An annuity is a contract with an insurance company: you pay in, and the insurer contractually owes you income — for a set period or for life. That longevity promise is the product. It is backed by the claims-paying ability of the issuing carrier, and you buy it by giving up liquidity, so it fits as a floor under essential expenses rather than as a whole plan.
What problem does an annuity actually solve?
One problem, and it is a real one: you do not know how long you will live, so you do not know how thin to slice your savings. An annuity moves that specific unknown onto an insurance company's balance sheet in exchange for money and flexibility.
Nothing else in a portfolio does that. A well-built index fund can grow, shrink, or recover, but it cannot promise a payment in year 31 of a retirement you did not budget for. A bank account cannot either. That contractual obligation is the entire product, and it is backed by the claims-paying ability of the issuing carrier — which is why the carrier matters as much as the illustration.
The catch is that annuities are also the most oversold, least understood category on the shelf. LIMRA and Life Happens found in the 2026 Insurance Barometer Study that 60% of consumers describe themselves as only somewhat or not at all knowledgeable about annuities — the worst score of the four products they tested, against 37% for life insurance and 54% each for disability and long-term care coverage. A product nobody understands is a product that gets sold rather than bought.
Sales volume says the same thing from the other direction. LIMRA's U.S. Individual Annuity Sales Survey put 2025 retail annuity sales at $464.1 billion, up 7% and a fourth straight record year. Volume is not evidence that a product fits you.
Insurance and annuity guarantees are backed by the claims-paying ability of the issuing carrier. Products are not FDIC-insured, not bank guaranteed, and may lose value.
How much of the paycheck does Social Security already cover?
More than most people assume, and you should measure it before you buy anything. The Social Security Administration's 2026 COLA Fact Sheet puts the estimated average monthly retired-worker benefit at $2,071 in January 2026, up from $2,015 after the 2.8% cost-of-living adjustment — a raise of about $56 a month, or $672 a year.
Social Security is already an inflation-adjusted lifetime income stream that you cannot outlive. In other words, you own an annuity. The question is not whether you want income the government owes you for life; you already have some. It is whether that amount covers the bills that have to be paid regardless of what the market did that year.
Do the subtraction first. Essential expenses minus Social Security equals the gap. That gap number, not a salesperson's target, is what tells you whether an income contract has a job to do.
| Figure | 2025 | 2026 |
|---|---|---|
| Cost-of-living adjustment | — | 2.8% |
| Estimated average monthly retired-worker benefit | $2,015 | $2,071 |
| Maximum benefit at full retirement age | $4,018/mo | $4,152/mo |
| Maximum earnings subject to Social Security tax | $176,100 | $184,500 |
| Retirement earnings test exemption, under full retirement age | $23,400/yr | $24,480/yr |
How long does the money have to last?
Longer than the averages suggest, because an average is a midpoint and half of everyone lands past it. The SSA's period life table for 2023, published with the 2026 Trustees Report, puts life expectancy at exact age 65 at 18.12 years for men and 20.66 years for women. At 55 it is 25.73 and 29.01 years.
Read those numbers correctly. They are not a finish line — they are the point at which half the group is still alive and still spending. For a married couple both aged 65, the plan has to survive the second death, not the first, which pushes the planning horizon out past either individual figure.
That is the case for putting a floor under the essentials rather than for annuitizing everything. If the rent, the utilities, the food and the insurance premiums are covered by income that does not stop, then a bad market year is a bad market year and not a crisis. The rest of the portfolio can stay invested for growth, and you can afford to leave it alone — which is usually where the real damage gets avoided.
Life expectancy is a midpoint, not a deadline. Half of everyone outlives it.
What do you give up to get a contractual income floor?
Liquidity, mostly, and it is priced into every version of the product. The SEC explains that if you withdraw some or all of your contract value within a certain number of years, the amount withdrawn may be subject to a surrender charge. That window is the trade, and it is stated in the contract before you sign.
You also give up simplicity. The SEC's own breakdown lists explicit fees, implicit costs reflected in the interest rate you are credited, base contract fees, underlying fund fees, and optional benefit fees. Some of those are visible on a statement and some are not, which is exactly why the sentence "there are no fees" should end a meeting rather than start one.
And you give up some upside, on purpose. A fixed indexed annuity credits interest tied to a benchmark with a rate the SEC says is guaranteed never to be less than zero — and the price of that floor is a cap or participation rate that limits the good years. A registered index-linked annuity moves both limits: the SEC states plainly that you can lose money in a RILA. A variable annuity has no limitation on losses or gains at all.
The product-by-product mechanics are worth their own read. The annuities and retirement income page breaks down what each type is, how the insurer earns on it, and who it genuinely fits.
| What you get | What it costs you |
|---|---|
| Income the insurer contractually owes for life | Access to the lump sum, permanently, once income begins |
| A credited rate that cannot fall below zero (fixed indexed) | A cap or participation rate that trims the strong years |
| Full market participation (variable) | No limitation on losses — the account can fall |
| Optional riders for income or death benefits | Additional annual fees for each rider elected |
| Deferral before income starts | Surrender charges on withdrawals inside the surrender period |
A worked example: building a floor, not a wall
Ruth is 66 and lives in Fort Wayne. Her essential monthly expenses — housing, utilities, groceries, insurance, transport — come to $4,200. Her Social Security benefit is close to the national average the SSA published for January 2026, $2,071 a month.
The gap is $4,200 minus $2,071, or $2,129 a month. That is $25,548 a year, and at this stage it is the number that decides everything else. Everything above the essentials is discretionary and can flex in a bad year.
Now the comparison. To cover $25,548 a year from an invested portfolio at a 4% withdrawal rate takes about $638,700 of capital set aside for that purpose alone. An income annuity approaches the same job from the other end: instead of holding capital and drawing a percentage, you exchange a premium for a payment the insurer owes for as long as she lives. Which structure is better depends on how much capital Ruth has, how much she wants to leave behind, and how she feels about handing over access.
Ruth's actual answer was neither extreme. She covered part of the gap with an income contract, kept the rest invested, and left roughly a year of expenses in cash so she is never a forced seller. The floor is a floor. It is not the whole house.
If you would rather see this with your own numbers in it, run it through the calculators before you talk to anyone.
An educational estimate for the 2026 plan year — not a quote, an offer, or a guarantee of any rate, return, or approval.
How is annuity income taxed, federally and in Indiana?
Federally, it depends on whether the money was already taxed. IRS Publication 575 (2025) describes the General Rule as the method generally used to determine the tax treatment of pension and annuity income from nonqualified plans, including commercial annuities — you recover your cost basis across the payments and the rest is ordinary income. Money inside an IRA or a 401(k) has no such basis, so distributions are generally taxable in full.
Timing carries its own penalty. Publication 575 covers an additional tax on early distributions taken before age 59 and a half, with a list of exceptions including disability, terminal illness and substantially equal periodic payments. If you are considering an annuity in your fifties, that rule belongs on the whiteboard before the product does.
Indiana adds two layers and removes one. The Indiana Department of Revenue set the individual adjusted gross income tax rate at 2.95% for 2026, falling to 2.90% in 2027, and Departmental Notice #1 effective January 1, 2026 lists Allen County's local income tax rate at 1.59%. Combined, an Allen County resident pays 4.54% of Indiana taxable income. County rates across the state range from 0.50% in Porter County to 3.00% in Randolph County, so where you retire inside Indiana changes the arithmetic.
The layer Indiana removes is a good one: the Department of Revenue states that Indiana does not tax Social Security or Railroad Retirement Board benefits. So on Ruth's $25,548 gap, if every dollar of it came from a fully taxable annuity distribution, Indiana would take $753.67 at the state rate and $406.21 for Allen County — about $1,160 a year. Had that same income come from Social Security, Indiana would take nothing.
That contrast is the whole argument for sequencing withdrawals deliberately instead of by habit. Where this meets the code: tax incentive strategies.
Educational content only. This is not tax, legal, or individualized financial advice. Consult your own CPA or attorney before acting.
Who stands behind the promise?
The issuing insurance company, first and last. There is no federal deposit insurance behind an annuity. When a contract says the insurer will pay, the strength of that sentence is the strength of the insurer, which is why carrier financials belong in the comparison alongside the rate.
State regulation is the backstop around that. The Indiana Department of Insurance says its Consumer Services Department exists to inform and protect consumers from illegal insurance practices by ensuring insurance companies and licensed producers operating in Indiana comply with state insurance laws, and it publishes lists of licensed companies you can check before you sign anything.
Two practical habits follow. Confirm the company and the producer are licensed in Indiana. And spread large amounts across more than one carrier rather than concentrating a retirement's worth of income promises in a single balance sheet.
When is the answer no?
Often. An annuity is a specific tool for a specific job, and it is the wrong answer more frequently than the marketing suggests.
Say no when Social Security and a pension already cover the essentials — you are buying a floor you already own. Say no when the money is your emergency reserve, because surrender charges turn an emergency into an expensive emergency. Say no when the illustration leans on an "income account value" that you cannot actually walk away with, and nobody will show you the surrender value beside it on the same page.
Say no, too, when the purchase would put an uncomfortable share of your net worth inside one contract with one insurer. Concentration is a risk even when the product is conservative.
And be suspicious of urgency. A rate that expires on Friday is a sales technique, not a financial fact. This is the kind of thing worth a second opinion before you sign.
- Reasonable fit: a real gap between essential expenses and lifetime income, money you can genuinely lock up, and a carrier you have checked.
- Poor fit: emergency savings, money needed inside the surrender period, or a purchase driven by a deadline someone else set.
- Always confirm: the surrender schedule in years and percentages, every rider fee, and the cash surrender value alongside any income-value illustration.
How does this decision touch the rest of your plan?
Through taxes, most sharply. Filling a Roth conversion up to the top of a bracket in one year and starting annuity income in the same year can push both into a higher bracket than either would have hit alone. Sequencing is the fix, and it only works if somebody is looking at the whole year before December rather than at one product in isolation.
Through the protection layer, too. An income contract that starts at 70 does nothing for a disability at 58, and the 2026 Barometer found 25% of adults would raid a retirement account and eat the penalty if a disability stopped their income. That is the gap disability coverage exists to fill — see the insurance pillar for how the pieces sit together.
And through what is left over. Annuity income is designed to stop at death unless you pay for a feature that says otherwise. If leaving money behind matters to you, that has to be a deliberate decision made at purchase, not a discovery made by your heirs.
Frequently asked questions
Is an annuity FDIC-insured?
No. Annuities are insurance contracts, not bank deposits. Guarantees are backed by the claims-paying ability of the issuing carrier. Products are not FDIC-insured, not bank guaranteed, and may lose value.
How much of my savings should go into an annuity?
Start from the gap, not from a percentage. Subtract your lifetime income — Social Security, any pension — from your essential expenses. The shortfall is the part an income contract has a job covering. Anything beyond that is a choice, and it costs liquidity.
What is a surrender charge?
A fee applied if you withdraw some or all of your contract value within a set number of years. The SEC notes that withdrawals inside that window may be subject to it. Ask for the schedule in writing — the years and the percentage for each year — before you sign.
Does Indiana tax annuity income?
Indiana taxes annuity distributions that are included in Indiana adjusted gross income at the state rate — 2.95% for 2026 per the Indiana Department of Revenue — plus a county rate, which is 1.59% in Allen County under Departmental Notice #1 effective January 1, 2026. Indiana does not tax Social Security benefits.
What happens if I take money out before age 59 and a half?
IRS Publication 575 (2025) describes an additional tax on early distributions before age 59 and a half, with exceptions including disability, terminal illness and substantially equal periodic payments. Surrender charges from the insurer can apply on top of that. Check both before you move money.
Are annuities regulated?
Fixed and fixed indexed annuities are insurance products regulated by state insurance regulators — in Indiana, the Department of Insurance. The SEC states that registered index-linked annuities and variable annuities are securities that must register with the SEC, so those carry securities-law disclosure as well.
Should I annuitize everything?
Rarely. Annuitizing gives up access to the capital permanently in exchange for the payment stream. Covering essential expenses and keeping the rest invested and liquid gives you the floor without turning the whole plan into one contract with one insurer.
Sources
- Social Security Administration, 2026 Cost-of-Living Adjustment Fact Sheet · 2026
- Social Security Administration, Period Life Table · 2023 table, published with the 2026 Trustees Report
- LIMRA, Final U.S. Retail Annuity Sales, 2025 · Full-year 2025
- LIMRA and Life Happens, 2026 Insurance Barometer Study · 2026
- U.S. Securities and Exchange Commission, Annuities (investor.gov) · Accessed 2026
- IRS, Publication 575, Pension and Annuity Income · 2025 returns
- Indiana Department of Revenue, Rates, Fees and Penalties · 2026 rate 2.95%; 2027 rate 2.90%
- Indiana Department of Revenue, Departmental Notice #1 · Effective Jan. 1, 2026 — Allen County 1.59%
- Indiana Department of Revenue, Indiana Deductions from Income · Social Security and Railroad Retirement deduction
- Indiana Department of Insurance, Consumer Services · Accessed 2026