What an annuity actually does

In exchange for a premium (a lump sum or payments over time), an insurance company contractually guarantees to pay you income, often for life. This guarantee is backed by the issuing insurer’s own financial strength and by state guaranty associations, not the federal government.

The real tradeoffs worth knowing

Annuities can offer guaranteed lifetime income that market-based investments can’t promise, but they typically involve surrender charges for early withdrawal, ongoing fees (especially variable and indexed annuities), and less liquidity than a brokerage account. Whether one fits your situation depends on your need for guaranteed income versus flexibility – a fee-only fiduciary advisor can help evaluate that tradeoff for your specific numbers.

FAQ

Are annuities backed by the federal government like FDIC-insured deposits?
No. Annuities are backed by the issuing insurance company’s financial strength and by state guaranty associations, which have coverage limits that vary by state – not federal deposit insurance.

Sources

• NAIC – Annuities Buyer’s Guide

Written by Samuel, Certified Public Accountant. This page may contain affiliate links; see our advertising disclosure.