Last updated: October 19, 2026
Quick Answer
An annuity is a contract in which an insurance company makes a series of income payments at regular intervals in return for a premium or premiums you have paid. Annuities are most often bought for future retirement income. Only an annuity can pay an income that can be guaranteed to last as long as you live.
Annuity income payments
Income payments are usually made monthly but you may choose to receive them less often. The size of income payments is based on the accumulated value in your annuity and the annuity’s benefit rate in effect when income payments start. The benefit rate usually depends on your age and sex, and the annuity payment option you choose.
Tax deferral
Under current federal law, annuities receive special tax treatment. Income tax on annuities is deferred, which means you aren’t taxed on the interest your money earns while it stays in the annuity. Tax-deferred accumulation isn’t the same as tax-free accumulation. An advantage of tax deferral is that the tax bracket you’re in when you receive annuity income payments may be lower than the one you’re in during the accumulation period. You’ll also be earning interest on the amount you would have paid in taxes during the accumulation period.
Part of the payments you receive from annuity will be considered as a return of the premium you’ve paid. You won’t have to pay taxes on that part. Another part of the payments is considered interest you’ve earned. You must pay taxes on the part that is considered interest when you withdraw the money. You may also have to pay a 10% tax penalty if you withdraw the accumulation before age 59½.
Death benefit
In some annuity contracts, the company may pay a death benefit to your beneficiary if you die before the income payments start. The most common death benefit is the contract value or the premiums paid, whichever is more.
Charges and the long-term nature of an annuity
Most annuities have charges related to the cost of selling or servicing it. These charges may be subtracted directly from the contract value.
If you take out part of the value, you may pay a withdrawal charge. If you take out all of the value and surrender, or terminate, the annuity, you may pay a surrender charge. The company may reduce or even eliminate the surrender charge after you’ve had the contract for a stated number of years.
You should understand the long-term nature of your purchase. Be sure you plan to keep an annuity long enough so that the charges don’t take too much of the money you put in. Be sure you understand the effect of all charges.
What an annuity is not
Only an annuity can pay an income that can be guaranteed to last as long as you live. An annuity is neither a life insurance nor a health insurance policy. It’s not a savings account or a savings certificate. You shouldn’t buy an annuity to reach short-term financial goals.
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Questions & Answers
| Question | Answer |
|---|---|
| What are the benefits of an annuity? | Income payments are usually made monthly but you may choose to receive them less often. The size of income payments is based on the accumulated value in your annuity and the annuity’s benefit rate in effect when income payments start. The benefit rate usually depends on your age and sex, and the annuity payment option you choose. |
| What is the advantage of an annuity? | Under current federal law, annuities receive special tax treatment. Income tax on annuities is deferred, which means you aren’t taxed on the interest your money earns while it stays in the annuity. Tax-deferred accumulation isn’t the same as tax-free accumulation. An advantage of tax deferral is that the tax bracket you’re in when you receive annuity income payments may be lower than the one you’re in during the accumulation period. You’ll also be earning interest on the amount you would have paid in taxes during the accumulation period. |
| What are the pros and cons of an annuity? | You should understand the long-term nature of your purchase. Be sure you plan to keep an annuity long enough so that the charges don’t take too much of the money you put in. Be sure you understand the effect of all charges. |
| What are annuity benefits? | In some annuity contracts, the company may pay a death benefit to your beneficiary if you die before the income payments start. The most common death benefit is the contract value or the premiums paid, whichever is more. |
Large Print Version
Benefits of Annuities: Pros and Cons
An annuity is a contract in which an insurance company makes a series of income payments at regular intervals in return for a premium or premiums you have paid. Annuities are most often bought for future retirement income. Only an annuity can pay an income that can be guaranteed to last as long as you live.
What are the benefits of an annuity?
Income payments are usually made monthly but you may choose to receive them less often. The size of income payments is based on the accumulated value in your annuity and the annuity’s benefit rate in effect when income payments start. The benefit rate usually depends on your age and sex, and the annuity payment option you choose.
What is the advantage of an annuity?
Under current federal law, annuities receive special tax treatment. Income tax on annuities is deferred, which means you aren’t taxed on the interest your money earns while it stays in the annuity. Tax-deferred accumulation isn’t the same as tax-free accumulation. An advantage of tax deferral is that the tax bracket you’re in when you receive annuity income payments may be lower than the one you’re in during the accumulation period. You’ll also be earning interest on the amount you would have paid in taxes during the accumulation period.
What are the pros and cons of an annuity?
You should understand the long-term nature of your purchase. Be sure you plan to keep an annuity long enough so that the charges don’t take too much of the money you put in. Be sure you understand the effect of all charges.
What are annuity benefits?
In some annuity contracts, the company may pay a death benefit to your beneficiary if you die before the income payments start. The most common death benefit is the contract value or the premiums paid, whichever is more.
Source: © 2025 National Association of Insurance Commissioners (NAIC). Reprinted with permission. Further reprint or distribution strictly prohibited without written permission of NAIC.
Annuities Explained is not affiliated with or endorsed by the National Association of Insurance Commissioners (NAIC).
Educational content provided by Jeffrey Scott McLeod, LUTC, National Insurance Producer License #558629. This is for informational purposes only and is not a recommendation to buy or sell any annuity. Guarantees are subject to the claims-paying ability of the issuing insurance company. Always consult your own advisor and read the full NAIC Buyer’s Guide. For residents of your state.
Jeffrey Scott McLeod, LUTC — Texas License #901162 (National Producer #558629).
Questions? Contact Jeff@AnnuitiesExplained.org.