What is an annuity, and how does it work?
An annuity is a contract with an insurance company that can turn savings into income later. This guide covers fixed and fixed indexed annuities, with the trade-offs.
Last checked October 18, 2026 · Written by licensed advisors · Sources are numbered and listed under Notes and sources
What is an annuity?
An annuity is a contract with an insurance company. You put money in, and it can turn into regular income later.
This guide covers fixed and fixed indexed annuities. They are insurance contracts, not investment accounts. We do not sell stocks, bonds or mutual funds.1
- A contract with an insurance company
- You put money in
- It can pay you income later
- Not a bank account
- Guarantees depend on the insurer
How does an annuity work?
You fund the annuity, and the insurer credits interest under the contract’s terms. Later, you can choose to turn the value into regular payments. Depending on the contract, payments can be for a set time or for life.
How much income you get depends on your age, the contract and the rates when you start. We cannot say what a particular amount would pay without a personal illustration from the insurer.1
- You fund itOne payment or several
- It growsInterest is credited under the contract’s terms
- You chooseTake income, take money out, or keep waiting (key step)
- IncomeRegular payments, for a set time or for life, depending on the contract
What to do: Ask a licensed advisor for an illustration from the insurer, so you see the real numbers before you decide.
What is the difference between a fixed and a fixed indexed annuity?
A fixed annuity credits interest under the contract’s terms for a set period. A fixed indexed annuity links interest to a market index, with limits set in the contract.
With an indexed annuity you are not investing directly in the market or the index. The contract limits the gains, for example with a cap. Withdrawals, fees and surrender charges can still reduce what you get.1
- Interest credited under the contract
- Terms set for a period
- Simpler to compare
- Interest linked to a market index
- Limits on the upside, such as a cap
- Terms differ by contract
What is the downside of an annuity?
Your money is tied up. Most annuities limit how much you can take out each year without a charge. Taking out more early can mean surrender charges.
The guarantees are backed by the insurance company that issues the contract. Rates, caps and fees differ by product.
An annuity is not a bank account and is not covered by FDIC insurance.12
- The surrender charge schedule
- How much you can take out free
- Caps and rates
- The insurer that backs it
Heads up: Taking out more than the contract allows in the early years can mean surrender charges.
What to do: Read the surrender schedule and the free-withdrawal limit before you sign. A licensed advisor can go through both with you.
Who might an annuity fit?
It can fit someone who wants part of their savings to become income later, and who will not need that money for a long time.
It does not fit money you may need soon. It is also not an investment account.