Ask Mike: Annuities Explained—Types, Fees, Risks and When to Buy

Annuities can help provide guaranteed growth, retirement income, or protection from stock-market losses—but not every annuity works the same way. Before purchasing one, it is important to understand the different types, possible fees, withdrawal rules, guarantees, and risks.

In this edition of Ask Mike, Mike Minter of Mintco Financial answers frequently asked questions about MYGAs, fixed annuities, fixed indexed annuities, variable annuities, immediate annuities, income riders, surrender charges, and retirement planning.

What Is an Annuity?

Mike: An annuity is a contract issued by an insurance company. Depending on the type of annuity selected, it may be designed to provide guaranteed interest, tax-deferred accumulation, protection from direct stock-market losses, or a stream of retirement income.

An annuity is not automatically appropriate for everyone. The right product depends on your age, financial goals, income needs, time horizon, liquidity requirements, risk tolerance, and other retirement assets.

What Are the Main Types of Annuities?

Mike: The term “annuity” covers several different products. The major categories include:

• Multi-Year Guaranteed Annuities, or MYGAs
• Traditional fixed annuities
• Fixed indexed annuities
• Immediate income annuities
• Deferred income annuities
• Variable annuities
• Registered index-linked annuities

Each type has different guarantees, costs, growth potential, restrictions, and risks. Never select an annuity based only on an advertised rate.

What Is a MYGA?

Mike: A Multi-Year Guaranteed Annuity provides a fixed interest rate for a specified contract period. Common guarantee periods may include three, five, seven, or ten years, although available terms vary by company and state.

A MYGA may appeal to someone who wants predictable growth without direct exposure to stock-market fluctuations. The credited interest generally grows tax-deferred until money is withdrawn.

What Is a Traditional Fixed Annuity?

Mike: A traditional fixed annuity credits interest according to the terms of the contract. The insurer may guarantee a rate for an initial period and later declare renewal rates, subject to a contractual minimum.

Fixed annuities are commonly considered by people who prioritize stability and principal protection over aggressive market-based growth.

What Is a Fixed Indexed Annuity?

Mike: A fixed indexed annuity credits interest using the performance of a market index as a reference. Your money is not invested directly in the index. Interest is calculated according to the contract’s crediting method, participation rate, spread, cap, or other limitations.

A fixed indexed annuity may protect the contract value from direct market losses, but it does not normally receive all of the index’s gains. Contract provisions can be complicated, so illustrations should be reviewed carefully.

What Is a Variable Annuity?

Mike: A variable annuity allows money to be allocated among investment options known as subaccounts. The contract value can increase or decrease depending on investment performance.

Variable annuities may include mortality and expense charges, administrative expenses, investment-management expenses, and additional charges for optional riders. They also involve market risk and should be compared carefully with other investment alternatives.

What Is an Immediate Annuity?

Mike: An immediate annuity converts a lump sum into a series of income payments that generally begin shortly after the contract is purchased. Payments may continue for a set number of years, for one person’s lifetime, or for the lifetimes of two people.

The income amount depends on factors such as age, interest rates, premium amount, payment option, and whether beneficiary protection is included.

What Is a Deferred Income Annuity?

Mike: A deferred income annuity is designed to begin income payments at a future date. Someone might purchase the contract today but delay income until age 70, 75, 80, or another selected age.

It may be considered by people who want to create a future income floor, but it can involve limited liquidity. The income election and beneficiary provisions should be reviewed before purchasing.

Do Annuities Have Fees?

Mike: Some annuities have explicit annual fees, while others do not. However, a product without a visible annual fee may still contain surrender charges, interest-crediting limitations, optional rider costs, or other contractual restrictions.

What Is a Surrender Charge?

Mike: A surrender charge is a fee that may apply when you withdraw more than the contract permits during the surrender period. The percentage frequently decreases over time.

For example, a contract might begin with a higher surrender charge in the first year and gradually reduce it until the surrender period ends. The exact schedule depends on the product.

This is why you should avoid placing money into an annuity if you may need unrestricted access to it shortly after purchase.

Can I Withdraw Money From an Annuity?

Mike: Many annuities permit limited penalty-free withdrawals, often calculated as a percentage of the contract value. However, provisions vary. Withdrawals may reduce future income benefits, trigger surrender charges, create taxable income, or result in an additional federal tax penalty when taken before age 59½.

Always review withdrawal provisions and consult a qualified tax professional about your specific situation.

When Is a Good Time to Consider an Annuity?

Mike: There is no single perfect age or time to purchase an annuity. People frequently consider annuities when they are:

• Approaching retirement
• Concerned about stock-market volatility
• Rolling over money from an employer retirement plan
• Looking for predictable interest or retirement income
• Selling a business or property
• Receiving an inheritance
• Trying to reduce risk in part of a retirement portfolio
• Planning future income for themselves or a spouse

An annuity should be evaluated as part of your complete financial picture—not as an isolated product.

When Might an Annuity Not Be Appropriate?

Mike: An annuity may not be appropriate when you need immediate access to all of your money, do not have adequate emergency savings, cannot tolerate the surrender period, or do not fully understand the contract.

It may also be unnecessary when another investment or insurance product can meet the same goal more efficiently. A recommendation should be based on your needs—not simply on the product offering the highest advertised rate or commission.

Are Annuities Safe?

Mike: Fixed-annuity guarantees are backed by the claims-paying ability of the issuing insurance company. They are not bank deposits and are not insured by the FDIC.

Before purchasing, review the insurer’s financial-strength ratings, history, contract terms, and state availability. It can also be prudent to avoid concentrating an excessive amount with one insurance company.

Are Annuities Taxable?

Mike: Earnings inside many annuities grow tax-deferred until withdrawn. The taxation of withdrawals depends on whether the contract was purchased with qualified retirement funds or nonqualified money.

Annuities do not automatically make qualified retirement money more tax-deferred because those accounts already receive tax-deferred treatment. An annuity inside an IRA should provide other benefits that justify its use.

Tax laws can be complicated. Consult a qualified tax advisor regarding your individual situation.

Should I Put All My Retirement Savings Into an Annuity?

Mike: Usually, retirement planning requires a balance between liquidity, growth, safety, and income. Placing all retirement assets into one product may leave you without sufficient flexibility.

The appropriate allocation depends on your income sources, Social Security benefits, pension income, expenses, emergency reserves, investments, health considerations, and estate-planning goals.

How Should I Compare Annuities?

Mike: Do not compare annuities only by their headline rates. Review:

• The financial strength of the insurance company
• The guaranteed interest period
• The surrender-charge schedule
• Penalty-free withdrawal provisions
• Annual fees and optional rider charges
• Index-crediting formulas
• Income guarantees
• Death-benefit provisions
• Renewal-rate terms
• Market-value adjustments
• Your need for liquidity
• Your tax and estate-planning objectives

Why Work With an Independent Advisor?

An independent advisor can compare annuity products from multiple insurance companies rather than being limited to one carrier. This may help you evaluate different guarantee periods, income features, financial-strength ratings, surrender schedules, and contract provisions.

At Mintco Financial, we focus on helping clients understand what they are purchasing, what is guaranteed, what is not guaranteed, and how the annuity may fit into their broader retirement strategy.

Important disclosure: This material is provided for general educational purposes and is not intended as individualized investment, tax, or legal advice. Annuity products, rates, features, guarantees, surrender periods, and availability vary by insurance company and state. Guarantees are based on the claims-paying ability of the issuing insurer. Withdrawals may be subject to surrender charges, income taxes, and possible federal tax penalties. Consult appropriate financial, legal, and tax professionals before making a decision.