What is Annuity?

An annuity is a long-term financial contract entered into with an insurance company, designed to convert a lump-sum payment or a series of premium payments into a guaranteed, steady stream of income in retirement. Annuities are primarily utilized by investors seeking to mitigate longevity risk, the hazard of outliving their retirement savings. In exchange for the paid premiums, the insurance company agrees to disburse payments to the annuitant starting either immediately or at a designated future date. Because they are hybrid insurance and investment products, annuities are complex instruments regulated at the state level by insurance commissioners and, in the case of variable products, at the federal level by the SEC.

Annuities are categorized by when payouts begin and how the investment returns are structured. Immediate annuities start paying out within 12 months of purchase, converting a lump sum directly into cash flow. Deferred annuities accumulate interest over a growth phase before transitioning to the payout phase. In terms of return structures, fixed annuities offer a guaranteed rate of interest, shielding the owner from market risk. Variable annuities permit the owner to invest in stock or bond sub-accounts, making their future income dependent on investment performance. Index-linked annuities tie their returns to a benchmark market index, offering a cap on returns in exchange for a floor on potential losses.

Under the SECURE 2.0 Act, regulations governing Qualified Longevity Annuity Contracts (QLACs) were significantly expanded. A QLAC is a deferred annuity purchased using pre-tax funds from a traditional IRA or 401(k) that allows the owner to delay taking Required Minimum Distributions (RMDs) on those funds up to age 85. The lifetime premium limit for a QLAC was raised to $210,000 for the 2026 tax year (up from $200,000 in 2025), and the restrictive rule capping QLAC premiums at 25% of the total retirement account balance was completely eliminated.