Stay Informed with these Annuity Basics

What in an Annuity?

An annuity is an insurance contract that provides future income in exchange for present contributions. It is a long-term investment designed to help protect investable assets and mitigate the risk of outliving income.

What are the different categories of annuities?

Annuities come in several categories with varying attributes and benefits. Two of the most common categories are immediate annuities and deferred annuities.


Immediate annuity: Single premium immediate annuities (SPIAs) are insurance contracts where a lump sum is invested, and the insurance company agrees to make periodic income payments for life, a specified period, or the longer of the two. A SPIA can also be structured to pay for the longer of two lives (usually married spouses), with full or partial payments continuing after the first death. SPIAs have no cash value beyond the insurer’s obligation to make periodic payments under the contract terms.


Deferred annuity: A deferred annuity is a contract with an insurance company that can be annuitized (promises to pay the owner a regular income) at some future date. Generally, a deferred annuity may be annuitized, surrendered for cash, or a combination of the two. Interest credited to fixed and fixed indexed annuities, and interest and capital gains earned in variable annuities are only taxed once monies are withdrawn or the contract is annuitized.

What are the types of annuities?

There are many types of annuities, and they are generally categorized by how the annuity credits investment gains and interest. Here are a few of the most common types of annuities:

Fixed annuity: A fixed annuity is a tax-deferred insurance contract that promises to pay the buyer a guaranteed interest rate on their contributions and provides a lifetime income stream in retirement. The insurer credits interest based on what they earn on their general account investments.

Fixed indexed annuity: A fixed indexed annuity is a tax-deferred insurance contract that provides principal protection in down markets and an opportunity for growth. Fixed-indexed annuities credit a guaranteed interest amount, with the opportunity to earn additional interest based on positive changes in the value of one or more market indexes, such as the S&P 500. Still, contract owners are not directly invested in these indexes.

Variable annuity: A variable annuity is an annuity with an account value tied to the performance of an investment portfolio. The value of the annuity, and payments from the annuity, can increase if the portfolio performs well and decrease if the portfolio loses money.

Registered index-linked annuity: A registered index-linked annuity (RILA) is an insurance contract providing a tax-deferred long-term savings option that limits exposure to downside risk and provides the opportunity for growth. Like indexed annuities, interest is credited based on the change in one or more market indexes without the contract owner being directly invested in the indexes. Still, RILAs generally have both greater upside potential than indexed annuities and the possibility of some investment loss.

How is money contributed money to an annuity?

When purchased, an annuity contract is funded by a sum of money known as the purchase premium payment. Annuities can be funded with a one-time lump sum, known as a single premium annuity, or flexible premium annuities allow for additional premiums over time. A single premium annuity does not allow for additional contributions.

Why should annuities be considered in retirement planning?

Annuities can play a vital role in helping investors save for retirement and receive guaranteed lifetime income during retirement — effectively allowing them to create their own pensions. Unlike other investments, annuities provide a wide variety of benefit options. Annuities can protect against untimely death, provide principal guarantees, assure a specified amount of income when the contract is annuitized, guarantees withdrawals for life, or a combination of all of these.

How can annuities be purchased?

Financial professionals sell annuities throughout the financial industry. Most commonly, these professionals are found at insurance agencies, banks, and investment firms. There are various types of annuity products, the sale of which requires insurance licensing and securities licensing in the case of variable annuities and RILAs. Investors must understand their financial situations and goals when investing in annuities and how annuities fit into their overall financial planning.

Need More Information?

Access IRI’s glossary of annuity terms for more information.

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Insured Retirement Institute provides you with information you need at your fingertips. Access our Annuities Glossary for definitions of industry terms, find courses through RegEd and FINRA, or explore IRI webinars.