By the Kryder Cares Data Desk · Reviewed by Kris Kryder, licensed agent · Updated
Key points
- Fixed annuities guarantee a minimum interest rate; any higher rate is set by the insurer.
- Fixed-indexed annuities link interest to an index, limited by caps, participation or spread rates, with a 0% floor.
- Surrender charges usually decline each year; many contracts allow about 10% a year without a charge.
- Earnings are tax-deferred, and withdrawals before 59½ may face a 10% additional tax.
What an annuity is
The NAIC describes the feature all annuities share: the insurance company promises to pay you income on a regular basis for a period you choose, which can be the rest of your life. An immediate annuity starts paying soon after you buy it. A deferred annuity has an accumulation period, when its value grows, and a payout period, when it pays you.
Kris works with fixed and fixed-indexed deferred annuities. Variable annuities, whose value depends on investment subaccounts and can lose money, are securities sold by FINRA-registered representatives and aren’t covered in this guide.
Fixed annuities
Money in a fixed deferred annuity earns interest at a rate the insurer sets, usually fixed for a period such as a year. When that period ends, the insurer sets a new rate, which can be higher or lower. Every fixed annuity has a guaranteed minimum interest rate stated in the contract that can’t change while you own it. Ask what the starting rate is, how long it lasts and how renewal rates are announced.
Fixed-indexed annuities
A fixed-indexed annuity credits interest based on changes in a market index, such as the S&P 500, over a set index term. You aren’t investing in the market directly. The insurer uses a formula, and the interest usually reflects only part of the index change:
- Cap rate: typically the most interest the annuity will earn in a term.
- Participation rate: how much of the index increase is counted, often less than 100%.
- Spread (margin): a percentage subtracted from any index gain.
- Floor: if the index goes down, zero interest is added, so the value doesn’t drop from index losses as long as you don’t withdraw.
Surrender charges and other costs
Most deferred annuities charge a surrender charge if you take money out during a set number of years. It’s a percentage of what you withdraw and usually goes down each year until the period ends. Many contracts let you take a portion — often up to 10% a year — without a charge, and some waive charges for events such as death.
Watch for a market value adjustment, which can raise or lower what you receive on a withdrawal depending on interest rates, and for optional riders, such as lifetime income benefits, that usually cost extra. Some contracts pay a bonus that you could lose if you withdraw early. All guarantees depend on the insurer’s financial strength and claims-paying ability.
How annuities are taxed
Earnings inside an annuity are tax-deferred: you don’t pay income tax on them until you take money out, and then the taxable part is taxed as ordinary income. Withdrawals before age 59½ may be subject to a 10% additional tax on the taxable portion, with some exceptions described in IRS Publication 575. An annuity held inside an IRA follows IRA rules. Kris is a licensed insurance agent, not a tax or investment adviser; talk with your CPA about your situation.
Questions to ask before you buy
Under the NAIC’s best-interest standard, adopted by 48 states according to the NAIC, an agent’s recommendation must be in your best interest, and the agent can’t put their own financial interest ahead of yours. Expect questions about your income, assets, other savings, tax status, risk tolerance and when you might need the money. Then ask your own:
- What’s guaranteed, and what isn’t? What’s the guaranteed minimum rate?
- How long is the surrender period, and what are the charges each year?
- How much can I take out each year without a charge?
- Can the cap, participation or spread rate change after the first term?
- What do riders cost, and do I need them?
- Have I used other tax-deferred options, such as a 401(k) or IRA?
How Kris helps
Kris explains fixed and fixed-indexed annuities from the insurers she represents in plain terms, including the parts that aren’t guaranteed, and won’t rush a decision. See the annuities page, her article on annuities for retirement income, and the long-term care page if you’re planning for care costs. Our life insurance guide covers the protection side, and life insurance with Kris lists every option.
Your next step
Have questions about your own situation? Contact Kris or schedule a no-cost meeting. You can also read more about Fixed & Fixed-Indexed Annuities and Long-Term Care Insurance.
Sources
Life insurance and annuity products are issued by the insurance company, and guarantees are backed by the financial strength and claims-paying ability of the issuer. Kris Kryder is a licensed insurance agent, not a tax, legal or investment adviser.
This guide is general education, not a recommendation for any specific plan or policy. Figures were current as of October 19, 2026; plan details and government amounts change every year.