Understanding the Different Types of Annuities

Annuities are often misunderstood, not because they’re overly complex, but because there are several different types, each designed for a very specific purpose.

When used correctly, annuities can provide:

• Guaranteed income

• Predictable growth

• Protection from market volatility

• Longevity insurance in retirement

When used incorrectly, they can feel restrictive or unnecessary.

This blog breaks down the main types of annuities, how they work, and when each one typically makes sense, so you can decide whether an annuity fits into your savings or retirement strategy.

Quick Answer (TL;DR)

There is no single “best” annuity.

• Fixed annuities focus on safety and predictable growth

• Variable annuities offer market exposure with higher risk

• Indexed annuities balance growth potential and downside protection

• Immediate annuities convert savings into guaranteed income

• Deferred annuities focus on future income or growth

The right annuity depends on time horizon, risk tolerance, and income needs.

What Is an Annuity?

An annuity is a contract with an insurance company where you:

1. Deposit money (lump sum or over time)

2. Allow it to grow or convert into income

3. Receive payments either now or in the future

Annuities are insurance products, not bank accounts, and are commonly used for retirement planning, not short-term savings.

The Two Big Categories: Immediate vs Deferred

All annuities fall into one of two broad groups, immediate and deferred.

Immediate Annuities

What they do: Convert a lump sum into a guaranteed income stream that starts almost right away (usually within 12 months).

Best for:

• Retirees who want predictable income

• Replacing or supplementing pensions

• Covering essential expenses

Key trade-off: Once income begins, access to the original principal is limited or gone.

Immediate annuities are about income certainty, not growth.

Deferred Annuities

What they do: Allow money to grow first, then convert to income later if desired.

Best for:

• Pre-retirees

• Long-term planners

• Savers looking to defer taxes

Deferred annuities come in several forms, which is where most confusion arises.

Fixed Annuities

How they work: Offer a guaranteed interest rate for a set period.

Key features:

• Predictable growth

• No market risk

• Tax-deferred earnings

• Surrender charges for early withdrawals

Common example: Multi-Year Guaranteed Annuities (MYGAs), for a more detailed breakdown of MYGA’s read out blog "What Is a Multi-Year Guaranteed Annuity (MYGA) and How Does It Work?".

Best for:

• Conservative savers

• CD alternatives

• Long-term, tax-deferred growth

Fixed annuities prioritize stability and certainty.

Fixed Indexed Annuities (FIAs)

How they work: Link growth potential to a market index (like the S&P 500) while protecting against losses.

Key features:

• No direct market losses

• Growth capped or limited by participation rates

• Tax-deferred earnings

• No dividends credited

Best for:

• Moderate risk tolerance

• Long-term growth with downside protection

• Retirement-focused money

FIAs aim to balance growth potential and protection.

Variable Annuities

How they work: Invest directly in market-based subaccounts similar to mutual funds.

Key features:

• Full market upside and downside

• Higher fees

• Optional income or death benefit riders

• Tax-deferred growth

Best for:

• Investors comfortable with market risk

• Long time horizons

• Those who value optional guarantees

Variable annuities are the most complex and require careful evaluation.

Income Riders (Optional Features)

Some deferred annuities offer income riders, which:

• Guarantee future income levels

• Do not usually increase account value

• Add cost but increase predictability

Income riders are often used to:

• Create a future pension-like income

• Reduce longevity risk

• Add certainty to retirement planning

They are tools, not requirements.

How Annuities Are Typically Used Together

Many retirement strategies combine annuities with other products:

• Savings accounts for liquidity

• CDs or MYGAs for fixed growth

• Indexed annuities for protected growth

• Immediate annuities for guaranteed income

Annuities work best as part of a system, not as standalone solutions.

Common Misunderstandings About Annuities

❌ “All annuities are bad”

They’re tools, value depends on usage.

❌ “Annuities are only for retirees”

Many are designed for pre-retirement planning.

❌ “Higher returns mean better annuities”

Predictability and guarantees matter more than upside alone.

How to Know If an Annuity Might Make Sense

An annuity may be worth considering if you:

• Value predictable income

• Want protection from market downturns

• Are planning for retirement income

• Have long-term money you won’t need immediately

They are rarely appropriate for:

• Emergency funds

• Short-term savings

• Money requiring frequent access

Final Thoughts

Annuities are not one-size-fits-all, and that’s exactly the point.

Each type is designed to solve a specific problem:

• Growth

• Protection

• Income

• Longevity risk

Understanding the differences allows you to evaluate annuities objectively, without hype or fear, and decide where, if anywhere, they belong in your plan.

Check out some of the top MYGA Rates or some of the top Advisor Lead Annuity companies to get started on your next Annuity.