Key takeaways
- An annuity is a contract with an insurance company that turns savings into income you cannot outlive. Guarantees rest on the carrier's claims-paying ability — not the government, and not the FDIC.
- Americans are buying them at record pace: U.S. retail annuity sales hit a record $464.1 billion in 2025, a fifth straight record year, according to LIMRA.
- The four main types — fixed, fixed-indexed, immediate (SPIA) and variable — trade off growth potential against how much market risk you carry.
- Only fixed and fixed-indexed annuities protect your principal from market losses. Variable annuities can lose value and are regulated as securities.
- Annuities are usually one income layer alongside Social Security, which pays retired workers about $2,071 a month on average (SSA, January 2026).
An annuity is a contract with an insurance company that turns a lump sum of savings into a stream of income — often income you cannot outlive. You pay the insurer now (or over time), and in exchange it promises to pay you back on a schedule, either for a set number of years or for the rest of your life. That is the whole idea: trading a pile of money you have to manage yourself for a paycheck someone else guarantees.
For retirees, that guarantee solves a specific fear — running out of money. Social Security and a pension (if you have one) cover part of your essential expenses, but many people want a bigger, more predictable income floor. An annuity can fill that gap. In this guide we explain, in plain English, how annuities work, how the four main types differ, why sales are at all-time highs, and where an annuity does — and does not — make sense. This is general education, not individualized advice, and every guarantee described here depends on the claims-paying ability of the issuing insurance company.
The short version: an annuity is longevity insurance. You give up some access to a portion of your savings in exchange for income that keeps coming — in many contracts, for as long as you live.
What an annuity actually is
Strip away the jargon and an annuity has two phases. In the accumulation phase, your money sits in the contract and grows — at a fixed rate, a market-linked rate, or through investments, depending on the type. In the payout (or income) phase, the insurer converts your value into scheduled payments. Some annuities skip straight to income (you buy them with a single premium and start collecting almost immediately); others are built to accumulate for years first.
Because an annuity is an insurance contract, the company can promise something a bank account cannot: income for an unknown length of time. If you live to 100, a life annuity keeps paying; the insurer pools that risk across thousands of contract holders. That pooling is exactly why annuities are the only mainstream product that can guarantee income you cannot outlive.
How an annuity creates guaranteed income
When you "annuitize" or switch on an income benefit, the insurer calculates your payment from four things: how much you put in, your age (and often your spouse's), current interest rates, and how long payments are expected to last. Choose income for life and the payments continue until you die; add a "period certain" or joint option and payments can continue to a spouse or beneficiary for a defined time.
The trade-off is access. Money committed to lifetime income is generally no longer a liquid lump sum you can spend all at once — that is the price of the guarantee. The right amount to annuitize is usually just enough to cover essential, must-pay expenses, leaving the rest of your portfolio flexible. Our annuity income calculator can help you estimate how much monthly income a given premium might generate before you ever talk to an agent.
The four main annuity types, compared
Nearly every annuity is a variation on four designs. They differ mainly in one thing: how much market risk you take on in exchange for growth potential.
| Type | How your money grows | Market risk | Income profile | Best suited to |
|---|---|---|---|---|
| Fixed annuity | Set interest rate declared by the insurer | None — principal protected | Predictable, stable | Safety-first savers who want certainty |
| Fixed-indexed annuity (FIA) | Credited based on an index (e.g. S&P 500) up to a cap, with a 0% floor | Limited — no loss from market drops, but growth is capped | Moderate; can add a lifetime-income rider | Savers who want some upside without downside |
| Immediate annuity (SPIA) | Little accumulation — you buy income directly | None on the income guarantee | Highest immediate payout; starts within ~1 year | Retirees who need income now |
| Variable annuity | Invested in market subaccounts you choose | Yes — value and income can fall | Variable; may include optional income guarantees | Investors comfortable with market risk for growth |
A few plain-English distinctions matter. Fixed and fixed-indexed annuities are insurance products that protect your principal from market losses — an indexed annuity simply swaps a guaranteed rate for index-linked crediting with a floor of zero in a down year. A SPIA (single premium immediate annuity) is the purest "pension you buy yourself": hand over a lump sum, start collecting income almost right away. A variable annuity is different in kind — it is a security, regulated by the SEC and FINRA, whose value can rise or fall with the investments you pick. More potential growth, more risk.
Rule of thumb: if protecting principal is the priority, look at fixed or fixed-indexed. If you need income to start now, a SPIA usually pays the most per dollar. If you want market growth and accept market risk, that is variable territory.
Why annuities are surging right now
Annuities are not a niche product anymore. According to LIMRA, U.S. retail annuity sales reached a record $464.1 billion in 2025 — up 7% over 2024 and the fifth consecutive record-setting year. Higher interest rates made fixed and indexed annuities far more attractive, and waves of baby boomers reaching retirement age have been shifting money toward guaranteed income.
U.S. retail annuity sales by year
Total annual sales, in billions of dollars — five straight record years
The mix of what people buy tells the same story. In 2025, the two principal-protected designs — fixed-rate deferred and fixed-indexed annuities — together made up the largest share of sales, evidence that most buyers are prioritizing safety and predictable growth over market exposure.
2025 annuity sales by product type
U.S. retail sales, in billions of dollars, by category
Where annuities fit in a retirement plan
An annuity is rarely the whole plan — it is one layer. Most retirees already have a base of guaranteed income from Social Security, which pays retired workers an estimated average of about $2,071 per month in January 2026 after the 2.8% cost-of-living adjustment, according to the Social Security Administration. For many households, that base is not enough to cover all essential bills, and that is precisely the gap an income annuity is built to close.
A common approach is to add up your essential monthly expenses — housing, food, utilities, insurance, healthcare — subtract your Social Security (and any pension), and consider covering the shortfall with guaranteed annuity income. That leaves the rest of your savings invested and flexible for travel, emergencies and legacy goals. If you would like help thinking through Social Security timing first, see our Social Security guidance, and explore how annuities work alongside it on our annuities page.
Wondering how much guaranteed income you could create?
Sit down with a licensed Connecticut advisor and walk through your real numbers — no cost, no pressure, just clear answers about whether an annuity fits your retirement.
Book a Free ConsultationAre annuities safe? The fine print
This is the most important section, so we will be direct. Annuities are not bank products. They are not insured by the FDIC or any federal agency, and they are not backed by the U.S. government. The guarantees in an annuity contract are backed by the financial strength and claims-paying ability of the issuing insurance company. State guaranty associations provide a limited layer of backup protection if an insurer fails, but coverage limits vary by state and are not a substitute for choosing a strong carrier.
Read before you buy. Annuity guarantees depend on the issuing carrier, not the government, and annuities are not FDIC insured. Understand surrender charges, fees, riders and the surrender period, and how they affect access to your money. Variable annuities can lose value. TSM Life & Health is an independent agency and helps you compare options across carriers — we do not push a single product.
None of this means annuities are risky in the everyday sense — fixed and fixed-indexed annuities are designed specifically to protect principal. It means the guarantee is only as strong as the company behind it, and the contract details matter. Surrender charges can apply if you withdraw more than allowed during the early years, and optional riders (like guaranteed lifetime income) add cost. A good advisor walks you through all of it in writing before anything is signed.
How to put a number on it
You can get a useful first estimate on your own: list your essential expenses, subtract your expected Social Security and pension income, and see how large a monthly shortfall you would want to guarantee. Our annuity income calculator can translate a premium into an estimated monthly payment so you can see the trade-offs before you talk to anyone.
Where a licensed advisor adds value is in the fit — which type of annuity (if any) matches your goals, how much to allocate, which financially strong carriers to compare, and how it coordinates with the rest of your plan. If you would like a second set of eyes, we are glad to help. Read more about how we work on our process page, browse common questions on our FAQ, or reach out for a free consultation. Everything we do starts with education, not a sales pitch.
Frequently asked questions
An annuity is a contract with an insurance company: you hand over a lump sum or a series of payments, and in return the insurer promises to pay you income, either for a set number of years or for the rest of your life. People use annuities mainly to turn retirement savings into a predictable paycheck they cannot outlive. Any guarantees depend on the claims-paying ability of the issuing insurance company, not the government.
When you annuitize, or turn on an income benefit, the insurer converts your account value into a stream of scheduled payments. It calculates the amount using your premium, your age, current interest rates and how long payments are expected to last. With a life annuity, those payments continue for as long as you live, which is why annuities are often described as insurance against outliving your money.
A fixed annuity credits a set interest rate and protects your principal from market losses, so the trade-off is stability for lower growth potential. A variable annuity invests your money in subaccounts tied to the markets, so the value and future income can rise or fall with investment performance. Variable annuities are securities regulated by the SEC and FINRA and can lose value; fixed and fixed-indexed annuities are insurance products.
Annuities are not bank products and are not insured by the FDIC or any federal agency. The guarantees are backed by the financial strength and claims-paying ability of the issuing insurance carrier, and state guaranty associations provide limited backup coverage. That is why it matters to choose a financially strong insurer and to understand the contract before you buy.
Annuities tend to fit people at or near retirement who want a predictable income floor to cover essential expenses, who worry about outliving their savings, or who want to protect a portion of their nest egg from market losses. They are usually one piece of a plan alongside Social Security and other savings, not a replacement for all of it. A licensed advisor can help you decide whether and how much annuity income fits your situation.
Written by
Keith McLiverty
Keith is the founder and COO of TSM Life & Health, with more than 30 years in finance, taxes, medical insurance and retirement planning. He believes in educating first and planning second, so every client understands the "why" behind their coverage. This article is general education, not individualized insurance, tax or investment advice.
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Sources & methodology
All figures in this article were verified from primary sources on July 31, 2026.
- LIMRA: Final U.S. Retail Annuity Sales Set New High, Totaling $464.1 Billion in 2025 — 2025 total and product-type breakdown.
- LIMRA: 2024 Retail Annuity Sales Grow to a Record $434.1 Billion — 2024 total.
- LIMRA: Record-High 2023 Annuity Sales — 2023 total ($385.4B).
- LIMRA/Secure Retirement Institute: 2021 and 2022 Annuity Sales — 2021 ($254.8B) and 2022 ($312.8B) totals.
- Social Security Administration: 2026 Cost-of-Living Adjustment (COLA) Fact Sheet — estimated average retired-worker benefit (~$2,071/month, January 2026).
- U.S. SEC / Investor.gov: Annuities — variable annuities as SEC-regulated securities.