Typically, annuities are safe if you’re looking for guaranteed income and principal protection, but they’re not risk-free. Whether annuities are safe depends on the type you choose and how comfortable you are with risk. Some options, like fixed annuities, will suit conservative individuals who value stability and predictable returns. Others, like variable annuities, carry more risk because they depend on market performance.
Discover annuities' safety features and safeguards and learn how to choose the right annuity for your savings strategy.
An annuity’s safety varies by type, protection level, and potential earnings. Here’s a breakdown of the various types of annuities and their risks.
A fixed annuity provides guaranteed, regular payments with a fixed interest rate, offering a stable and predictable income stream, but they’re not completely risk-free. Inflation can erode purchasing power, and annuities depend upon the financial stability of the issuing insurance company. That said, you can still count on receiving reliable payouts at regular intervals.
Variable annuities work like mutual funds, growing your money while introducing some additional risk. When you deposit funds, you’ll allocate your premiums to subaccounts that can include stocks, bonds, or money market funds. Your earnings depend on how these chosen options perform, so your account grows with the market.
These annuities offer valuable benefits despite the risk, including:
There are also some optional features you can add on to any annuity type, known as riders, that give you extra protection and peace of mind. However, adding riders will increase your annuity fees, so it’s important to weigh the cost against the value. If you can afford them, riders can be a great way to customize your annuity and create a safety net that works for you.
Income annuities include fixed, variable, and indexed options. Each option offers a reliable income stream with varying safety depending on the guarantees and contract terms.
You can also opt for deferred income annuities (DIAs), which give you guaranteed income starting at a future date. They provide a steady stream of earnings beginning at your chosen date, making them a solid option if you’re looking for reliable, predictable payouts. The insurer’s financial strength backs your income, so DIAs are generally safe — but they do come with trade-offs.
For instance, inflation can chip away at the value of your payments over time, which means your money might not always go as far. Plus, DIAs don’t offer much flexibility, as early withdrawals can be hard to navigate once you commit.
That said, DIAs can be a solid choice if you’re planning for retirement and want a steady income you can count on. They can also benefit those aiming to retire in the next 5–10 years who want to lock in some financial security.
Annuities are contracts between you and an insurance company. While not risk-free, annuities usually involve much less risk than other market-performance-based investments. If you're particularly risk-averse, you may prefer annuity options that offer guaranteed income, understanding that they come with lower earnings but more built-in protection. But if you're more comfortable taking risks, you can earn more from annuities with higher gains — though they introduce more uncertainty.
Here are some key annuity risks.
Living beyond your income streams can be a concern, especially in retirement, as you can’t predict your exact lifespan or unforeseen expenses. Healthcare costs, inflation, and unexpected emergencies can damage your savings. And if you live longer than expected, you might struggle to cover daily costs or maintain the lifestyle you’ve worked hard to build. That’s why planning for a steady, reliable income is so important.
A longevity annuity is one solution as it offers guaranteed income later in life. However, since payments don’t start immediately, you might not live long enough to get the full value. Luckily, you can name a beneficiary to inherit the annuity, so your family will still have income if something happens to you.
Surrender charges can make it challenging to access your money when you need it. These penalties can take a big chunk of your funds — sometimes as much as 25% of your principal. Also, if you withdraw money before age 59½, you’ll pay an extra 10% IRS penalty tax.
Luckily, some annuities offer flexibility for emergencies. Fixed, variable, indexed, and immediate annuity contracts let you make limited free withdrawals — usually up to 10% of the contract value yearly. Limits and provisions for each type may vary and are stipulated in the contract.
Depending on which annuity you choose, it’s possible to miss out on higher interest rates. For example, fixed annuities give you a guaranteed rate, which adds stability, but inflation means the value of your fixed earnings might not keep up with the cost of living. Plus, some annuities may lock your money into accounts for years, limiting access to other options that might offer higher returns or more flexibility.
For example, assume you have an indexed annuity, which is tied to market performance. There are typically limits on what you can earn when the market is doing well, and you only receive a portion of any gains. Additionally, high fees can reduce your earnings over time. Luckily, if you choose a digital annuity provider you can often avoid these fees altogether.
Be proactive about your risk management approach by following these three practical tips to protect your savings.
Balance risk and return by diversifying your annuity options across different types. For instance, combining fixed and variable annuities gives you stability and growth potential. This is because fixed annuities offer steady, predictable earnings, while variable annuities let you tap into market-driven opportunities for higher returns. A study by TIAA and Morningstar found this strategy could boost your retirement income by up to 20%.
High fees can consume your earnings, so be mindful of penalties and additional costs when choosing an annuity. Look for providers that are transparent about fees and don’t charge hidden commissions. This approach helps you invest more funds and efficiently work toward your financial goals. Consider plans with no hidden fees or commissions, so more of your money remains working for you.
When purchasing an annuity, investigate the insurer's financial stability and review its credit ratings to assess its reliability. Also, study the contract’s fine print, especially regarding withdrawal terms and surrender periods, as these can affect access to your money.
It’s also important to understand the risk profile of the annuity you’re choosing — read up on the various types to choose one that fits your relationship to risk as well as your financial goals.
This depends on the annuity you choose. The risk is lower with fixed annuities, which protect your principle and offer guaranteed returns. But variable annuities lose value when the market has a downturn, making them harder to predict.
No — FDIC insurance doesn’t cover annuities. However, state regulations require insurance companies to hold reserves to safeguard your annuity. This creates a safety net offering protection similar to FDIC secured bank funds.
In a recession, some annuities can provide stability. Fixed annuities, for instance, may protect you with guaranteed rates and steady payments, no matter what happens in the market. And if you opt for inflation protection, you can have reliable income even when other investments take a hit. Variable annuities, however, are tied to market performance, so their value can fluctuate and drop during a downturn. This means fixed annuities might be the better way to secure your income in uncertain times.
This communication is for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice.
