Annuities get sold hard and explained badly, which is a shame, because the core idea is one sentence: you give an insurance company money, and they pay you an income you can't outlive. Whether that promise is a good deal depends on details most brochures bury. Here's the whole machine, taken apart.
An annuity is a contract between you and an insurance company. You pay them money, as a single premium or a series of contributions, and in exchange they either start paying you income immediately or at a date you choose. That's it. Everything else is variation on when payments start, what they're based on, and what happens when you die.
Two features separate annuities from savings accounts and bonds. A lifetime annuity keeps paying however long you live, so the insurer absorbs longevity risk. And the money grows tax-deferred: you owe nothing until payments start. Both features are priced in, which is why an annuity's quoted rate and a CD's rate aren't the same animal.
The accumulation phase is when your money sits with the insurer and grows, tax-deferred; in a deferred annuity it can run 10 or 20 years. The payout phase, called annuitization, converts the balance into monthly checks for a fixed number of years or for life. An immediate annuity skips straight to payout. Deferring lets the balance compound and lets you start lifetime income at an older age, when the monthly figure is richer.
| Type | How it grows | Payments guaranteed? | Watch out for |
|---|---|---|---|
| Fixed immediate (SPIA) | Insurer credits a set rate; income starts within a year | Yes — the payment amount is fixed at purchase | Inflation erodes a fixed check; life-only pays nothing to heirs if you die early |
| Fixed deferred | Guaranteed rate, often 3–5% in recent years, then annuitize later | Growth rate yes; future payout rate is set when you convert | Teaser first-year rates; long surrender periods |
| Variable | Invested in market subaccounts, like mutual funds | No — payment depends on investment performance | M&E fees typically ~1.25%/yr plus fund expenses plus rider charges; balances can fall |
| Indexed | Tied to a market index with a cap and a floor | Principal floor yes; upside capped | Participation rates and caps that change; complex crediting formulas |
For pure income planning, the fixed immediate annuity is the clean instrument: the number on the quote is the number on the check.
For a payout over a fixed period, the math is the standard annuity formula: monthly payment = P × r ÷ (1 − (1 + r)−n), where P is your premium, r is the monthly rate, and n is the number of payments. $100,000 at 5.5% over 20 years works out to $687.89 a month. The annuity calculator runs this and a deferred-growth version.
For a lifetime payout, the insurer prices your life expectancy: the payment is set so money plus earnings run out on schedule for the average buyer. Live longer than the actuarial tables and you win; die sooner and the insurer keeps the difference, unless you bought a refund or period-certain option. That's why a 75-year-old gets a much bigger check than a 60-year-old, and why women's lifetime checks run slightly smaller than men's.
Samples from published life-only quotes (mid-2025 basis, with 2026 surveys running slightly higher):
| Age at purchase | Male, monthly | Female, monthly | Payout rate (approx.) |
|---|---|---|---|
| 60 | $545 – $580 | $515 – $550 | ~6.7% |
| 65 | $610 – $655 | $575 – $620 | ~7.5% |
| 70 | $685 – $745 | $650 – $705 | ~8.5% |
| 75 | $790 – $860 | $745 – $810 | ~9.8% |
Read the payout-rate column carefully, because it's the number sales pitches blur. A 7.5% "rate" at 65 is not a 7.5% return; most of the check is your own money coming back, with the rest financed by the premiums of buyers who died early. That's not a scam, it's pooled longevity risk. Just don't compare the figure to a bond yield.
The money's origin decides the tax. Bought inside an IRA or 401(k) rollover, every dollar of each payment is ordinary income. Bought with after-tax money, the exclusion ratio splits each check: part is a tax-free return of principal, and only the earnings portion is taxed. Withdraw earnings before age 59½ and a 10% IRS penalty usually applies on top. And note that annuity gains are taxed as ordinary income, never at capital-gains rates.
The honest case is narrow. An annuity makes sense when fixed expenses will outlast your other guaranteed income, you value a check that can't stop, and you hold enough liquid savings that you won't need this money in an emergency. Converting part of a portfolio into lifetime income covers your floor while the rest stays invested for growth and heirs.
It makes little sense if the money must stay liquid, if a large inheritance is the priority, or if the pitch is a variable annuity inside an IRA, where the tax deferral is redundant and the fees are pure cost. Run the full picture first: the retirement calculator shows how long a portfolio lasts under different spending plans, and the compound interest calculator shows what the money does if you keep it invested. Then price the annuity's guarantee against those.
Enter a principal, rate, and payout period to see the monthly income, or switch to Grow mode to build a deferred balance first and see what it buys.
Annuity Calculator →An annuity is insurance against outliving your money: one premium, one promise, checks for life or a fixed span. Fixed immediate contracts are the transparent version, paying roughly $610 to $655 a month per $100,000 for a 65-year-old man at recent quote levels; variable and indexed versions add fees that have to earn their keep. Watch the surrender schedule, price the riders, and compare the guarantee against simply investing the money. Start with the annuity calculator, the retirement calculator, and the compound interest calculator.
Your guarantee rests on the insurance company's ability to pay, not on FDIC insurance. If the insurer fails, state guaranty associations step in, with coverage limits set by each state — commonly $250,000 for the present value of an annuity. The practical protections are buying from insurers with strong ratings (A.M. Best A or better) and staying under your state's guaranty limit, optionally split across two insurers.
Not with a life-only or joint-and-survivor payout — the checks keep coming as long as you (or the survivor) live, which is the unique feature annuities sell. The trade-off is that a life-only annuity can also pay out far less than you put in if you die early. Period-certain and cash-refund options cap that downside in exchange for smaller monthly checks.
It depends entirely on the payout option. Life-only payments stop at death. Period-certain options keep paying a beneficiary for the rest of the guaranteed window, joint-and-survivor options continue for a spouse's lifetime, and cash-refund options return any principal not yet paid out. A deferred annuity that hasn't started paying passes its account balance to your beneficiary.
Illiquidity. Surrender periods of 5 to 10 years lock the money up with exit penalties that start around 7% and decline each year, and fees on variable and indexed products can quietly eat a point or two a year. Fixed payments also lose purchasing power to inflation unless you accept a lower starting check with a cost-of-living rider.
They solve different problems. A CD or Treasury ladder keeps principal liquid and pays market interest, but the income ends when the ladder does. A life annuity pays more than a CD of the same size can sustainably pay — because it is returning your principal plus interest plus the money of annuitants who died early — and it cannot be outlived. A common compromise is annuitizing only part of your savings to cover fixed expenses and keeping the rest invested.