Annuities – Frequently Asked Questions

How does an annuity work?

An annuity is a contract with an insurance company: you contribute a lump sum or series of payments, and in return the insurer promises future income or growth on your money. In the accumulation phase, the contract may earn interest or market‑linked returns. In the payout phase, the insurer converts the account value into a stream of payments, which can be guaranteed for a set period or for life.

What are the four main types of annuities?

1. Immediate annuities: You invest a lump sum and income starts right away, often within 12 months.
2. Deferred annuities: Money grows tax‑deferred for a period of time and income begins later.
3. Fixed annuities: Provide a guaranteed interest rate or a guaranteed income amount.
4. Variable or indexed annuities: Tie growth to market investments or an index, offering more upside potential but also more complexity and risk.

How do annuities pay out?

Annuities offer multiple payout options so you can match income to your needs.

1. Lifetime income: Payments continue for as long as you live, and in some cases for your spouse’s life as well.
2. Period certain: Income is guaranteed for a specific number of years, such as 10, 15, or 20.
3. Lump sum: Some contracts allow a one‑time payout of the remaining value instead of ongoing income.
4. Systematic withdrawals: You take regular withdrawals from the contract without formally “annuitizing” it.

Do annuities pay out monthly?

Yes. Most annuities can be set up to pay monthly, quarterly, semi‑annually, or annually. Monthly payments are common in retirement because they feel similar to a paycheck and make budgeting easier.

At what age does an annuity pay out?

Some annuities start income right away (immediate annuities), while others are designed to begin at a future date you choose (deferred annuities). Many people start annuity income in their 60s or 70s to help cover retirement spending, but the “right” age depends on your other income sources, health, and goals. Certain tax rules and penalties may apply to withdrawals before age 59½.

How much does a $100,000 annuity pay per month?

The monthly income from a $100,000 annuity depends on your age, whether the payments last for a set period or for life, and current interest rates. A lifetime income for a 65‑year‑old will look very different than a 10‑year payout for a 55‑year‑old. To see what a $100,000 annuity could pay in your situation, it’s best to run a personalized quote based on your age, health, and the specific contract options you are considering.

Any figures shown are general illustrations, not quotes. Actual income depends on your age, the payout option chosen, prevailing rates at purchase, the insurance company, and any riders or optional features attached to the contract, which carry additional cost and change the amount paid. Michael can request a current quote based on your circumstances.

Do you pay taxes on annuities?

In most cases, annuity growth is tax‑deferred and taxed as ordinary income when you take withdrawals. If you bought the annuity with after‑tax money, part of each payment is usually treated as a return of your original principal and part as taxable earnings. If the annuity is inside an IRA or other retirement plan, all withdrawals are generally taxable. A tax professional can help you understand how an annuity would be taxed in your specific situation.

What does it cost to own an annuity?

Costs vary widely by product. Some fixed annuities have simple, transparent structures with no explicit annual fees but may have surrender charges for early withdrawals. Variable and indexed annuities can include mortality and expense charges, administrative fees, underlying investment expenses, and rider costs. It is important to ask for a clear summary of all fees and surrender charges before you buy.

What are the main disadvantages or downsides of annuities?

1. Limited liquidity: Many contracts have surrender periods and penalties for early or large withdrawals.
2. Fees and complexity: Some annuities, especially variable and indexed products, can be complicated and carry multiple layers of cost.
3. Opportunity cost: Committing money to guarantees can mean less flexibility if interest rates or markets change later.
4. Tax treatment: Earnings are typically taxed as ordinary income, and early withdrawals may face tax penalties.

Are annuities safe? Are they guaranteed?

Fixed annuity guarantees are backed by the issuing insurance company, not by the federal government like FDIC bank insurance. That makes the financial strength and ratings of the insurer very important. Many states have guaranty associations that provide a level of protection if an insurer fails, but limits apply and rules differ by state. Reviewing the company’s ratings and working with a reputable carrier are key parts of evaluating annuity safety.

Who are annuities best suited for, and who should avoid them?

Annuities can be a fit for people who value predictable income, want to reduce longevity risk (the risk of outliving their savings), and are comfortable giving up some liquidity for guarantees. They may not be a good fit for investors who want maximum flexibility, high growth potential, or who already have ample guaranteed income from pensions and Social Security. A financial advisor can help you decide whether an annuity belongs in your overall plan or if other strategies would be better.

How do I buy or cash out an annuity?

To buy an annuity, you typically work with a licensed insurance professional or financial advisor who represents one or more insurance companies. They help you choose a contract, complete an application, and transfer funds. To cash out or take withdrawals from an existing annuity, you must follow the rules in your contract, which may include surrender charges or limits on how much you can take each year. Before buying or cashing out, it’s wise to review your options with an advisor who understands both the product and your broader financial picture.