Start with the contract
An annuity is a contract with an insurance company. You provide a premium, and the insurer promises benefits described in the contract. Those benefits may focus on accumulation, principal protection, or income.
The two broad phases
Some annuities have an accumulation phase, when value may grow under the contract's crediting or investment options. An income phase may follow, when withdrawals or scheduled payments begin. Not every contract uses both phases in the same way.
Fixed, indexed, and variable
A fixed annuity credits interest according to insurer-declared or contract-guaranteed terms. A fixed indexed annuity uses a formula linked to an index without directly investing the contract in that index. A variable annuity offers investment subaccounts whose values can rise or fall.
Income now or later
Immediate annuities generally begin payments within one year. Deferred income annuities schedule income for a later date. Other deferred annuities may offer optional income riders rather than immediate annuitization.
Read the trade-offs
Annuities can involve surrender periods, withdrawal limits, rider charges, investment expenses, caps, participation rates, spreads, and tax consequences. Guarantees depend on the issuing insurer's claims-paying ability.
Before deciding, ask a licensed professional to identify what is guaranteed, what can change, how accessible the money remains, and how the professional is compensated.