Annuities Explained: Types, Costs, and When They Actually Make Sense

Retirement Planning · Updated May 2026 · 13 min read

Cindy Kowalski
Licensed Independent Medicare & Retirement Advisor · Eligry LLC · NPN 21601670

This article is part of the Retirement Mistakes That Can Cost You Thousands series.

Annuities may be the most polarizing product in all of retirement planning.

Some advisors sell them to everyone. Others tell you to avoid them entirely. Some radio hosts have built entire careers on calling annuities a scam. Meanwhile, the insurance industry runs billions of dollars in TV ads making them sound like the answer to every retirement worry.

Neither extreme is honest. And both are usually driven by what the person saying it gets paid to do.

The truth is more nuanced: annuities are contracts. Some are simple and useful. Some are complex and expensive. Some are well-suited to certain people in certain situations. And some are sold to people who do not need them, structured in ways that serve the agent’s commission more than the client’s retirement.

I am licensed to sell annuities. I also regularly tell people not to buy them when the product does not fit their situation. This article is my honest attempt to explain what annuities actually are, how the different types work, what they really cost, and how to tell whether one makes sense for you.

My job is not to sell you an annuity. My job is to make sure you understand what you are buying — or what someone else is trying to sell you — so you can make a decision you will not regret.

What is an annuity?

An annuity is a contract between you and an insurance company. You give them a sum of money, and in return they guarantee certain things — depending on the type of annuity, that might be a fixed interest rate, protection from market losses, or income payments for life. All annuities grow tax-deferred, meaning you do not pay taxes on the gains until you withdraw the money.

That is the simplest version. The complexity comes from the fact that there are five fundamentally different types of annuities, and they have almost nothing in common with each other beyond the tax-deferred wrapper. A MYGA and a variable annuity are as different as a savings account and a stock portfolio — but they both get called “annuities,” which is where most of the confusion begins.

What are the five types of annuities?

The five main types are fixed annuities, multi-year guaranteed annuities (MYGAs), fixed index annuities (FIAs), variable annuities, and single premium immediate annuities (SPIAs). Each has a different risk profile, cost structure, and purpose.

Type	How it works	Risk level	Typical fees	Best for
Fixed annuity	Insurance company declares an interest rate that can change periodically	Low	Usually none	Conservative savers wanting stable growth
MYGA	Locked-in guaranteed rate for a set term (3-10 years). Like a CD from an insurance company.	Low	Usually none	People who want a guaranteed return and can leave the money alone
Fixed index annuity (FIA)	Returns linked to a market index (S&P 500) with a 0% floor and a cap on the upside	Low-moderate	Low to moderate (higher with riders)	People wanting some market upside with principal protection
Variable annuity	Money invested in sub-accounts similar to mutual funds. No floor — principal can lose value.	Higher	2-3.5% annually (highest of all types)	Investors who want market exposure with tax deferral and optional guarantees
SPIA	Lump sum converts to guaranteed income payments starting within 30 days to 12 months	Low	None (built into payout rate)	Retirees who want pension-like income to cover essential expenses

The rest of this article breaks down each type, what it costs, and who it does and does not make sense for.

MYGA: the simplest annuity

A multi-year guaranteed annuity is the easiest annuity to understand. You deposit a lump sum, the insurance company locks in a guaranteed interest rate for a set term — typically 3 to 10 years — and your money grows at that rate with no market risk and no fees. When the term ends, you can cash out, renew, or roll the money into another product.

In 2026, competitive MYGA rates range from about 4.5% to over 6% depending on the term length and the carrier’s financial strength. That is meaningfully higher than most CDs, and the tax-deferred growth means your money compounds without annual tax drag.

The catch is liquidity. If you withdraw money before the term ends, you will typically face surrender charges starting at 7-10% in the first year and declining each year until they disappear. Most MYGAs allow you to withdraw up to 10% of the account value annually without penalty, but anything beyond that triggers the charge.

MYGAs are best suited for money you do not need to access for the length of the term. If you might need the money in two years, a MYGA with a five-year term is the wrong product — not because the MYGA is bad, but because the fit is wrong.

Fixed index annuity: upside with a floor

A fixed index annuity links your returns to a market index — most commonly the S&P 500 — with a guaranteed floor (typically 0%) that protects your principal from market losses. Like an IUL, you are not investing in the market directly. The insurance company uses options to provide the index-linked crediting.

The mechanics are similar to what I described in my IUL article: a cap limits your upside in strong years, a participation rate determines how much of the index gain you receive, and the floor protects you in down years. The trade-off is the same: you give up some upside for guaranteed downside protection.

Where FIAs get complicated — and where people get into trouble — is when income riders are added. An income rider is an optional feature that guarantees a minimum income stream in retirement, regardless of how the index performs. It sounds great. But riders typically add 0.50% to 1.50% per year to the cost of the contract, and the “guaranteed income” is calculated on a separate “benefit base” that is not the same as your actual account value. Many people do not understand this distinction until they try to access their money and discover the benefit base and the cash value are two very different numbers.

FIAs also carry long surrender periods — often 7 to 10 years. If you need your money back during that period, you will pay a penalty that can be substantial in the early years.

Variable annuity: the most expensive option

Variable annuities invest your money in sub-accounts that function like mutual funds. Unlike fixed and index annuities, there is no floor — your principal can lose value if the market drops. The upside is that there is also no cap on gains.

The problem with variable annuities is the cost. They typically carry 2% to 3.5% in total annual fees when riders are added. That includes mortality and expense charges (M&E), administrative fees, sub-account management fees, and optional rider fees. On a $300,000 variable annuity, 3% in annual fees means you are paying $9,000 per year — every year — before you see any return.

$9,000 per year in fees on a $300,000 annuity

That is the reality of a variable annuity with a typical fee load. Over 20 years, those fees can consume more than the tax-deferral benefit provides. Low-cost variable annuities from companies like Vanguard, Fidelity, and TIAA-CREF charge under 0.5% total — but those are rarely the ones being sold by commissioned agents.

Variable annuities can make sense in narrow circumstances — someone who has maxed out every other tax-advantaged account, wants market exposure with a tax-deferred wrapper, and is comfortable with the fee structure. But for most people, the same market exposure is available through lower-cost alternatives like a brokerage account, an IRA, or a Roth IRA.

SPIA: the one annuity most planners agree on

A single premium immediate annuity converts a lump sum into guaranteed income payments that begin almost immediately — typically within 30 days to 12 months. You give the insurance company $200,000, and they pay you a set amount every month for the rest of your life. The amount depends on your age, gender, interest rates at the time of purchase, and whether you include a joint or survivor option.

As a rough example using 2026 rates, a 70-year-old man depositing $200,000 into a SPIA might receive approximately $1,300 to $1,500 per month for life. A joint annuity covering both spouses would pay less per month but continue until the second spouse dies.

SPIAs are the one annuity type that nearly all financial planners — even the ones who dislike every other annuity — acknowledge can make sense. They are particularly valuable for retirees without a pension who want to cover essential expenses (housing, food, utilities, insurance) with guaranteed income beyond Social Security. Once essential expenses are covered by guaranteed income, the rest of the portfolio can be invested more aggressively because you are not relying on it for next month’s bills.

The trade-off is irreversibility. Once you annuitize, the money is gone. You cannot get the lump sum back. If you die early, the insurance company keeps the remainder unless you purchased a period-certain or refund option (which reduces the monthly payment). This is the biggest objection to SPIAs, and it is a legitimate one — but it is also the reason the payments are as high as they are.

What do annuities actually cost?

It depends entirely on the type. Fixed annuities and MYGAs typically have no explicit fees. FIAs have low base costs but can become expensive with riders. Variable annuities carry the highest fees of any annuity type, often 2-3.5% annually.

Fee type	Fixed / MYGA	Fixed index (FIA)	Variable
Mortality & expense (M&E)	None	Usually none	1.0-1.25%/year
Administrative fees	None	Usually none	0.10-0.30%/year
Sub-account / fund fees	N/A	N/A	0.25-1.00%/year
Income rider	N/A	0.50-1.50%/year	0.50-1.50%/year
Surrender charges	Yes (if withdrawn early)	Yes — 7-10 year period typical	Yes — 7-10 year period typical
Total annual cost	~0%	0-1.5%/year	2-3.5%/year

The fee structure is the single most important factor in whether an annuity works for you over the long term. A 1% difference in annual fees on a $300,000 annuity compounds to over $60,000 in lost value over 20 years. That is not a rounding error — it is the difference between a comfortable retirement and a strained one.

Who should actually consider an annuity?

An annuity may be worth considering if you need guaranteed income in retirement that you cannot outlive, you want principal protection from market losses, or you have already maxed out your other tax-advantaged accounts and want additional tax-deferred growth. Beyond that, the specific type of annuity matters more than whether you buy one at all.

The people who benefit most from annuities typically share some combination of these characteristics:

They are retired or within 5 years of retirement
They do not have a pension and want guaranteed income to cover essential expenses
They are risk-averse and losing sleep over market volatility in their portfolio
They have already maxed their 401(k), IRA, and Roth IRA and want additional tax deferral
They have a long enough time horizon to survive the surrender period without needing the money
They understand that they are trading liquidity for guarantees

Who should not buy an annuity?

If you have not maxed your employer’s 401(k) match, do that first. If you need the money within the next 3-5 years, do not lock it up in a surrender period. If you are being told an annuity is “better than” your 401(k) or IRA, be very cautious — that claim usually serves the person saying it more than it serves you. And if someone cannot clearly explain the fees, the surrender charges, and the difference between the account value and the benefit base, do not sign anything until you get those answers from someone who can.

Five questions to ask before buying any annuity

I use these five questions with every client who asks me about annuities, and I also use them when clients bring me proposals from other advisors:

What are the surrender charges and for how long? Know the exact penalty schedule and when it expires. If you might need your money in year three and the surrender charge is 6%, that is a $18,000 penalty on a $300,000 annuity.
What are the total annual fees? Not just the M&E charge — the all-in cost including riders, administrative fees, and sub-account fees. If the person selling it cannot give you a single number, that is a red flag.
How does the income rider actually work? What is the benefit base? How is it different from the account value? Can you access the account value, or only the income stream? What happens to the remaining money if you die?
What happens if I need my money back? Beyond the free withdrawal amount (typically 10% per year), what are the penalties? Is there a market value adjustment? What are the tax consequences of surrendering?
Is there a simpler, less expensive way to accomplish the same goal? If you want guaranteed income, a SPIA may do it with no fees and no complexity. If you want tax-deferred growth, a Roth IRA or traditional IRA may do it with more flexibility and lower cost. The right question is not “should I buy an annuity?” — it is “what am I actually trying to solve?”

What are the red flags when someone is selling you an annuity?

“This annuity will replace your 401(k).” No annuity should replace an employer-matched retirement account. If you are not getting your full employer match, that is free money you are leaving on the table.
The surrender period is 10+ years. The longer the surrender period, the larger the commission the agent received. If you are 68 and the surrender period ends when you are 78, ask yourself whether that makes sense for your situation.
The agent cannot explain the fee structure in one sentence. If the total annual cost is not clear, the product is either too complex or the person selling it does not understand it well enough.
You are being shown the benefit base, not the account value. The benefit base is a number used to calculate your guaranteed income. It is not money you can withdraw. If someone is presenting the benefit base as though it is your account balance, they are being misleading.
“You cannot lose money.” Technically, fixed and index annuities protect your principal from market losses. But surrender charges, fees, and inflation can all erode the real value of your money. The 0% floor protects you from the market — it does not protect you from the cost of the contract.
There is urgency to sign today. Annuity rates change, but they do not change overnight. If someone is pressuring you to commit before you have had time to understand the contract, they are prioritizing their timeline over yours.

How I approach annuities with my clients

When someone asks me about annuities, the first question I ask is: what are you trying to solve? If the answer is guaranteed income, we look at SPIAs and potentially FIAs with income riders — and we compare the total cost against simpler alternatives. If the answer is tax-deferred growth with principal protection, we look at MYGAs and FIAs. If the answer is “my neighbor bought one and said I should too,” we take a step back and figure out whether there is actually a problem to solve in the first place.

I also review annuity proposals that clients have received from other advisors. I see the fee structure, the surrender schedule, the illustration assumptions, and the rider details. In some cases, the annuity makes sense and I tell them so. In many cases, it does not — either because the product is too expensive, the surrender period is too long, or there is a simpler way to accomplish the same goal.

There is no charge for that review. If the other advisor’s proposal is better than what I would recommend, I will say so.

Annuities are not good or bad. They are tools. The question is whether the tool fits the job — and whether the person handing it to you explained how it works before they asked you to sign.

Frequently Asked Questions

Are annuities a good or bad investment?

Annuities are not investments in the traditional sense — they are insurance contracts. Whether one makes sense depends entirely on your goals, liquidity needs, time horizon, and what you are trying to solve. A SPIA for guaranteed income is fundamentally different from a variable annuity for market exposure. The question is not “are annuities good?” — it is “does this specific annuity fit my situation?”

What is the difference between the account value and the benefit base?

The account value is your actual money — what you would receive if you surrendered the contract (minus any surrender charges). The benefit base is a separate number used to calculate your guaranteed income payments from an income rider. The benefit base is often higher than the account value, which can be confusing. You cannot withdraw the benefit base as a lump sum. This distinction is one of the most common sources of misunderstanding in annuity sales.

How long are annuity surrender charges?

Surrender periods typically range from 3 to 10 years depending on the type of annuity and the carrier. Penalties usually start at 7-10% in the first year and decline each year. Most annuities allow you to withdraw up to 10% of the account value annually without penalty. If you hold the annuity to the end of the surrender period, there are no charges.

Is a MYGA better than a CD?

MYGAs often offer higher interest rates than CDs of the same term length, and they grow tax-deferred. However, CDs are FDIC-insured (up to $250,000 per depositor), while MYGAs are backed by the insurance company and your state’s guaranty association — which has different limits. MYGAs also have longer surrender periods than most CD early-withdrawal penalties. For money you will not need during the term, a MYGA can be a strong option. For money you might need sooner, a CD offers more flexibility.

Should I buy an annuity before maxing out my 401(k) or IRA?

In almost every case, no. Max your employer match first (it is free money), then your IRA or Roth IRA. Annuities become relevant after those accounts are fully funded and you still want additional tax-deferred growth or guaranteed income. Anyone telling you to skip your 401(k) match for an annuity is giving you advice that benefits their commission more than your retirement.

Does it cost anything to have Cindy review an annuity proposal?

No. If you have received an annuity proposal from another advisor and want a second opinion on the fees, surrender charges, and illustration assumptions, I will review it at no cost. If the proposal is sound, I will tell you. If it is not, I will explain what to watch out for.

Talk to Cindy — It’s Free

Whether you are considering an annuity for the first time, want a second opinion on a proposal you received, or just want to understand whether an annuity fits your retirement plan, I am here to help. No pressure. No obligation.

Schedule My Free Consultation ☎ (352) 464-4400

Available 7 days a week · I’ll tell you honestly if an annuity is not the right product for you.

Annuities Explained: Types, Costs, and When They Actually Make Sense | Eligry