Last Updated on: June 10th, 2026
Reviewed by Kyle Wilson
Someone just recommended an annuity to you. Maybe it was a financial advisor, a bank representative, or a family member who swears it changed their retirement. Now you are trying to figure out what an annuity actually is and whether it is the right move or a contract you will regret.
The problem is that “annuity” is not one thing. There are at least six common types, each with a completely different structure, risk profile, and payout pattern. Signing up for the wrong one — or misunderstanding what you bought can lock your money away for years with steep penalties for getting out early.
Here is everything you need to know before making any decision
An annuity is the contract that is between you and an insurance company. You give them money either or at once or over the time and they promised to pay it back to you as the regular income stream either the starting now or at the future date you choose.
That is the very important annual definition and it will applies to every day. What changes between types is when women start, how the money goes during the period and how much risk you’ve taken on.
According to FINRA, all the entities share one fundamental characteristic and that is like the money inside them grows on a tax deferred basis. You do not have to pay taxes on the earning until you withdraw, which is meaningful advantage for the long-term retirement planning.
The two most important questions for anyone looking at an annuity are is that when do I want income to start, and how much risk am I willing to take with the growth phase? Those two answers narrow down which type actually fits your situation.
A fixed annuity is the most straightforward type. The insurance company guarantees a specific interest rate on your money for the set time that is similar to a CD, but with the tax deferred growth and typically a higher rate.
In 2026, competitive multi-year guaranteed annuity MYGA rates range from 4.5 to 6 percent depending on the term and the insurer’s financial strength. The best 5-year MYGA rate currently sits at approximately 6.30 percent, compared to around 4.15 percent for a top 5-year bank CD. That gap, combined with tax deferral, represents a real advantage for conservative savers who are not touching the money immediately.
The trade off is liquidity. Fixed annuities carry surrender charges if you withdraw early, and withdrawals before age 59½ trigger a 10 percent IRS penalty on top of ordinary income tax. If you may need the money within the surrender period, a fixed annuity is the wrong tool.
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These two terms describe when payments begin, not how the money grows. The distinction matters because it determines whether an annuity is a growth vehicle or an income vehicle.
A deferred annuity has an accumulation phase that comes first. You put money in, it grows (fixed, variable, or indexed, depending on the subtype), and payments do not begin until a future date you select that is typically retirement. Most annuities sold to people under 65 are deferred.
An immediate annuity that is also called a Single Premium Immediate Annuity or SPIA and it works differently. You hand over a lump sum and payments begin within 30 days to 12 months. There is no accumulation phase, this is a pure income product.
A variable annuity invests your premiums in sub-accounts that function similarly to mutual funds. Returns are not guaranteed they move with the performance of the investments you select. If markets rise, your account grows faster. If they fall, your account value drops.
The variable annuities are regulated not just by the state insurance commissioners, but also at the federal level by SEC and finra because of their investment component. This additional oversight reflects the higher complexity and risk involved.
The appeal is uncapped growth potential. The risk is that fees on variable annuities tend to be significantly higher than other types, often totaling 2 to 3 percent annually once sub-account expenses and optional riders are included. At that cost drag, the investment returns need to be meaningfully higher than a comparable index fund just to break even on fees.
Variable annuities may make sense for high-income earners who have already maxed all other tax-advantaged accounts (401k, IRA, Roth IRA) and want additional tax-deferred growth. For most other people, the fee structure erodes the advantage.
A fixed index annuity FIA that is sometimes called an equity indexed annuity, and this is the hybrid between a fixed and a variable annuity. Your principal is protected from market losses, but your growth is linked to the performance of a market index such as the S&P 500.
The mechanics involve a cap rate, a participation rate, or a spread. If the index gains 14 percent in a year but your cap is 8 percent, you earn 8 percent. If the index loses 10 percent, you earn zero not negative. The floor protects your principal. The cap limits your upside.
| Type | Growth Mechanism | Principal Protected? | When Income Starts | Best For |
| Fixed (MYGA) | Guaranteed rate (4.5–6%+) | Yes | Deferred or immediate | Conservative savers wanting stable returns |
| Variable | Market sub-accounts (no guarantee) | No | Deferred | High earners with long time horizons |
| Fixed Index (FIA) | Market-linked with floor and cap | Yes (floor = 0%) | Deferred | Growth with downside protection |
| RILA (Structured) | Market-linked with buffer, not full protection | Partial | Deferred | Moderate risk tolerance, higher upside cap |
| Immediate (SPIA) | N/A — income only | NA | Starts within 1 year | Retirees who need income now |
| Deferred Income (DIA) | Fixed growth, delayed income | Yes | Years or decades later | Planning income for a specific future age |
A Registered Index-Linked Annuity (RILA) is sometimes called a structured annuity or buffer annuity. It sits between a fixed index annuity and a variable annuity on the risk spectrum.
Unlike a fixed index annuity where your floor is zero (you never lose principal), a RILA offers a buffer that is typically 10 to 20 percent. If the market falls 15 percent and your buffer is 10 percent, you absorb a 5 percent loss. The trade-off is that in exchange for accepting some downside risk, you get a higher cap on the upside potentially significantly more than a standard FIA allows.
RILAs are regulated by both state insurance commissioners and the SEC. They are more complex than fixed or indexed annuities and require careful review of the specific contract terms before committing.
If you have seen ordinary annuity in a finance course or retirement planning context, here is the simple explanation. An ordinary annuity makes payments at the end of each period. An annuity due makes payments at the beginning.
The best definition of annuity is a series of equal payments made at the end of consecutive periods, monthly, quarterly, or annually. Most retirement income annuities function as ordinary annuities, paying at the end of each month.
This distinction primarily matters in financial calculations. In real-world retirement planning, the type of annuity (fixed, variable, indexed) and when income starts (immediate vs deferred) are far more consequential than whether it is technically ordinary or due.
Understanding annuity types is one part of retirement financial planning. The other part is making sure the people you leave behind are protected, without putting that burden on your savings.
At Burial Senior Insurance, we work with seniors and families who want straightforward answers about retirement income protection and final expense coverage. If you are sorting through your options and want guidance without a hard sales pitch, burialseniorinsurance.com is a practical starting point.
The monthly payment depends on your age, the type of annuity and the payout options. In so many cases, a $100,000 annuity can pay roughly around $400-$700 per month for the exact amount can be different.
An annuity is the financial tax that we will turn lump sum of money into the regular payment often used to provide the income during the retirement.
Annuities can have fees, limited access to your money, surrender charges for early withdrawals, and may not grow as quickly as some investments.
Neither is always better. A 401(k) is designed to help you save and invest for retirement, while an annuity is designed to provide guaranteed income. Many people use a 401(k) to build savings and an annuity to create retirement income later.
Senior Writer & Licensed Life Insurance Agent
Jazmine Cooke is a dynamic and insightful senior writer with a passion for life insurance and financial planning. With over 8 years of hands-on experience in the insurance industry, Jazmine Cooke has earned a reputation for delivering clear, actionable advice that empowers individuals to make informed decisions about their financial future. At Burial Senior Insurance, she not only excels as a licensed insurance agent but also as a trusted guide who has successfully advised over +1500 clients, helping them navigate the often complex world of life insurance and annuities. Her articles have been featured in top-tier financial publications, making her a respected voice in the industry.
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