Annuities

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.