What is an annuity, and should you buy one?

An annuity is a contract in which you pay an insurance company a sum of money and they pay you income, either starting immediately or at a future date. The genuine problem it solves is longevity risk, meaning the possibility of living longer than your savings last, which no investment portfolio can fully address because you cannot know your own timeline. A single premium immediate annuity is the simplest form: you hand over a lump sum and receive a fixed payment for life. That product is transparent, easy to compare across insurers on price, and defensible for retirees who want a floor of guaranteed income covering essential expenses.

The complexity and the sales pressure escalate sharply from there. Variable annuities invest in subaccounts and layer insurance features on top, frequently carrying total annual costs several times what an index fund charges once mortality and expense fees, administrative fees, subaccount expenses, and optional riders are combined. Fixed indexed annuities credit interest tied to a market index subject to caps, participation rates, and spreads that the insurer can often adjust, which makes the actual return difficult to evaluate in advance and usually well below the index itself. Both typically carry surrender charges lasting many years, meaning your money is not accessible without penalty.

Two things to check before signing anything. Commission structure, since annuities pay among the highest commissions in financial services and that is a substantial part of why they are recommended so persistently, particularly to people rolling over retirement accounts. And whether the tax deferral being marketed is actually a benefit, because it is not when the annuity is placed inside an IRA or 401(k) that is already tax-deferred, a practice regulators have criticized for years. Annuity guarantees depend on the insurer's claims-paying ability rather than any federal insurance, so the issuer's financial strength rating matters, and state guaranty association coverage exists but is limited. If you want guaranteed lifetime income, price a plain immediate annuity from several highly rated insurers and compare it against the alternative of delaying Social Security, which is the cheapest inflation-adjusted lifetime annuity most people can buy.