Annuity Basics: A Beginner's Guide
Planning for retirement can feel scary and overwhelming. The problem is uncertainty: How much money will you need if you’re not earning an income?
Annuities are a powerful and unique financial product that helps bring you certainty in retirement.
This article explains the basic details of annuities, and will point you on the way to a variety of resources we put together to help you understand everything you’d ever want to know about this financial product.
What Are Annuities?
Annuities are a financial product you can buy from life insurance companies and annuity companies.
They are a contract between you and the company. In its simplest version, you make payments (called premiums) to the company. In return, they promise to pay your money back to you later as a steady stream of income.
Annuities and life insurance are two types of life insurance products. Whereas life insurance products give money to your beneficiaries after you die, annuities give you money while you’re still alive.
Note: The person that completes the application for an annuity and makes the initial deposit is the annuity owner. The person that receives the annuity payouts is called the annuitant.
Usually, these are the same person, but not always. For example, you may buy an annuity for your spouse. In that case, you would be the annuity owner, and your spouse would be the annuitant.
How Do Annuities Work?
In general, annuities have two phases:
- The accumulation phase
- The annuitization (payout) phase
Here’s how each phase works.
Funding Your Annuity: The Accumulation Phase
The accumulation phase, sometimes called the accumulation period, starts when you buy an annuity. It’s the period of time during which your annuity earns interest and grows.
Once you pay your annuity premiums, they’re put into your annuity account. The money in that account earns interest, and the interest crediting rate is determined by the type of annuity you have (explained below). That interest accumulates tax-deferred.
If you want, you can also withdraw your money during the accumulation phase. Keep in mind, though, that you may have to pay fees, surrender charges, or tax penalties on early withdrawals.
Note: Some annuities, called immediate annuities, skip the accumulation phase. They start to pay you back immediately or soon after you pay your premiums.
Receiving Funds From Your Annuity: The Annuitization Phase
Your money continues to earn interest and grow until you annuitize it. When you annuitize, you end the accumulation period and start receiving regular income payouts. This is called the annuitization period, distribution phase, or payout phase.
When you annuitize, you’ll choose between different payout options, like how often you want your income payouts, how long you want your income payments to last, and whether you want to add a joint annuitant.
For example, you might choose monthly payments for the rest of your life. Or, you might choose to receive monthly payments for a specified period, like 10 years. In the first option, each payout would be much lower than the payouts in the second option.
Note: Annuity income is taxable in the year you receive it. See our annuity taxation article for more details.
Annuities Come in a Variety of Types
There are several different types of annuities to choose from.
- Immediate annuities have no accumulation phase — they begin to pay you back soon after you buy them.
- Deferred annuities accumulate over the term you choose and start to pay you back years in the future.
- Fixed annuities pay a fixed minimum interest crediting rate, which makes them very low risk.
- Variable annuities are higher risk than the annuities above because they pay an interest rate that varies based on stock market performance.
- Fixed-indexed annuities are also higher risk because they pay an interest rate that is tied to a stock market index.
- Qualified annuities are funded with pre-tax income, so they offer some extra tax advantages but come with some limitations.
- Non-qualified annuities are funded with post-tax income, so they offer fewer tax advantages but come with fewer limitations.
- Single premium annuities are annuities that you fund with a single lump-sum payment.
- Flexible premium annuities are annuities that you fund with multiple premium payments over time.
Each of these different kinds of annuities can provide you with a guaranteed lifetime income — they just differ slightly in how they work.
Other specific annuity products that combine the above types in different ways include:
- Single Premium Immediate Annuities (SPIAs)
- Deferred Income Annuities (DIAs)
- Multi-Year Guarantee Annuities (MYGAs)
- Qualified Longevity Annuity Contract (QLAC)
Beyond annuity types, there are also a number of optional add-ons and riders you can add to your policy to customize it for your circumstances. These may often come with additional fees.
Some of the most common options available include:
- Death benefits. These allow any remaining funds in your annuity account when you die to be passed on to beneficiaries.
- Annuity income riders. These are designed to provide you with lifetime income payouts at a set rate, even if your account value falls to zero.
- Cost of living rider (COLA). A rider that adjusts your monthly payouts to account for inflation.
Annuities Have a Variety of Payout Options
Not only are there different types of annuities, but you also can choose between many different annuity payout options. Some of the more common payout options include:
- Single-life annuities (also called straight life annuities) provide you with income payments until you die, and then the payments stop.
- Period certain annuities provide you with guaranteed payments for a given period of time — for example, 10 years. The payments continue even if you die.
- Life annuities with period certain provide you with monthly payouts for life. Also, if you die early within the “period certain,” any remainder in your annuity account will pass on to a beneficiary.
- Joint and survivor annuities provide you and another person — often a spouse — income payments until both people die.
- Lump sum payments provide you with the entire annuity income up front in a single payment.
Why Add an Annuity to Your Retirement Portfolio?
There are many good reasons to buy an annuity. Some of the most significant annuity benefits include:
- Certain annuities carry low risk. Fixed annuities are low risk because they offer guaranteed rate of return. Canvas Annuity’s fixed annuity products also earn interest at a guaranteed minimum rate.
- Financial certainty. You can choose a payout option that offers income until you die.
- Tax advantages. Annuities are tax-advantaged, so you don’t pay tax on them in the year you earn gains — only in the year you receive income payments.
For those reasons, many retirees love having annuities in their retirement portfolio.
Is an Annuity Right for You?
Annuities might be a good fit for you in the following circumstances:
- You’re looking for a low-risk, tax-advantaged place to grow your retirement savings.
- You’re looking for a way to secure a guaranteed income in your retirement.
- You’re looking for a place to put your money for the long term.
- You’re approaching the end of your career, or you’re already retired.
- You have some retirement savings already.
If you’re looking for higher-risk investment options or short-term investment options, annuities may not be the best choice for you.
Further reading:
Annuities Help Secure Your Retirement Finances
Annuities are designed to provide you certainty by offering a steady stream of retirement income. They’re popular because retirees feel more secure knowing that they have some money coming in each month.
Want to learn more about whether annuities could be a good fit for you?
Here are some articles to get you started so you understand the basics.
Continue Reading
May 2026 Annuity Interest Rates & Market Conditions: What to Know Right Now
Planning for Your Ideal Retirement Lifestyle
