Coverage · Annuities
Income you cannot outlive.
An annuity is a contract with an insurance company. You give the carrier money and the carrier promises something back: a rate of interest, a floor under losses, or payments that continue for as long as you live.
The market has been moving in one direction.
LIMRA published final figures for 2025 showing total U.S. retail annuity sales of $464.1 billion, up 7%, the fourth consecutive record year. Bryan Hodgens, senior vice president and head of LIMRA research, put it down to conditions rather than salesmanship: “Favorable economic conditions, expanded distribution, and growing investor demand for protected lifetime income have propelled the annuity market in recent years.”
Every deferred annuity has the same shape. The NAIC’s Buyer’s Guide describes it: annuities “have an accumulation period and a payout period. During the accumulation period, the value of your annuity changes based on the type of annuity. During the payout period, the annuity makes income payments to you.”
Three features apply almost across the board. A free look, which the guide describes as “a set number of days (usually 10 to 30 days) to change your mind about buying an annuity after you receive it.” A surrender charge, being “a charge if you take part or all of the money out of your annuity during a set period of time.” And frequently a market value adjustment, which “could increase or decrease your annuity’s account value, cash surrender value, and/or death benefit value if you withdraw money from your account.”
The four kinds
Four different promises.
Fixed-rate deferred
A stated rate for a stated term, often three, five or seven years. The insurance equivalent of a certificate of deposit, with tax deferral instead of federal deposit insurance. The largest category in 2025 at $165.3 billion.
Fixed indexed
Interest credited according to an index, subject to a cap or participation rate, with a floor of zero. You are not invested in the index and cannot lose account value to a market fall. Sales of $127.9 billion in 2025.
Registered index-linked
You accept a defined amount of downside, often the first 10% or 20% of a loss, for a much higher cap than a fixed indexed contract offers. A registered product with a prospectus. The fastest growing category at $79.5 billion, up 20%.
Income annuities
A lump sum converted into payments that begin at once or at a chosen future date and continue for life. Single premium immediate annuities reached $14.4 billion in 2025 and deferred income annuities $4.8 billion.
What income annuities actually do.
These are the only products in the category that do the thing annuities are supposed to be for. You are buying income you cannot outlive, and the cost is that the money is gone as a lump sum. There is no account value to withdraw and, depending on the option chosen, nothing left for heirs.
Options exist to soften that. A period certain guarantees payments for a minimum number of years even if you die early. A joint and survivor option continues payments to a spouse. Both reduce the monthly amount, which is the honest trade.
The size of this category next to $293 billion of fixed-rate and indexed sales says something about what people are actually buying. Most annuity money is going into accumulation products rather than into guaranteed income.
How annuities are taxed
Ordinary income, and one surprise.
- While it accumulatesGrowth inside the contract is tax deferred. Nothing is reported while the money is in there.
- On withdrawalFrom a non-qualified annuity, gains come out first and are taxed as ordinary income rather than at capital gains rates. Your basis follows tax free. The NAIC guide adds the rest: “You also may have to pay a 10% tax penalty if you withdraw money before you’re age 59½.”
- On annuitizationEach payment is split between a return of basis and taxable gain according to an exclusion ratio, so only part of each payment is taxable until basis runs out.
- At deathAn annuity death benefit is not treated like a life insurance death benefit. The gain is income to the beneficiary. This surprises people who assume the two products work the same way, and it is one reason a large annuity balance is often not the best asset to leave behind.
What should I ask about any annuity?
What is the surrender charge schedule, year by year, and how long does it run. Is there a market value adjustment and what does it do if rates rise. What is the free look period on this contract. If it is indexed, what is the current cap, what is the guaranteed minimum cap, and does the index calculation include dividends. If there is an income rider, what does it cost annually, and is the benefit base the same as the account value, because it usually is not. How much can I take out each year without a charge. What happens to this money when I die. And what is the carrier’s financial strength rating.
That last question carries more weight here than it does in life insurance. An annuity is a promise to pay you for decades, and the promise is only as good as the company behind it.
Where does an annuity actually fit?
It is a reasonable instrument for money that has a job: income in retirement, a floor under a portion of a portfolio, or a rate locked for a defined period. It is a poor instrument for money you may need before the surrender schedule ends, and for anybody who cannot live with that schedule.
Apex writes annuities alongside term and whole life, indexed universal life and final expense across the more than 20 carriers we hold, and we will show you the surrender schedule before the application rather than after. There is a fuller explanation in what an annuity actually pays.
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