and sometimes the surrender math says stay put. Run the numbers before you sign anything.
How and where do you buy an annuity?
Through licensed professionals — and the type dictates the license. Fixed and fixed indexed annuities are insurance products sold by state-licensed insurance agents. Variable annuities are securities, regulated by the SEC and FINRA, and require a securities-licensed rep. Banks and brokerages typically shelve one carrier’s menu; an independent agency shops multiple A-rated carriers against your goals. Cost-wise there is no fee to buy — your premium funds the contract; the design determines what you keep.
Who should buy an annuity — and who should not?
Fit: people near or in retirement who want a guaranteed income floor under their essential expenses, savers who have maxed other tax-advantaged buckets, and anyone whose plan fails if the market drops in the wrong decade. Poor fit: money you may need liquid soon, young accumulators with decades of horizon, and anyone being pitched an annuity as a market-beating growth play. The product is a paycheck guarantee — buy it for that job or not at all.