Annuities are often described in absolutes — either "completely safe" or "risky and full of fees." The truth is more nuanced. Whether you can lose money in an annuity depends on the type of contract, the features you select, and how and when you access your money.
Fixed and fixed indexed annuities
Fixed annuities pay a guaranteed interest rate and protect your principal. Fixed indexed annuities credit interest based on a market index but include a floor — typically 0% — so a market decline doesn't reduce your principal. In both cases, you're not exposed to market losses on your principal. The main way to lose value is by withdrawing more than the contract allows during the surrender period, which can trigger penalties.
Variable annuities are different
Variable annuities tie your account value to underlying investment subaccounts that can rise and fall with the market. With a variable annuity, you can lose principal if those investments decline. They also tend to carry higher fees. These are a different category from the principal-protected products above, and it's important not to confuse the two.
The fine print that matters
- Surrender charges: taking out more than your free-withdrawal amount early can cost you.
- Fees and riders: optional benefits add cost and can reduce your net return.
- Inflation: even a protected annuity's fixed payment can lose purchasing power over time.
- Claims-paying ability: guarantees depend on the financial strength of the issuing insurer.
Annuities are not FDIC insured. Guarantees on fixed and fixed-indexed annuities are subject to the claims-paying ability of the issuing insurance company. If you already own an annuity and aren't sure how much risk it carries, Tim Hartle will read the actual contract and explain it plainly, at no cost.
Primary sources
Sources are provided for general verification. Rules and agency guidance can change.
This article is for general educational purposes only and is not financial, tax, or legal advice. Rules and product features vary by situation and by state. Please consult a qualified advisor about your own circumstances. Any annuity guarantees discussed here are subject to the financial strength and claims-paying ability of the issuing insurance company. Annuities are not FDIC insured and are not bank guaranteed.