An annuity is a contract with an insurance company designed to turn a portion of your savings into tax-deferred growth, a stream of income, or both. You provide a lump sum (or, less commonly, a series of payments). In return, the insurer provides contractual guarantees, such as a stated interest rate, protection of principal against market losses, or income payments that can last for a set period or for life.
Annuities are not FDIC-insured and are not bank deposits. All guarantees depend on the financial strength and claims-paying ability of the issuing insurer.
For individuals and families allocating hundreds of thousands of dollars (or more), an annuity is generally viewed as one tool within a broader plan: a way to create a personal pension that covers essential expenses while other assets remain invested for growth, flexibility, or legacy goals. It is not a universal solution, nor is it intended to replace a diversified portfolio.
How an Annuity Works
Most annuities have two distinct phases:
- Accumulation phase: Your money grows inside the contract. Growth is typically tax-deferred, meaning you do not pay taxes on earnings until you withdraw them. (General information, not tax or legal advice; consult a tax professional.)
- Distribution (or income) phase: You begin receiving payments. These can be structured as a fixed amount for a defined number of years, for the rest of your life, or for the longer of your life and a spouse's life. Some contracts allow you to keep the account value available for withdrawals rather than fully "annuitizing" it.
You can also choose when income starts:
- Immediate annuities begin payments within one year of purchase.
- Deferred annuities allow the money to accumulate for years (or decades) before income begins.
Guarantees in an annuity are contractual promises made by the issuing insurance company. They are backed by the company's financial strength and claims-paying ability, not by the FDIC or any bank. That is why I review each insurer's financial strength ratings from independent rating agencies.
Main Types of Annuities
Fixed Annuities
These credit an interest rate set by the insurer for a stated period. A common version is the multi-year guaranteed annuity (MYGA), which locks in a rate for a set number of years, similar in concept to a CD but with tax-deferred growth. Principal is protected from market losses. Credited interest is predictable and set by contract. (General information, not tax or legal advice; consult a tax professional.)
Fixed Indexed Annuities
Interest credits are linked to the performance of a market index (commonly the S&P 500), with a floor that typically protects against market losses in down years. Upside is limited by caps, participation rates, or spreads. These appeal to people who want some market-linked crediting potential without direct exposure to market declines. You are not invested directly in the index.
Variable Annuities
Variable annuities are securities sold by FINRA-registered representatives. Eric Blazej does not offer variable annuities or securities.
Immediate Income Annuities (SPIAs)
You exchange a lump sum for a stream of payments that begins within a year. These are often used at or near retirement to convert a portion of savings into reliable monthly income. Lifetime income options can pay for as long as you live, subject to the claims-paying ability of the issuing insurer.
Deferred Income Annuities (DIAs) and QLACs
You pay a premium today for income that starts at a future date you choose. A Qualified Longevity Annuity Contract (QLAC) is a deferred income annuity purchased with qualified retirement funds, subject to an IRS-set dollar limit, adjusted annually, that can defer required minimum distributions on that amount. (General information, not tax or legal advice; consult a tax professional.)
Who Annuities May Fit
Annuities may fit people who:
- Are near or in retirement and want a portion of essential expenses covered by contractual income
- Want principal protection from market losses on part of their savings
- Have maxed out other tax-advantaged savings and want tax-deferred accumulation (general information, not tax or legal advice; consult a tax professional)
- Are concerned about outliving their savings
They may not fit people who need full access to the money in the near term or who have limited savings outside the contract.
Key Considerations
- Liquidity and surrender charges: Most deferred annuities have a surrender period. Withdrawals above the contract's annual withdrawal allowance during that period may incur surrender charges. Surrender charge amounts and periods vary by contract. Keep adequate liquid reserves outside the contract.
- Fees and riders: Optional income or other riders typically carry an annual charge. Review every rider cost and what it provides.
- Taxes: Earnings are taxed as ordinary income (not capital gains) when withdrawn. Withdrawals before age 59½ may also incur a 10% IRS penalty on the taxable portion. Non-qualified annuities use an "earnings first" rule on withdrawals. (General information, not tax or legal advice; consult a tax professional.)
- Inflation: Fixed payments do not automatically rise with the cost of living. Some contracts offer cost-of-living adjustments or inflation riders at the expense of a lower initial payment.
- Carrier strength: I review each insurer's financial strength ratings from independent rating agencies (such as AM Best, S&P, Moody's, and Fitch) and the company's track record. Guarantees are only as strong as the insurer's ability to pay claims.
- Integration with the rest of your plan: Annuities are often used as a targeted allocation rather than the core of your wealth.
Frequently Asked Questions
What is the simplest way to understand an annuity?
It is a contract, issued by an insurance company, that converts a sum of money into growth with contractual guarantees, a stream of income, or both.
How do annuity guarantees work?
Fixed and fixed indexed annuities protect principal from market losses. All guarantees depend on the financial strength and claims-paying ability of the issuing insurer. Annuities are not FDIC-insured and are not bank deposits.
Can I lose money in an annuity?
In a fixed or fixed indexed annuity, principal is generally protected from market declines. However, surrender charges may apply to early withdrawals, and withdrawals before age 59½ may incur a 10% IRS penalty, which can reduce the amount you receive, and optional rider charges can reduce your account value.
How are annuities taxed?
Earnings grow tax-deferred. When withdrawn, earnings are taxed as ordinary income. Qualified annuities (funded with pre-tax retirement dollars) are generally fully taxable upon distribution. Withdrawals before 59½ may incur a 10% IRS penalty. This is general information, not tax or legal advice; consult a tax professional.
When does it make sense to buy an annuity?
It depends on the goal. Immediate income annuities are most often purchased at or near retirement. Deferred contracts can be considered several years earlier when the objective is accumulation with principal protection or future income starting at a planned age.
Do I have to annuitize and give up access to my money?
Not always. Many contracts allow systematic withdrawals or an income rider while keeping the account value available (subject to contract rules and any surrender charges). Full annuitization converts the balance into an irrevocable stream of payments.
How an Independent Agent Helps
Because annuity contracts, features, and carrier strength vary widely, an independent agent can help you compare fixed, fixed indexed, and income annuity options from the insurers I represent. An independent agent can review your income needs, existing guaranteed sources, tax situation, and liquidity preferences, then identify contracts that align with a specific portion of your capital rather than applying a one-size-fits-all product. I review each insurer's financial strength ratings from independent rating agencies.
Suitability is reviewed in a one-on-one consultation.
If you are evaluating whether an annuity belongs in your plan, or how large an allocation makes sense relative to the rest of your assets, a structured conversation is the practical next step.
Call or text (817) 552-4717 to schedule a consultation.
This information is for educational purposes only and does not constitute financial, tax, legal, or investment advice. Annuities are not FDIC-insured and are not bank deposits. Annuity guarantees are subject to the claims-paying ability of the issuing insurance company. Surrender charges and a 10% IRS penalty before age 59½ may apply. Contracts vary; always review the specific contract and disclosure documents. Tax treatment depends on individual circumstances and current law; consult a tax professional.
Eric Blazej, licensed Texas insurance agent, doing business as Fortify360 Insurance Group · TDI #3517967 · NPN #22274526