The Complete Guide to Annuities

If you’re approaching retirement, you may be asking a different question about your money than you did 10 or 20 years ago.

It may be less about, “How much more can I grow?” and more about, “How can I turn what I’ve worked hard to build into income I can depend on?”

That shift is one reason annuities often come up in retirement conversations.

An annuity is an insurance contract that can be designed to help accumulate money, create retirement income, or both. Depending on the type of annuity, it may offer features such as a stated interest rate, principal-protection features, interest-crediting potential linked to an external index, or income options that can continue for life.

But there is an important point to understand before going any further:

There is no single type of annuity, and an annuity is not automatically right for everyone.

Different contracts are built for different purposes. They can have different guarantees, income provisions, surrender periods, withdrawal rules, beneficiary provisions, costs, and limitations.

That’s why education should come before a product decision.

At Summerlin Benefits Consulting, we believe the first step is understanding what an annuity does, what it does not do, and what questions you should ask before deciding whether one deserves a place in your retirement income strategy.

An annuity is a contract between you and an insurance company.

Generally, you provide money to the insurer through a lump-sum premium or, depending on the contract, a series of payments. In return, the insurer provides benefits according to the terms of the contract.

Those benefits can vary significantly.

Some annuities are designed primarily to accumulate value for the future. Others are designed primarily to turn a lump sum into retirement income. Some can do both.

This distinction matters because simply asking, “Is an annuity good?” doesn’t tell you very much.

A better question is:

What job would I need an annuity to do?

For someone approaching retirement, that job might include creating more predictable income, adding greater stability to a portion of retirement assets, accumulating money for a later stage of retirement, or reducing exposure to certain ups and downs in the market.



The appropriate answer depends on the individual and on the actual contract.

It helps to think about annuities in terms of two possible stages: accumulation and income.

During an accumulation period, money can earn interest or receive interest credits according to the terms of the annuity contract.

At a later point, the owner may have several options depending on the contract. Those might include taking withdrawals, electing an available income benefit, annuitizing the contract, or taking another form of distribution permitted by the contract.

Not every annuity has a long accumulation period.

An immediate income annuity, for example, is generally purchased with a lump sum specifically to begin generating income soon after purchase.

This is why the word “annuity” by itself is not enough to understand what someone owns—or what they are considering buying.

You need to understand the type of annuity and its specific contract provisions.

Annuities can be classified in several ways, but for someone trying to understand the retirement-income landscape, four categories are particularly useful to know.

Fixed Annuities and Multi-Year Guaranteed Annuities (MYGAs)

A fixed annuity is an insurance contract designed to provide a stated or declared interest rate according to the terms of the contract. For someone who values stability and predictability, the appeal is straightforward: the interest credited is not based on the day-to-day ups and downs of the stock market.

A Multi-Year Guaranteed Annuity, commonly called a MYGA, is a type of fixed annuity that provides a contractually stated interest rate for a specified period, such as a multi-year term.

Rather than thinking of fixed annuities and MYGAs as two completely separate categories, it can be more helpful to think of a MYGA as a specific type of fixed annuity designed to provide greater rate predictability for a defined period.

As with any annuity, it is important to understand the full contract, including the length of the guarantee period, available withdrawal provisions, surrender schedule, and what happens when the initial guarantee period ends.



Contract guarantees are subject to the terms of the annuity and the claims-paying ability of the issuing insurance company.

Fixed Index Annuities

A Fixed Index Annuity, or FIA, is also an insurance product.

Instead of directly participating in the stock market, an FIA uses the performance of an external market index as part of the method for determining potential interest credits.

Your money is not directly invested in the index.

That is an important distinction.

A Fixed Index Annuity (FIA) is designed to help protect your principal from market downturns while providing the opportunity to earn interest based in part on the performance of a market index, subject to the terms of the contract and the claims-paying ability of the issuing insurance company.

For many retirees, an FIA can be a way to move a portion of their retirement savings out of direct market risk while still maintaining growth potential.

The trade-off for this added protection is that interest credited may be limited by features such as caps, participation rates, spreads, and other crediting methods. In exchange, you gain a level of protection and predictability that money invested directly in the market does not provide.

Think of it as finding a balance between stability and growth potential—giving a portion of what you have worked hard to build greater protection from market ups and downs while still providing an opportunity for index-linked interest credits.

Because those mechanics deserve a fuller explanation, Summerlin Benefits Consulting’s separate Knowledge Center resource, What Is a Fixed Index Annuity and How Does It Work?, takes a deeper look at FIAs.

Immediate Income Annuities

An immediate income annuity is designed primarily to convert a lump sum into a stream of income that begins relatively soon after the contract is purchased.

Instead of focusing primarily on future accumulation, the focus is income.

Depending on the contract and payout option selected, payments may continue for a specified period, for the lifetime of one person, for the lives of two people, or according to another available payout structure.

The payout choice is important because it can affect both the amount of income received and what may remain for beneficiaries.

Variable annuities are another category consumers may encounter when learning about annuities generally.

Unlike the fixed insurance products discussed above, variable annuities involve investment options whose values can rise or fall based on their performance. Variable annuities are securities as well as insurance contracts.

They are included here so you understand that the broader annuity category contains products with substantially different structures and risks.

Summerlin Benefits Consulting’s documented insurance-side annuity focus includes fixed annuities, Fixed Index Annuities, MYGAs, and immediate income annuities.

For someone who is still several years from needing retirement income, a deferred annuity may provide an accumulation period before income begins.

How that accumulation occurs depends on the contract.

A MYGA may provide a stated interest rate for a defined multi-year period, while a Fixed Index Annuity may credit interest based in part on the performance of an external index, subject to the contract’s crediting method and limitations.

One reason some people consider these types of annuities as retirement approaches is that their priorities may be changing.

A Fixed Index Annuity may credit interest based in part on the performance of an external index, subject to the contract’s crediting method and limitations.

One reason some people consider these types of annuities as retirement approaches is that their priorities may be changing.

Someone who spent decades focused primarily on accumulation may begin placing greater importance on questions such as:

• How much of my retirement money do I want exposed to market declines?
• How much stability would help me feel more confident?
• When will I need this money?
• How much access will I need along the way?
• How will I eventually turn retirement assets into income?

Those questions matter more than simply asking which product has the most attractive feature.

Ready to Talk About Your Retirement?

No pressure. No obligation. Just a conversation about your goals and concerns.

One of the best-known purposes of an annuity is creating income.



But there is more than one way that can happen.

Annuitization

Annuitization generally converts an annuity contract into a stream of payments under a selected payout option.

Depending on the option, payments may continue for life, for a specified period, or under another contractually available arrangement.



The tradeoff is important: after annuitization, access to the underlying contract value may become significantly restricted or unavailable. Beneficiary outcomes also depend on the payout option selected.

Immediate Income

An immediate income annuity is purchased specifically to begin producing income relatively soon.

For someone concerned about turning a portion of accumulated assets into predictable income, this may be one option worth understanding.

Income or Living-Benefit Features

Some deferred annuities may offer optional income or living-benefit features.

Depending on the contract, these features may allow withdrawals calculated under specified rules and may provide lifetime-income provisions.

They may also involve charges, limitations, waiting periods, or other conditions.

The important question is not merely:

“Does this annuity offer lifetime income?”

Instead, ask:

“How does the income feature work, what does it cost, what restrictions apply, and what happens to the rest of the contract?”



That is the difference between recognizing a feature and actually understanding it.

The word guarantee deserves careful attention.

Certain annuities can provide legitimate contractual guarantees. But you should always understand exactly what is being guaranteed.

Depending on the contract, a guarantee might apply to:

• A stated interest rate for a particular period
• A minimum contract value
• Certain principal-protection features
• An income payment
• A lifetime-income provision when applicable conditions are met
• A death-benefit provision

A guarantee on one feature does not mean every aspect of the annuity is guaranteed.

It also does not mean the contract is “risk-free.”

Insurance guarantees are subject to the terms of the contract and, where applicable, the claims-paying ability of the issuing insurance company.

A useful question whenever you hear the word “guaranteed” is:

What exactly is guaranteed—and what is not?

Certain annuities are designed to provide principal-protection features from losses caused by market declines, according to the terms of the contract. For someone approaching retirement, that added stability can be an important part of the conversation.

In exchange for that protection, it is important to be comfortable with the commitments that come with the contract.

Depending on the annuity, those considerations may include:

• How long you plan to leave the money in the contract
• How much access you may need along the way
• The contract’s surrender period
• Available free-withdrawal provisions
• How interest will be credited
• Any applicable rider or benefit charges
• How inflation may affect your purchasing power over time
• The financial strength and claims-paying ability of the issuing insurer

Understanding these details helps you see the full picture - both the stability and predictability the annuity is designed to provide and the commitments that come with those benefits.

Summerlin Benefits Consulting helps clients walk through these considerations in plain English so they can understand both the benefits and the commitments before making a decision.

A surrender period is the period of time during which withdrawals above the amount permitted by the contract may result in a surrender charge.

That does not necessarily mean your money is completely inaccessible.

Many annuity contracts include provisions allowing a certain amount to be withdrawn without a surrender charge, although the amount, timing, and conditions vary by contract.

The key is making sure the annuity and its access provisions match how you expect to use the money.

Summerlin Benefits Consulting reviews this with clients as part of the education process—looking at how long the money can reasonably remain committed, how much access may be important along the way, and what the specific contract allows.



The goal is to understand those provisions before making a decision so the contract can be considered in light of your retirement goals and expected need for access.

Many annuities offer tax-deferred accumulation, meaning applicable earnings generally are not taxed while they remain inside the contract.

But tax-deferred does not mean tax-free.

How an annuity distribution is taxed depends on factors including how the annuity was funded, whether it is held inside a qualified retirement arrangement, how distributions are taken, and the owner’s individual circumstances.

For example, federal rules generally treat a nonperiodic withdrawal from a nonqualified commercial annuity before the annuity starting date as coming from earnings first and then from the owner’s cost in the contract.

Different rules can apply to qualified retirement money and to periodic annuity payments.

The larger lesson is simple:

Do not make an annuity decision based on a broad tax slogan.

Understand how the particular contract will be funded and how you expect to use the money.

Summerlin Benefits Consulting provides general retirement and insurance education, not individualized tax advice. Current tax rules should be verified, and individual tax questions may need to be discussed with an appropriately qualified tax professional.

This is another area where the contract matters.

If the owner dies during the accumulation period, a deferred annuity may provide a death benefit or remaining contract value to the named beneficiary according to the contract terms.

If the annuity has already been converted into income payments, what happens next may depend on the payout option that was selected.

Some options may continue payments to a surviving spouse or another beneficiary.

Some may provide payments for a guaranteed period.

Other payout structures may stop at death.

The tax treatment of inherited annuity proceeds can also depend on the circumstances.

If leaving money to a spouse, children, or other beneficiaries matters to you, beneficiary provisions should be part of the annuity conversation from the beginning—not something discovered after an income option has already been selected.

Annuities can provide features that may be valuable for certain retirement goals. Depending on the type and contract, those may include:

For someone who has spent years watching retirement savings rise and fall with the market, greater predictability may provide an added sense of confidence as retirement approaches.

But that does not mean everyone should purchase an annuity.


The benefit only matters if it solves a problem you actually have.

In Summerlin Benefits Consulting’s educational seminars, you may hear these described simply as the “catches.”

Every strategy has something you receive and something you agree to in return. With an annuity, greater stability, principal-protection features, or income options may come with considerations such as:

• A longer-term time commitment
• Surrender periods
• Limits on how much can be withdrawn without a surrender charge
• Limits on index-linked interest-crediting potential
• Rider or benefit charges when applicable
• Contract provisions that affect certain income choices

The word “catch” does not mean something is hidden or inherently negative. It is a reminder to understand the entire contract—not just its most appealing feature.

For example, an annuity designed to provide greater predictability may offer different growth potential than direct participation in the market. An income feature may provide greater confidence about future income while also carrying specific rules about how that benefit works.



Summerlin Benefits Consulting believes those details should be explained clearly upfront. When you understand what you are getting and what you are committing to, you are in a better position to decide whether the tradeoff feels comfortable for you.

This may be the most important question in the guide.

You do not start by asking which annuity to buy.

You start by understanding what you want your retirement money to accomplish.

Questions worth considering include:

• When will I need income from this money?
• How predictable do I want that income to be?
• How much access to the money do I need?
• How much exposure to market ups and downs am I comfortable with?
• Is leaving money to beneficiaries important?
• What other retirement-income sources will I have?
• How long do I expect this money to remain committed?
• What exactly does the contract guarantee?
• What can change?
• What happens if I need more money than expected?
• What happens when I die?
• Do I understand the contract well enough to explain it in my own words?

There is another question that is just as important:

What am I giving up in exchange for the benefits I want?

That is where a product feature becomes an informed retirement decision.

Retirement can change the way you think about money.

During your working years, a market decline may have felt like something you had time to recover from. As retirement approaches, you may be looking at those same dollars differently because they may soon need to help pay the mortgage, groceries, healthcare, travel, or everyday living expenses.

It is understandable to want greater confidence about what comes next.

But confidence does not come from being told that one product solves every problem.

It comes from understanding your options.

At Summerlin Benefits Consulting, our approach is education first. That means helping you understand all the aspects - what an annuity can do, what it cannot do, and what questions deserve answers before discussing a particular solution.

No pressure. No need to make a decision before you understand what you are considering.

If you want to learn more about the types of annuities Summerlin Benefits Consulting works with, you can explore Summerlin’s annuity strategies.

And if you have reached the point where you want to discuss your own retirement income goals, concerns, timeline, and questions, you can request a complimentary retirement review.

The goal of that conversation is not to begin with a product.

It is to begin with understanding your options so you can move forward with greater confidence.