Annuity Pros and Cons: Benefits, Tradeoffs and Questions to Ask

Annuities can provide contractual guarantees, tax-deferred accumulation and retirement-income options, depending on the type of contract. In exchange, they may require a long-term commitment and can include surrender charges, limited liquidity, taxes, product-specific fees or adjustments, and limits on growth.

The important point is that not all annuities have the same advantages or disadvantages. A fixed annuity, fixed indexed annuity, variable annuity and immediate-income annuity can behave very differently.

So, the question is not simply whether annuities are “good” or “bad.”

A better question is:

What do I need this portion of my retirement savings to accomplish, and does the annuity’s combination of guarantees, growth potential, income features, liquidity, and limitations align with that goal?

The National Association of Insurance Commissioners notes that annuities differ in how they accumulate value, create income and provide guarantees. The specific risks, costs and benefits therefore depend on the contract being considered.

Annuity pros and cons at a glance

Potential benefits	Important tradeoffs
Contractual guarantees, depending on the annuity	Guarantees depend on the issuing insurance company
Potential retirement income, including lifetime options	Some income elections can reduce future access to contract value
Tax-deferred accumulation in a nonqualified annuity	Taxable earnings are generally taxed as ordinary income when distributed
No direct stock-market exposure with traditional fixed annuities and traditional FIAs	Fixed products generally give up some or all direct market participation
Predictable interest with some fixed annuities and MYGAs	You may miss higher future rates or stronger market growth
Limited index-linked growth potential with FIAs	Caps, participation rates, spreads or other terms may limit credited interest
Beneficiary or death-benefit provisions	The amount and treatment vary by contract
A variety of contract designs for different retirement needs	More features can also make some contracts harder to understand
Potential withdrawal provisions	Larger or early withdrawals can trigger surrender charges or other adjustments

Key takeaways

• An annuity is an insurance contract designed primarily for long-term retirement objectives.
• Different annuity types address different needs; a benefit of one type may not apply to another.
• Fixed annuities can provide contractual interest guarantees without direct exposure to stock-market declines.
• Fixed indexed annuities can provide limited index-linked interest while protecting against negative indexed-interest credits under traditional designs.
• Variable annuities can provide greater market participation but expose contract value to market losses.
• Many annuities can provide scheduled or lifetime income.
• Earnings in nonqualified annuities generally accumulate tax-deferred.
• Access to money may be restricted and subject to surrender charges during a surrender period.
• Surrender charges, market value adjustments, taxes and product-specific costs can affect the amount received.
• An annuity purchased inside an IRA or another tax-qualified account does not provide additional tax deferral.
• All contractual guarantees depend on the claims-paying ability of the issuing insurance company.

Investor.gov similarly emphasizes that annuities can provide tax-deferred accumulation and income options, but the costs, risks and features differ significantly from one contract to another.

What is an annuity?

An annuity is a contract between an individual and an insurance company.

You provide money to the insurance company—usually as a single premium or through a series of payments. In return, the contract may accumulate value, provide guarantees, create future income or offer a combination of these features.

Annuities can generally be classified in two different ways.

Immediate versus deferred

Immediate annuities generally begin providing income within one year of purchase.

Deferred annuities provide an accumulation period before income payments begin, if the owner later chooses an income option.

Fixed, indexed or variable

Fixed annuities provide guarantees established by the insurance company.

Fixed indexed annuities calculate potential interest partly by reference to an external market index while maintaining insurance-contract guarantees.

Variable annuities allocate value to separate-account options whose performance can increase or decrease the contract value.

The NAIC uses these same broad classifications and emphasizes that the guarantees and market exposure differ by annuity type.

The main potential benefits of annuities

1. An annuity can provide retirement-income options

One of the defining features of an annuity is the ability to convert contract value into periodic income.

Depending on the contract and election, income may continue:

• For a specified number of years
• For the owner’s lifetime
• For the lifetimes of two people
• For life with a minimum guaranteed payment period
• Under another settlement option described in the contract

This can help address one of retirement’s difficult uncertainties: how long income may need to last.

The amount of income depends on factors such as the contract value, age, interest rates, payout option and contract terms.

Selecting an income option can also involve a tradeoff. Some forms of annuitization may substantially restrict or end access to the underlying contract value.

Investor.gov identifies guaranteed periodic income as one of the primary reasons consumers purchase annuities.

2. Nonqualified annuities can provide tax-deferred accumulation

Earnings inside a nonqualified deferred annuity generally are not subject to federal income tax while they remain in the contract.

That allows credited interest or gains to remain in the annuity rather than generating an annual federal income-tax obligation simply because value increased.

Tax deferral does not mean tax-free growth.

When taxable amounts are distributed, they are generally treated as ordinary income. The actual tax treatment depends on the contract, funding source and form of distribution.

There is also an important qualification when an annuity is purchased inside an IRA or another tax-qualified retirement plan:

The retirement account already provides tax deferral, so the annuity does not create another layer of tax deferral.

The annuity may still provide insurance guarantees, income options or other features that the owner values, but those features—not additional tax deferral—should support the decision. Investor.gov makes the same distinction.

3. Fixed annuities can provide greater predictability

Traditional fixed annuities can provide a stated or contractually determined interest rate without direct exposure to daily stock-market movements.

A multi-year guaranteed annuity, or MYGA, generally establishes an interest rate for a stated guarantee period.

That may help someone who wants to know:

• How interest will be determined
• How long a rate will apply
• How a portion of retirement savings may grow
• When the guarantee period ends

The tradeoff is that a traditional fixed annuity does not participate directly in stock-market growth.

For a complete explanation, read What Is a Fixed Annuity? How Fixed Annuities Work

4. Fixed indexed annuities can provide protection with limited growth potential

A fixed indexed annuity, or FIA, can earn interest partly based on the performance of an external index.

The contract owner is not directly invested in that index.

Under a traditional FIA design with a 0% indexed-interest floor, negative index performance generally results in no indexed interest for the measurement period rather than a negative indexed-interest credit.

When the index performs positively, interest may be credited according to the contract’s formula.

The tradeoff is that the owner does not receive the index’s full return. Caps, participation rates, spreads, crediting methods and the exclusion of dividends can limit credited interest.

For a deeper explanation, read What Is a Fixed Indexed Annuity?

5. Different annuity structures can address different retirement needs

Annuities are not a single product with one set of features.

Traditional fixed annuities and MYGAs are designed to provide fixed-interest guarantees for specified periods, which may be relevant when evaluating options for predictable interest.

Someone who values downside protection but wants some index-linked potential may evaluate an FIA.

Immediate annuities are designed primarily to provide income that begins shortly after purchase. A consumer willing to accept market losses for greater market participation may encounter variable annuities.

The advantage of having different structures is flexibility.

The corresponding disadvantage is that consumers need to understand which guarantees, risks and costs apply to the specific annuity they are evaluating.

6. Many annuities include beneficiary provisions

Deferred annuities commonly provide a death benefit or contract value for beneficiaries if the owner or annuitant dies before income payments begin.

Some contracts may offer additional beneficiary features or optional death-benefit riders.

The exact value, tax treatment and payment choices depend on:

• Contract terms
• Ownership
• Beneficiary designation
• Timing of death
• Whether income has begun
• Applicable tax rules

A beneficiary provision should therefore be evaluated as part of the complete contract rather than assumed to work the same way across all annuities.

The main disadvantages and tradeoffs of annuities

1. Your money may be less liquid

Many deferred annuities are designed to be held for several years.

If you withdraw more than the contract’s permitted amount during the surrender period, a surrender charge may apply.

Some contracts also contain a market value adjustment, or MVA, which may increase or decrease the amount received from certain withdrawals or a full surrender.

Investor.gov cautions that withdrawals can trigger surrender charges, taxes and contract adjustments and may also reduce other contract benefits.

That makes liquidity one of the most important considerations before purchasing an annuity.

An annuity generally should not be treated like an emergency fund or everyday transaction account.

2. The value you see may not equal the amount you can immediately receive

With some annuities, contract value and cash surrender value are different.

The contract value may reflect premium plus credited interest or accumulated market value, adjusted for prior transactions.

The cash surrender value may also reflect:

Contract value
− surrender charge

• or − market value adjustment
  • − other applicable adjustments

The exact calculation varies by product.

This means protection of contract value from one type of risk does not necessarily guarantee unrestricted access to the same amount at every point in time.

3. Costs can be difficult to compare across annuity types

Annuity costs do not always appear as one obvious annual fee.

Depending on the product, costs or economic tradeoffs may include:

• Surrender charges
• Rider charges
• Contract or administrative fees
• Separate-account expenses in a variable annuity
• Market value adjustments
• Caps or participation limits in an FIA
• Reduced liquidity during the surrender period

Investor.gov distinguishes between explicit fees and implicit costs. It notes, for example, that many fixed and fixed indexed annuities may not impose an explicit ongoing base fee, while their economics may instead be reflected in credited rates or limits on potential interest.

This is why “Does this annuity have a fee?” is usually not enough.

A better question is:

What can reduce my value, limit my return or affect the amount I receive?

4. Annuity earnings generally do not receive capital-gains tax treatment

Tax deferral can be valuable, but the eventual tax treatment matters.

Taxable annuity distributions generally are treated as ordinary income rather than long-term capital gains.

For certain distributions before age 59½, the taxable portion may also be subject to an additional 10% federal tax unless an exception applies.

The rules can differ for:

• Qualified versus nonqualified annuities
• Withdrawals
• Annuitized payments
• Death benefits
• Exchanges
• Inherited contracts

Consult a qualified tax professional regarding individual circumstances.

5. Some annuities can limit growth potential

Protection and predictability generally come with an economic tradeoff.

A traditional fixed annuity earns according to its contractual interest terms rather than participating directly in equity-market gains.

A FIA can provide index-linked interest, but caps, participation rates, spreads and other terms can limit positive interest.

An immediate annuity primarily designed for predictable income may give up access to the accumulation value in exchange for the selected income guarantee.

This does not make the tradeoff inherently good or bad.

The question is whether the contract is delivering the feature the owner values enough to justify what they are giving up.

6. Fixed returns may not keep pace with inflation

A fixed dollar amount can become less valuable over time as the cost of living rises.

For example, a fixed annuity can grow exactly as its contract promises while still producing less purchasing power if inflation consistently exceeds the credited rate.

Similarly, a level income payment may buy less later in retirement than it did when payments began.

Inflation risk therefore needs to be considered alongside:

• Market risk
• Longevity risk
• Liquidity needs
• Income needs
• Growth objectives

One retirement solution generally cannot address every risk equally well.

7. Variable annuities can lose value because of market performance

This tradeoff does not apply equally to fixed annuities.

A variable annuity exposes contract value to the performance of the selected separate-account options. If those options decline, contract value can decline as well.

Variable annuities can also include contract expenses and underlying fund expenses that fixed annuities do not typically have in the same form.

Investor.gov specifically notes that poor performance in the selected options can cause losses in a variable annuity and that variable contracts frequently involve multiple layers of expenses.

8. Some contract terms may change over time

Not every number shown when an annuity is purchased is guaranteed for the full life of the contract.

Depending on the product, non-guaranteed elements may include:

• Renewal interest rates
• FIA caps
• Participation rates
• Spreads
• Certain rider values
• New-money rates

The contract should clearly distinguish between:

What is guaranteed

and

What can change

A first-year rate, initial cap or current participation rate should not be interpreted as a permanent promise unless the contract specifically says that it is.

9. Guarantees depend on the insurance company

An annuity is an obligation of the issuing insurance company.

It is not a bank deposit and is not insured by the FDIC.

The FDIC specifically states that annuities are not covered by federal deposit insurance—even when purchased through an insured bank.

All guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company.

That makes the insurer’s financial strength an important part of evaluating an annuity.

Financial-strength ratings can provide useful information, but a rating is an opinion, may change and does not guarantee future claims payment.

Not all annuity pros and cons are the same

Feature	Traditional fixed / MYGA	Fixed indexed annuity	Variable annuity	Immediate fixed annuity
Contractual insurer guarantees	Yes	Yes	Certain insurance guarantees may apply	Yes
Direct market exposure	No	No	Yes, through separate-account options	No
Is accumulation predictable?	Often, for the guaranteed period	No	No	Usually designed primarily for income rather than accumulation
Market-loss exposure	No direct stock-market exposure	Negative index performance generally does not create a negative indexed-interest credit under traditional designs	Contract value can decline	Payments depend on selected contract terms
Growth potential	Contractual fixed interest	Limited index-linked potential	Greater market participation with corresponding risk	Generally, not the primary objective
Tax-deferred accumulation	Generally, for nonqualified deferred contracts	Generally, for nonqualified contracts	Generally, for nonqualified contracts	Tax treatment depends on funding and payout
Liquidity	May be restricted	May be restricted	May be restricted	Often substantially limited after annuitization
Typical central tradeoff	Certainty vs. growth and liquidity	Protection vs. upside and liquidity	Growth potential vs. market risk and expenses	Guaranteed income vs. access and flexibility

The most useful comparison is not “Which annuity is better?”

It is:

Which combination of guarantees, growth potential, income and liquidity is most appropriate for the job this money needs to do?

When might someone explore an annuity? An annuity may be worth discussing with a licensed financial professional when the individual has a long-term retirement objective; values contractual guarantees, income options or tax-deferred accumulation; has sufficient liquid assets for near-term needs; understands the contract’s limitations; and can identify a specific role for the annuity within the broader retirement strategy. Because annuities are generally designed for long-term objectives and may limit access to money, these potential benefits should be evaluated together with liquidity needs, time horizon, contract limitations and other available financial resources.

For example, one person may want predictable interest for a portion of retirement savings. Another may prioritize protection from negative index performance. A third may be primarily concerned about converting savings into future income.

Those are different objectives and may lead to different types of annuities.

When might an annuity be a poor fit?

An annuity may deserve additional scrutiny when the money is needed for emergencies or near-term expenses, liquidity is a high priority, the consumer does not understand the contract, the main appeal is an unusually high introductory rate or bonus, the individual expects benefits the product cannot provide, significant surrender costs would result from replacing another contract, or the proposed annuity does not solve a clearly identified retirement need.

Consumers should receive information about both potential benefits and important limitations, including liquidity, taxes, guarantees that can change, costs and relevant alternatives.

The NAIC’s buyer guide expressly recommends that consumers understand the risks, determine how the annuity supports their objectives and time horizon, review charges and withdrawal limits, and avoid purchasing a contract they do not understand.

How should you compare annuities?

Start with the purpose of the money—not the advertised rate.

Question	Why it matters
What job should this money perform?	Establishes whether the priority is accumulation, protection, income or another objective
What is guaranteed?	Separates contractual promises from current or non-guaranteed terms
What can change?	Identifies renewal-rate, cap, participation-rate or other uncertainty
When might I need the money?	Tests whether the surrender period fits the time horizon
What happens if I withdraw early?	Reveals surrender charges, MVA treatment, taxes and benefit reductions
How does value grow?	Clarifies fixed interest, index-linked interest or separate-account performance
What can reduce my result?	Identifies charges, crediting limits, taxes and market exposure
What happens when the guarantee period ends?	Reveals renewal, withdrawal, transfer and income choices
What happens if I die?	Clarifies beneficiary and death-benefit provisions
Who guarantees the contract?	Focuses attention on the issuing insurer and its financial strength

A rate or headline benefit should be evaluated only after these questions are understood.

Questions to ask before buying an annuity

1. What type of annuity is this, and how does it work?
2. What specific retirement need is the annuity intended to address?
3. Which contract values or benefits are guaranteed?
4. Which rates, caps, participation rates, spreads or other terms can change?
5. How long is the surrender period?
6. How much can I withdraw without a surrender charge?
7. Does a market value adjustment apply?
8. What other charges, rider costs or adjustments could affect my value?
9. What is the difference between contract value and cash surrender value?
10. How will interest or growth be determined?
11. Could the contract value decline because of market performance?
12. What happens if I need all of the money earlier than expected?
13. How will withdrawals and future income be taxed?
14. Does purchasing the annuity inside my IRA provide any benefit beyond tax deferral?
15. What happens at the end of the guarantee or surrender period?
16. What happens if I take no action at renewal?
17. What retirement-income options are available?
18. Would selecting an income option restrict future access to the contract value?
19. What happens to the contract when I die?
20. What is the issuing insurer’s current financial-strength rating?
21. Am I replacing another annuity or financial product?
22. What guarantees, benefits or liquidity would I give up by making that replacement?
23. How is the financial professional compensated?
24. How long is the contract’s free-look period?
25. Where are each of these provisions described in the contract and disclosure materials?

The NAIC and Investor.gov recommend asking many of these same questions before purchasing an annuity, particularly around goals, fees, surrender periods, guarantees, income features and the financial strength of the insurer.

The most important annuity tradeoff

An annuity can reduce one form of uncertainty while creating another tradeoff.

• Greater contractual certainty may mean less growth potential.

• Greater income certainty may mean less liquidity.

• Greater protection from direct market losses may mean less participation in positive market performance.

• Tax deferral can delay taxes, but it does not eliminate them.

More optional features can provide additional benefits, but they can also make a contract more complex or expensive.

There is no single annuity feature that should be evaluated in isolation.

The goal is to determine whether the complete exchange of benefits and limitations makes sense for the specific role the annuity is expected to play.

A clear approach to annuities from Oceanview

Oceanview Life and Annuity Company focuses on fixed annuity solutions designed around clarity, contractual guarantees and long-term retirement needs.

Oceanview’s current portfolio includes traditional fixed-annuity and MYGA solutions as well as fixed indexed annuities. Contract structures, rates, guarantee periods, index strategies, liquidity provisions and state availability vary by product.

Oceanview believes consumers should understand both sides of the decision:

• What the annuity is designed to provide
• What the owner gives up or limits in exchange
• What is guaranteed
• What may change
• How and when money can be accessed
• What happens throughout the life of the contract

Oceanview Life and Annuity Company currently has an A (Excellent) Financial Strength Rating from AM Best with a stable outlook, affirmed February 11, 2026. The rating is subject to change and is an opinion regarding the insurer’s financial strength, not a guarantee of future claims payment.

Could an annuity play a role in your retirement strategy?

Explore Oceanview’s educational resources on fixed annuities, MYGAs and fixed indexed annuities, or speak with a licensed financial professional about the guarantees, time horizon, liquidity and tradeoffs that may be relevant to your circumstances.

This article does not recommend a particular product or financial strategy.

Frequently asked questions

What is the biggest advantage of an annuity?

There is no single advantage shared equally by every annuity. Depending on the contract, important potential benefits can include contractual guarantees, tax-deferred accumulation, protection from certain market risks and the ability to create retirement income.

What is the biggest disadvantage of an annuity?

Reduced liquidity is one of the most common tradeoffs. Deferred annuities may impose surrender charges or other adjustments when substantial amounts are withdrawn early. Other disadvantages depend on the type of annuity.

Can you lose money in an annuity?

It depends on the annuity and the transaction. Variable annuities can decline because of market performance. Traditional fixed annuities generally are not directly exposed to stock-market declines, but withdrawals, surrender charges, a negative MVA, contract charges or insurer-related risk may still affect the amount received.

Are annuities only for retirement?

Annuities are generally designed as long-term retirement solutions, although individual contracts may serve different accumulation, income or legacy objectives.

Are annuity earnings tax-free?

No. Earnings in a nonqualified deferred annuity generally accumulate tax-deferred, but taxable amounts are ordinarily subject to income tax when distributed.

Does an annuity make sense inside an IRA?

An IRA already provides tax deferral, so an annuity does not create an additional tax-deferral benefit. Any evaluation of an annuity within an IRA should therefore focus on the annuity’s other features, guarantees, limitations, costs and liquidity provisions.

Are annuities FDIC-insured?

No. Annuities are insurance products rather than bank deposits and are not insured by the FDIC. Guarantees depend on the claims-paying ability of the issuing insurer.

Do all annuities have surrender charges?

No. Contract structures vary. Many deferred annuities have surrender periods, while other annuities may operate differently. The surrender schedule should always be reviewed before purchase.

Do all annuities have fees?

No single fee structure applies to every annuity. Some contracts deduct explicit annual fees, while others may have rider charges, surrender charges, contract adjustments or economic limitations reflected in credited rates or growth formulas.

Are annuities complicated?

Some are relatively straightforward; others have multiple rates, crediting strategies, riders, guarantees or separate-account options. A consumer should not purchase an annuity until they understand the features that affect their value, liquidity and income.

How do I know whether an annuity may fit?

Start by identifying the purpose of the money, the amount of liquidity you need, the guarantees you value, your time horizon and the tradeoffs you are willing to accept. Then compare the specific contract with relevant alternatives.

Sources

This article was developed using consumer and regulatory information from:

• National Association of Insurance Commissioners — Annuities and Buyer’s Guide for Deferred Annuities
• Investor.gov — Annuities
• Investor.gov — Variable Annuities
• Internal Revenue Service — Topic No. 410, Pensions and Annuities
• Internal Revenue Service — Publication 575, Pension and Annuity Income
• Federal Deposit Insurance Corporation — Deposit Insurance Guidance
• AM Best — Oceanview Life and Annuity Company Rating Disclosure

Important information

Annuities are generally designed as long-term retirement solutions. They are not intended to replace emergency savings, fund everyday expenses or meet short-term savings needs.

Features, guarantees, charges and risks vary substantially by annuity type and contract. Withdrawals may be subject to surrender charges, a market value adjustment and other contract provisions. A market value adjustment may increase or decrease the amount received.

Taxable distributions may be subject to ordinary income tax. Certain taxable distributions before age 59½ may also be subject to an additional 10% federal tax unless an exception applies. This article is provided for general educational purposes and is not intended as investment, legal or tax advice. Consult appropriately licensed professionals regarding individual circumstances.

Contracts purchased in an IRA or another tax-qualified retirement plan provide no additional tax-deferral benefit because the retirement account is already tax-deferred. Other annuity guarantees and features should be evaluated independently.

Annuities are products of the insurance industry. They are not guaranteed by a bank or credit union, are not insured by the FDIC or NCUA/NCUSIF, are not deposits and are not insured by a federal government agency. They may lose value. Guarantees are subject to the claims-paying ability of the issuing insurance company.

Annuities issued by Oceanview Life and Annuity Company, 1331 17th Street, Suite 1050, Denver, CO 80202. In California, Oceanview does business as Oceanview Life and Annuity Insurance Company. Product features, limitations, form numbers, rates and availability may vary by state.

The Harbourview MYGA (Generic Policy Form ICC19 OLA SPDA) and Harbourview FIA (Generic Policy Form ICC19 OLA FIA) are single premium deferred annuities. May not be available in all states.  

A.M. Best Rating as of February 11, 2026, is subject to change. A (Excellent) rating is third highest of fifteen possible rating classes for financial strength. The outlook assigned to these Credit Ratings is stable.

This material is a general description intended for general public, educational use. Oceanview Life and Annuity Company is not providing investment advice for any individual or in any individual situation, and therefore nothing in this correspondence should be read as such. 

Neither Oceanview Life and Annuity Company nor any of its representatives may provide tax or legal advice. Clients should consult their own qualified tax or legal advisors.

Rates, renewal caps, and declared interest rates, will always follow contract provisions relative to minimums and maximums stated.  Oceanview determines, at its discretion, the rates, renewal caps and, declared interest rates above the contractual minimums that are guaranteed. 

Interest credited to a FIA is not the same as direct investment performance in any index or the stock market. Interest credits are determined in accordance with the contract provisions and may be limited by caps, participation rates, spreads, or other limitations. Past index performance does not predict future results.Published 2026

Written by the Oceanview Editorial Team