Most annuity horror stories come from people who bought one type while thinking they were buying another. Here are the five main types, side by side.
| Type | How it grows | Principal at market risk? | Best known for |
|---|---|---|---|
| Fixed | A set interest rate, like a CD | No | Simplicity and predictability |
| Fixed Indexed (FIA) | Linked to a market index, with limits | No | Growth potential with downside protection |
| MYGA | A guaranteed rate for a set number of years | No | A CD alternative with tax deferral |
| SPIA | Does not grow. Converts a lump sum to income immediately | No | Immediate lifetime income |
| Variable | Invested directly in market subaccounts | Yes | Higher fees and market exposure |
Fixed annuities
The insurance company pays you a declared interest rate. Simple, predictable, and boring in the best way. Growth is modest but known in advance.
Fixed indexed annuities (FIAs)
Your money is not invested in the market. Instead, the insurance company credits you interest based on how a market index performed, subject to limits like caps and participation rates. When the index falls, you are credited zero, but your principal does not fall with the market.
You get a portion of the upside when the index goes up. You get zero, not a loss, when it goes down. The trade is that your upside is limited.
This is the type we get asked about most, so we wrote a full page on how the moving parts work.
MYGAs (multi-year guaranteed annuities)
You lock in a guaranteed rate for a set term, often 3 to 7 years. People often compare them to CDs. The main differences are that MYGA growth is tax deferred and MYGAs are backed by an insurance company rather than FDIC insurance.
SPIAs (single premium immediate annuities)
You hand the insurance company a lump sum, and payments to you start right away and can continue for life. You trade access to that lump sum for a dependable income stream. This is the oldest and simplest form of annuity.
Variable annuities
Your money is invested directly in market subaccounts, so your account value rises and falls with the market. Variable annuities often carry higher fees and are more complex. They are securities as well as insurance products, and they are not offered through this site. We mention them because most of the fee complaints you have heard about annuities trace back to this type.
Which type comes up most in retirement income planning?
For people who want principal protection plus the option of lifetime income, the conversation usually centers on fixed indexed annuities and SPIAs. Which one, if either, fits you depends on your timeline, your other assets, and your income needs. That is exactly what a free call is for.