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Annuities

Are Annuities Worth It? Annuity Pros, Cons & Investment Fit

Are annuities worth it? Weigh the pros and cons of each type of annuity: guaranteed income, fees, surrender charges, taxes and retirement savings fit.

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Lifeworth Insurance
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Annuities are worth it for some people and not for others. An annuity converts retirement savings into guaranteed income you cannot outlive, but it trades away liquidity, market upside and simplicity to do it. Whether an annuity is worth it depends on your income gap, your health, your time horizon and the specific annuity contract.

Annuities are one tool among several, and the same annuity that solves a real problem for one household is a poor fit next door. This page sets out the benefits and drawbacks side by side, with the circumstances that push the answer each way.

What an annuity is and how annuities work

An annuity is a contract between you and an insurance company. You hand over a lump sum or a series of payments, and the insurer promises something in return: a fixed interest rate for a set term, a rate of return linked to a market index, growth tied to underlying investments you select, or a life annuity paying for the rest of your life. Any guarantee inside an annuity contract is backed by the claims-paying ability of the issuing annuity company, not a government agency.

Most annuities have two phases. During accumulation, annuities grow tax-deferred; you defer taxes on gains until you take them out. Later the contract is surrendered for cash, left to accumulate, or annuitized so that annuities start paying regular payments to the annuity owner. A large share of buyers never annuitize.

LIMRA reported that U.S. retail annuity sales reached $464.1 billion in 2025, a fourth consecutive record year, led by fixed-rate deferred annuities at $165.3 billion and fixed indexed annuities at $127.9 billion. Popularity is not proof of suitability, but demand for principal protection and predictable retirement income is not a niche concern.

Kinds of annuities: which type of annuity does what

Saying “annuities” as one word hides how different these annuity products are. The pros and cons shift across the different types of annuities, and insurance companies design each around a different trade-off.

Fixed annuities and the fixed deferred annuity

A multi-year guaranteed fixed annuity credits a stated interest rate for a defined term, much like a bank certificate of deposit but issued by an insurer and taxed differently. Fixed annuities are the simplest of the deferred annuities: no index formula, no underlying investments, no market participation. The trade-off is a rate of return capped at the stated rate, and inflation risk over a multi-year commitment.

Fixed index annuities

Index annuities, sometimes called equity-indexed annuities, credit interest based on the movement of a market index, with a floor that prevents a negative crediting year. In exchange, the insurer limits the upside. The SEC’s investor bulletin on indexed annuities explains the three levers: a participation rate (75% participation on a 10% index return credits 7.5%), a cap (a 7% cap on a 12% index return credits 7%), and a spread (a 3% spread on a 9% index return credits 6%). The SEC also notes that index calculations typically exclude dividends. Caps and participation rates are usually reset each year, so the terms you buy are not the terms you keep.

Variable annuities and other market-linked investment options

Variable annuities let you invest premium in subaccounts that resemble mutual funds. Account value rises and falls with the performance of underlying investments, and you can lose principal. They are securities, sold with a prospectus and regulated by the SEC and FINRA on top of state insurance law, so the rules that apply to the investment options inside them are stricter than for fixed products. Registered index-linked annuities sit in between, buffering some losses for a capped upside.

Immediate annuities and deferred income annuities

Income annuities are the oldest design. You pay a lump sum and the insurer begins regular payments, right away with immediate annuities or later with deferred income annuities. There is no account value to watch and, in the plain version, no death benefit. This is the type of annuity that most resembles a pension, which is why a retirement annuity is sometimes called a personal pension.

Benefits of annuities: guaranteed retirement income you cannot outlive

The benefits of annuities cluster around risks that other investment vehicles handle poorly.

  • Longevity risk transfer. A stock and bond portfolio cannot guarantee income for an unknown lifespan. In the Social Security Administration’s 2023 period life table, a 65-year-old man can expect about 18.1 more years and a 65-year-old woman about 20.7 — averages half of people will exceed. A life-contingent annuity pays for the rest of your life however long that is.
  • Predictable income in retirement. Where fixed costs exceed Social Security and any pension, a guaranteed income floor can make the rest of the retirement plan easier to manage, because volatile assets no longer have to cover the grocery bill.
  • Principal protection. Fixed and index annuities do not lose value from stock market declines, which some savers value more than a higher expected rate of return.
  • Tax deferral without contribution limits. Unlike a 401(k) or an individual retirement account, a nonqualified annuity has no annual cap on how much you can save for retirement inside it. The Internal Revenue Service confirms in Publication 575 that earnings are not taxed until distributed.
  • Behavioral value. Retirees drawing from a portfolio often underspend. A stream of income arriving monthly can permit spending a balance-watching retiree would avoid.
  • Death benefit and estate planning features. Many deferred annuities pass account value to named beneficiaries without probate, and period-certain or cash-refund options return unused premium.

Disadvantages of annuities: fees, surrender charges and taxes

The drawbacks of annuities are real, and they are the reason a thoughtful buyer slows down.

  • Illiquidity and surrender charges. The SEC’s variable annuity bulletin describes surrender periods that typically run six to eight years and sometimes ten, with charges that might start at 7% and decline by roughly a point a year; its indexed annuity bulletin cites six to ten years or longer. Loss of market liquidity is the leading objection to investing in an annuity.
  • Layered costs. On a variable annuity, the SEC cites mortality and expense risk charges typically around 1.25% per year, administrative fees around 0.15%, investment management fees inside the subaccounts, and extra charges for optional riders. On fixed and index annuities the cost is usually implicit — a lower cap, participation rate or credited interest rate rather than a line item.
  • Ordinary income tax treatment. Publication 575 states that the taxable part of a distribution is treated as ordinary income. Gains do not get long-term capital gains rates, and nonqualified deferred annuities generally get no step-up in basis at death.
  • Early withdrawal tax. A 10% federal additional tax generally applies to the taxable portion of amounts taken before age 59½, with exceptions. That makes an annuity a poor fit for money you might tap in your fifties.
  • Inflation. A level payment that looks adequate at 65 buys noticeably less at 85. Cost-of-living increases are available on some income annuities but lower the starting payment.
  • Complexity. Two contracts with similar headline features can behave very differently, and comparing them takes more work than comparing mutual funds by expense ratio.
  • Insurer credit risk. A guarantee is only as good as the balance sheet behind it. State guaranty associations provide a backstop, not a federal one, and the limits are finite.

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

This is the most common question about income annuities, and the answer is a range. The payment depends on your age, sex, whether the contract covers one life or two, whether you add a period certain or refund feature, and interest rates on the day you buy. Annuity.org’s rate survey published in April 2026 showed a $100,000 immediate annuity producing roughly $590 to $625 a month for a single 65-year-old and about $703 to $750 for a single 70-year-old, with joint-life payouts lower — roughly $510 to $536 at 65.

Two points matter. Part of each payment returns your own principal, so the payout rate is not an investment return; the present value of what you receive depends on how long you live. And when you purchase an annuity you lock in that day’s interest rate, which is why some buyers stagger purchases rather than committing a lump sum at once.

Annuities vs. other retirement options and investment vehicles

Almost every argument for or against annuities is really a comparison. Mutual funds and exchange-traded funds offer daily liquidity, transparent costs and capital gains treatment, but no guarantee against outliving the money. A bond ladder gives predictable cash flow with liquidity, but ends on a date certain. Certificates of deposit carry federal deposit insurance up to applicable limits, but shorter terms and fully taxable interest. None removes longevity risk.

The comparison many advisers raise first is Social Security. Delaying a claim buys inflation-adjusted lifetime income: the SSA states that delayed retirement credits increase the benefit by 8% per year for those born in 1943 or later, stopping at age 70. Spending down other assets to delay a claim addresses the same longevity concern, and it is worth analyzing as part of any investment strategy before an annuity purchase.

A related option is the qualifying longevity annuity contract, which moves part of a qualified retirement plan or IRA into deferred income starting later in life. Under IRS Notice 2025-67, the QLAC premium limit remains $210,000 for 2026, and QLAC amounts are excluded from the balance used to calculate required minimum distributions, which the IRS says generally begin at age 73.

Who an annuity is right for — and whose retirement goals it does not fit

Certain fact patterns point toward an annuity being a reasonable fit:

  • Essential expenses exceed guaranteed income from Social Security and any pension, and the gap is persistent rather than temporary.
  • Enough liquid retirement savings sit outside the contract to absorb emergencies during the surrender period.
  • The buyer is closer to retirement than mid-career, and family longevity or good health makes an above-average lifespan plausible.
  • Market volatility prompts decisions the saver later regrets, such as selling stock holdings during declines.
  • A high earner has already maxed out a qualified retirement plan and wants additional tax deferral.

Other fact patterns point away from one:

  • Guaranteed income already covers fixed costs comfortably.
  • Assets are modest enough that tying up a large share leaves no reserve.
  • A shortened life expectancy makes a life-contingent payout unlikely to pay off.
  • The buyer is well under 59½ and may need access before then.
  • Leaving the largest possible estate outranks income security among the household’s retirement goals.
  • The contract would be funded by surrendering another annuity, life insurance policy or investment without a clear, documented reason.

Florida rules that shape whether an annuity may be worth it

Where you live changes the calculation. Florida imposes no state individual income tax, so tax deferral inside an annuity is worth less to a Florida resident than to someone in a high-tax state. On the other hand, Florida Statute 222.14 exempts the proceeds of annuity contracts issued to Florida residents from attachment, garnishment and legal process in favor of most creditors, a protection some residents weigh heavily.

Florida also regulates the sale itself. Florida Statute 627.4554 requires an agent recommending an annuity to act in the consumer’s best interest “without placing the financial interest of the agent or insurer ahead of the consumer’s interest,” to disclose the sources and types of compensation involved, and to make a written record of the recommendation and its basis. The same statute limits surrender charges for a senior consumer age 65 or older to no more than 10% of the amount withdrawn, with the charge gone after the tenth policy year or ten years after each premium payment.

The Florida Department of Financial Services states that annuity contracts must provide an unconditional refund for at least 21 days from policy delivery, though refunds on variable and indexed contracts may be reduced by market value adjustments. The department is blunt about the trade-off: an annuity “should only be considered as a long-term investment,” and if you may need your principal in the short term, an annuity may not be right for you.

If an insurer becomes insolvent, the Florida Life and Health Insurance Guaranty Association may provide limited protection to policyholders, but that protection is capped by statute and subject to conditions and exclusions, and the current limits are published by the association itself. Florida law prohibits the association’s protection from being used as an inducement to purchase insurance, and it should not be treated as a reason to buy any product.

Questions to ask a financial advisor before you buy an annuity

  1. What problem does this contract solve that my current retirement strategy does not?
  2. What is the surrender schedule, and what percentage can I withdraw annually without a charge?
  3. What are all the costs, including rider and investment management fees?
  4. On an index annuity, are the cap, participation rate and spread guaranteed, and if not, what is the contractual minimum?
  5. How is income calculated if I annuitize, and what happens to remaining value at death?
  6. How does this compare with delaying Social Security or leaving the money invested?
  7. What is the insurer’s financial strength, and how much compensation is paid on this sale?

Reviewing the answers with a financial advisor or tax professional who is not compensated on the transaction is one approach to buying annuities, as is using the 21-day refund window to read the issued annuity contract rather than the brochure.

Frequently asked questions

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

Recent published quotes for immediate annuities put a single 65-year-old around $590 to $625 a month and a single 70-year-old around $703 to $750, with joint-life payouts lower. Your figure depends on age, sex, payout option and interest rates when you purchase.

What is the disadvantage of an annuity?

The most-cited disadvantage is illiquidity: surrender charges often last six to ten years, and money withdrawn before age 59½ generally faces a 10% federal additional tax on the taxable portion. Cost, ordinary income tax treatment, inflation exposure and complexity are the other common drawbacks.

What is the best age to buy an annuity?

There is no single answer, but the mechanics point somewhere. Life-contingent payout rates rise with age because the expected payment period is shorter, so income annuities are commonly purchased between the mid-sixties and mid-seventies. Deferred annuities bought mainly for tax deferral are sometimes purchased earlier, though the age 59½ threshold limits their usefulness for younger savers.

Are annuities a good investment for retirement?

An annuity is better understood as insurance against outliving your money than as an investment competing on rate of return. Judged as an investment, most annuities trail a diversified stock portfolio over long periods. Judged as insurance, the question is whether the guarantee is worth its cost given your income gap and your alternatives.

Can I lose money in an annuity?

Yes. Variable annuities lose account value when underlying investments decline. Any annuity can lose value on an early surrender once charges apply. A life-only income annuity can pay out less than the premium if the annuitant dies early. And a failed insurer can leave amounts above guaranty association limits at risk.

What happens to an annuity when I die?

It depends on the contract. Deferred annuities generally pay the remaining account value or a stated death benefit to named beneficiaries. Income annuities pay nothing further under a life-only option, but period-certain, cash-refund and joint-life options continue. Beneficiaries generally owe ordinary income tax on the untaxed gain.

Can I get out of an annuity contract?

Within Florida’s 21-day unconditional refund period you can cancel and get your premium back, subject to market value adjustments on some contract types. After that, exiting means surrendering the contract, which may trigger surrender charges and taxes, or exchanging it for another annuity under Internal Revenue Code Section 1035, which defers tax but often starts a new surrender period.

Disclosures

This article is general information about a type of insurance product and is not financial, tax, investment or legal advice, and it is not a recommendation to buy, keep, exchange or surrender any annuity or other product. Rates, payout figures, caps, participation rates and contract terms change frequently and vary by insurer, state and individual circumstances; figures cited reflect the sources and dates named and may be out of date when you read this. Guarantees are subject to the claims-paying ability of the issuing insurer. Consult a licensed tax professional, attorney or financial advisor about your own situation as you plan for retirement. Lifeworth Insurance Agency is a trade name of Lifeworth Financial Group LLC, National Producer Number 21228343, licensed in Florida.

See also our annuities page.