Annuity
Also called annuities, deferred annuity, income annuity
An insurance contract to grow money tax-deferred or turn a lump sum into income — often wrapped in steep surrender charges, and not the same thing as life insurance.
An annuity is a contract with an insurance company, and it works in two phases. In accumulation, your money grows tax-deferred inside the contract. In the payout (or annuitization) phase, the insurer can turn that balance into a stream of income — sometimes guaranteed to last as long as you live. That longevity guarantee is the feature nothing else in personal finance replicates: protection against outliving your money.
But “annuity” is an umbrella over wildly different products. An immediate income annuity is simple and often genuinely useful — a lump sum in, a lifelong paycheck out. A deferred annuity grows first and pays later, and comes in fixed, variable, and fixed-indexed flavors that layer on crediting formulas, riders, and fees. The more moving parts, the more room for the product to be built around the commission rather than your goal.
The feature to scrutinize first is the surrender charge. Deferred annuities commonly lock your money behind a schedule — cash out in the early years and you forfeit a declining percentage (say 8% falling to 0% over 7–10 years). Stack that on top of annual mortality-and-expense charges and optional rider fees, and a contract sold as “safe growth” can deliver modest net returns while your money sits trapped.
Annuities are not life insurance — they solve the opposite problem — even though the same carriers and agents sell both. A plain income annuity can be a smart, boring tool for guaranteeing retirement income. A complex deferred annuity sold with urgency and a thick rider stack deserves a hard second look. Before signing, get every fee in dollars, the full surrender schedule, and — if you’re swapping out an existing contract — understand the 1035 exchange rules so you don’t trigger tax or fresh surrender charges.
Annuities range from genuinely useful (a plain income annuity that guarantees a paycheck for life) to genuinely predatory (a fee-laden deferred contract with a ten-year surrender cage). The word 'annuity' tells you almost nothing until you know which kind.
You hand an insurer $100,000. An immediate annuity might pay you, say, $6,000 a year for life starting now. A deferred annuity instead grows the money tax-deferred — but locks it behind a surrender schedule where cashing out in year two might cost you 8% of the balance.
The surrender schedule and the total annual fees. A long surrender period (7–10+ years) plus rider and M&E charges can quietly consume much of the return. Ask for every fee in dollars, and confirm how many years your money is locked up before you sign.