Annuity FAQs

Navigating an annuity contract can be difficult. Find the answers to commonly asked questions about annuities below.

Catherine Byerly, Annuity.org Writer
  • Written By
    Catherine J. Byerly

    Catherine J. Byerly

    Staff Writer

    Catherine J. Byerly has worked in digital communications for the past four years, handling everything from award-winning, on-air public radio casts to writing in-depth investigative stories for business news sites.

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  • Edited By
    Emily Miller
    Emily Miller, Managing Editor for Annuity.org

    Emily Miller

    Managing Editor

    Managing editor Emily Miller is an award-winning journalist with more than 10 years of experience as a researcher, writer and editor. Throughout her professional career, Emily has covered education, government, health care, crime and breaking news for media organizations in Florida, Washington, D.C. and Texas. She joined the Annuity.org team in 2016.

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  • Financially Reviewed By
    Somer G. Anderson, Ph.D., CPA, CGMA®, CFE
    Somer G. Anderson, Ph.D., CPA, CGMA, CFE,

    Somer G. Anderson, Ph.D., CPA, CGMA®, CFE

    Assistant Accounting Professor at Maryville University's Simon School of Business

    Somer G. Anderson is a licensed certified public accountant and holds a doctorate in personal financial planning. Her other designations include chartered global management accountant and certified fraud examiner. Somer has worked in the accounting and finance industries for over 20 years as a financial statement auditor, a finance manager in a large health care organization, and a finance and accounting professor.

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  • Updated: September 8, 2022
  • This page features 5 Cited Research Articles
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APA Byerly, C. J. (2022, September 8). Annuity FAQs. Annuity.org. Retrieved September 26, 2022, from https://www.annuity.org/annuities/faqs/

MLA Byerly, Catherine J. "Annuity FAQs." Annuity.org, 8 Sep 2022, https://www.annuity.org/annuities/faqs/.

Chicago Byerly, Catherine J. "Annuity FAQs." Annuity.org. Last modified September 8, 2022. https://www.annuity.org/annuities/faqs/.

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Annuity Basics

What Is an Annuity?
An annuity is a financial contract between an insurance company and a buyer — typically an investor or retiree. In exchange for a lump sum or monthly payments toward the principal, an insurance company will pay out income through a series of payments or a one-time lump sum. An annuity is meant to provide a guaranteed stream of income through a set period of time or until an annuitant’s — or an annuity owner’s — death. Annuity savings are tax-deferred and can accumulate interest over time.
What Does It Mean to Be Tax-deferred?
Annuities have a tax-deferred status, meaning that while interest accrues on the savings, they are not taxed until withdrawn. This status helps to increase the amount of earnings in an annuity account. This offers two advantages. First, you can put off paying taxes on the money put into an annuity until you draw it out after you retire. Second, you draw interest on the money you put into an annuity and the interest you earn isn't taxed.
What Happens to My Annuity When I Die?
A unique benefit to an annuity is the death benefit. Should an annuity owner die before their annuity disburses all payments, the remaining assets can transfer to a spouse or surviving beneficiary. If you choose not to have a beneficiary, upon your death all remaining annuity assets will be surrendered to the issuing insurance company.
Interested in Buying an Annuity?
Learn about the different types of annuities and find out which one is right for you.
Request Your Free Quote

Buying an Annuity

Who’s the Best Candidate for Buying an Annuity?
Annuities benefit individuals in their 50s and 60s the most, since they are closer to retirement and looking to save additional income toward their nest egg. While it is okay to invest in this financial product at a younger age, annuities may not be as profitable as investing in mutual funds or bonds. Young investors have a stronger risk tolerance and more opportunity to invest in products with a higher rate of return.
Why Invest in an Annuity vs. a Mutual Fund?
You should take the following into account when deciding between an annuity and mutual fund. Mutual funds follow the market conditions. While they may offer a higher rate of return if conditions are positive, they also carry higher risk of losing income and interest. Annuities, however, guarantee a steady, low-risk stream of income no matter the market conditions. They also have the ability to grow tax-deferred over time.
What’s the Difference Between Immediate and Deferred Annuities?
An immediate annuity contract disburses a stream of income payments immediately after the initial purchase. Deferred annuities also guarantee a payout stream, but will disburse at a later time.

Taxes & Fees

Are There Any Fees Associated With Purchasing an Annuity?
Different annuity types charge different sets of fees to invest. However, some of the most common fees include:

• Mortality and expense (M&E) fees to support insurance guarantees and selling expenses of the annuity contract.

• Administrative fees to maintain the annuity contract.

• Potential surrender charges to help avoid premature withdrawals. Often times these surrender charges can be expensive, but they would be spelled out in the contract.

• Investment management fees, specifically for variable annuity options. Rider fees.
Will a Beneficiary Have to Pay Taxes on the Annuity?
Yes, annuity payments disbursed to a spouse or beneficiary will be treated as taxable income.
How Soon Can I Withdraw From My Annuity Savings?
Annuity owners can begin withdrawing money from their annuity by the age of 59½ without having to pay an early withdrawal fee. Some annuity contracts offer a surrender period, or an amount of time an investor has to wait before withdrawing funds from their annuity account. If money is withdrawn before that time, you will be subject to paying a surrender charge.
Please seek the advice of a qualified professional before making financial decisions.
Last Modified: September 8, 2022
Catherine Byerly, Annuity.org Writer
Written By Catherine J. Byerly Staff Writer
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Emily Miller, Managing Editor for Annuity.org
Edited By Emily Miller Managing Editor
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Somer G. Anderson, Ph.D., CPA, CGMA, CFE,
Financially Reviewed By Somer G. Anderson, Ph.D., CPA, CGMA®, CFE Assistant Accounting Professor at Maryville University's Simon School of Business
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5 Cited Research Articles

Annuity.org writers adhere to strict sourcing guidelines and use only credible sources of information, including authoritative financial publications, academic organizations, peer-reviewed journals, highly regarded nonprofit organizations, government reports, court records and interviews with qualified experts. You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines.

  1. Annuity FAQ. (n.d.). Retrieved from http://www.retirementegg.com/pages/annuities/annuity-faq.php
  2. CNN Money. (n.d.). What are the different types of annuities? Retrieved from https://money.cnn.com/retirement/guide/annuities_basics.moneymag/index2.htm?iid=EL
  3. Rampton, J. (2022, September 8). How Are Annuities Given Favorable Tax Treatment? Retrieved from https://www.entrepreneur.com/finance/how-are-annuities-given-favorable-tax-treatment/434950
  4. U.S. Internal Revenue Service. (2022, June 15). Annuities — A Brief Description. Retrieved from https://www.irs.gov/retirement-plans/annuities-a-brief-description
  5. Williger, M. J. (2004, April 7). FAQ-Annuities. Retrieved from https://www.elderlawanswers.com/