The short version

An annuity is a contract between you and an insurance company. In exchange for your premium, the insurer makes you certain promises — often a guaranteed interest rate, protection of your principal, or income payments that can last the rest of your life. Like every financial tool, an annuity has real strengths and real trade-offs, and the honest answer to "are annuities good or bad" is: it depends entirely on what you need the money to do.

This guide lays out the genuine pros and cons of fixed and fixed-indexed annuities in plain English, so you can decide whether one fits your situation. It is educational only — not investment, financial, or tax advice. The Jordan Insurance Agency is a licensed independent insurance agency in Charlotte, North Carolina; we are not financial planners, and we do not manage investments or prepare taxes. For your own numbers, talk with a licensed professional and a tax advisor.

One important scope note up front: The Jordan Insurance Agency works in the fixed and fixed-indexed annuity lane only. We do not sell or advise on variable annuities or registered index-linked annuities (RILAs), which are securities that require a securities license. We mention those products below only to explain how they differ — not because we offer them.

The pros of annuities

1. Guaranteed income you can't outlive

The headline benefit of an annuity is the one no bank account or bond ladder can match on its own: the insurance company can promise to pay you income for the rest of your life, no matter how long you live. The NAIC describes this plainly — "the insurance company promises to pay you income on a regular basis for a period of time you choose — including the rest of your life."

That guarantee is what makes an annuity a tool against longevity risk: the risk of running out of money in a long retirement. You can structure the income for your lifetime alone, for the longer of your lifetime or your spouse's, or for a set number of years. Our guide on how guaranteed lifetime income works walks through those options in detail.

2. Protection of your principal from market drops

A fixed annuity credits a set, guaranteed interest rate declared by the insurer — your account value doesn't fall when the market falls. A fixed-indexed annuity goes a step further: it links your interest to a market index (such as the S&P 500), but with a guaranteed floor of zero percent. As the NAIC and Investor.gov both note, the credited rate on an indexed annuity "will never be less than zero."

In practice that means if the index falls over an index term, zero interest is added for that term and your value doesn't drop from the market decline — as long as you don't withdraw the money. Importantly, that floor protects against market losses; withdrawals, fees, and rider charges can still reduce your value. Our guide on whether annuities protect against market crashes covers exactly how that floor behaves.

3. Tax-deferred growth

Interest credited inside a non-qualified annuity isn't taxed while it stays in the contract. Investor.gov describes this as "tax-deferred growth until you begin receiving income payments." Compared with a bank CD — where interest is generally taxable in the year it's credited, even if you don't touch it — the annuity lets earnings compound without a yearly tax bill. You pay ordinary income tax only when you withdraw.

One nuance worth knowing: if you fund an annuity with money that is already inside a tax-deferred account like an IRA or 401(k), you don't get extra tax deferral from the annuity — that account is already tax-deferred. In that case, people choose an annuity for its guarantees or income, not for additional tax benefits. Our overview of how annuities are taxed explains the difference between qualified and non-qualified contracts.

4. A conservative home for "safe money"

For savers who want principal protection and a predictable, guaranteed rate rather than stock-market exposure, a fixed or multi-year guaranteed annuity (MYGA) can be a straightforward place to park money for a set term. The insurer locks a guaranteed rate for the whole term, and interest typically compounds annually. Terms are commonly offered in 3-, 5-, 7-, and 10-year lengths.

5. Some access, even during the term

Annuities are less liquid than a savings account, but they're not fully locked. Many fixed and fixed-indexed contracts allow a penalty-free ("free surrender") withdrawal each year — commonly up to about 10% of the account value — without triggering a surrender charge. The exact free-withdrawal amount is set in your specific contract, so it should always be read in the policy. Some contracts also waive surrender charges in certain situations, such as nursing-home care.

The cons of annuities

Now the trade-offs — and every one of these matters. An annuity that's wrong for your situation can cost you real money, so these are not fine print to skim past.

1. Your money is less accessible — the surrender period

When you buy an annuity, you're agreeing to leave the bulk of the money in place for a set span of years called the surrender period. In North Carolina, surrender charges typically apply during the first 5 to 15 years from the policy issue date. Withdraw more than your contract's penalty-free amount during that window, and the insurer applies a surrender charge to the excess.

The surrender charge declines over the life of the contract and reaches zero at maturity, but the exact starting percentage and step-down schedule are set in your contract — describe them as "what's in my policy," not a fixed rule. The practical takeaway: never put money into an annuity that you're likely to need for near-term expenses or emergencies. Our detailed guide on the annuity surrender period and surrender charges shows how this works.

2. Growth on indexed contracts is limited — caps, participation rates, and spreads

The zero-percent floor on a fixed-indexed annuity comes with a corresponding trade-off: you don't get all of the index's gain. Insurers limit your upside using one or more of these levers:

  • Participation rate — how much of the index's increase is counted. A 75% participation rate would credit only 75% of the index's gain (an illustration of the mechanics, not a current rate).
  • Cap rate — the maximum interest you can earn in an index term. If the index rose 12% but your cap were 7%, your credit would be limited to 7% (again, an illustration only).
  • Spread (or margin) — a set percentage the insurer subtracts from the index change. A 10% index gain with a 3.5% spread would credit 6.5% (illustration only).

Those percentages are examples to show how the levers work — they are not current or available rates, which are product-specific and change over time. The point is simply that principal protection is paid for with capped upside. If a market year is strong, an indexed annuity will generally credit less than being directly invested would have. Our explainer on how annuity indexing works breaks down each of these in depth.

3. Fees and rider costs

Fixed and fixed-indexed annuities tend to have fewer explicit fees than variable annuities, but they aren't free. The cost of a fixed-indexed annuity shows up mainly through the caps, participation rates, and spreads above — the insurer's margin. On top of that, optional features called riders (for example, a guaranteed lifetime withdrawal benefit) are available at extra cost. As the NAIC puts it, "you can add features (called riders) to many annuities, usually at an extra cost." A rider can be genuinely valuable, but its ongoing charge is a real trade-off that should be weighed against the benefit it provides.

4. Taxes on withdrawals — and a 10% penalty before 59½

Tax deferral isn't tax-free. When you withdraw earnings or take income, the gains come out taxed at ordinary income rates. And if you withdraw taxable amounts before age 59½, the IRS generally adds a 10% early-withdrawal tax on the portion includible in income, unless an exception applies. That 10% IRS penalty is separate from, and on top of, any insurance-company surrender charge. Our guide to the annuity early-withdrawal penalty explains the exceptions.

5. Complexity — and the risk of a poor fit

Annuities can be complicated, and the details differ from contract to contract. Two products marketed the same way can behave very differently depending on their surrender schedule, crediting method, caps, and riders. That complexity is exactly why North Carolina holds agents to a best-interest standard on annuity recommendations (more on that below) — and why it pays to have someone walk you through the specific contract line by line before you sign.

A clearly-labeled hypothetical

The following is a made-up illustration to show how the same annuity feature can be a pro or a con depending on the person — not a quote, not a real product, and not a projection of returns.

Imagine two Charlotte retirees, each considering the same fixed-indexed annuity with a multi-year surrender period.

  • Retiree A has a separate emergency fund and other liquid savings, and mainly wants a portion of her nest egg protected from a market drop while it earns interest, plus guaranteed income later. For her, the surrender period is a non-issue — she won't need that money early — so the principal protection and lifetime-income guarantee are pure pros.
  • Retiree B is putting nearly all of his cash into the same contract and may need to pull a large sum in a couple of years for a home repair. For him, the very same surrender period is a serious con: an early withdrawal above the penalty-free amount would trigger a surrender charge, and if he's under 59½, the IRS 10% penalty could apply to gains, too.

Same product, opposite verdict. The feature didn't change — the fit did. That's the whole lesson of annuity pros and cons: the trade-offs are fixed, but whether they help or hurt depends on your liquidity, your timeline, and your goals.

Where the guarantees actually come from

Because "guaranteed" is the word annuities are sold on, it's worth being precise about what stands behind it. An annuity is not FDIC-insured. A bank CD is backed by the FDIC up to $250,000 per depositor, per insured bank, per ownership category; an annuity is not a bank product and carries no FDIC coverage.

Instead, an annuity's guarantees rest on two things:

  • The issuing insurance company's financial strength and claims-paying ability. This is the primary backstop. One practical way to gauge it is the insurer's AM Best Financial Strength Rating, which measures the company's ability to meet its ongoing obligations — higher ratings (such as A- and above) indicate stronger claims-paying ability.
  • The North Carolina Life & Health Insurance Guaranty Association (NCLIFEGA), a secondary state safety net. It covers up to $300,000 for the present value of annuity benefits per individual, per member insurer, if that insurer becomes insolvent. NCLIFEGA is a private nonprofit created by state statute, not a government or FDIC program, and by law it can't be used as a sales inducement — so we present it only as background, never as a reason to buy.

Our companion guides on whether annuities are safe and whether annuities are FDIC-insured go deeper on both layers of protection.

What we do not do: variable annuities

To keep the pros and cons honest, it's worth naming the product that carries a con we've deliberately avoided. A variable annuity lets you invest in market subaccounts you choose; those returns are not guaranteed, and the account value can go up or down — you can lose principal. That's fundamentally different from a fixed-indexed annuity, whose value won't drop from a negative index because of the zero-percent floor. Variable annuities and RILAs are securities that require a securities license, and The Jordan Insurance Agency does not sell or advise on them. We mention them only so you understand what falls outside our lane.

Who annuities may — and may not — suit

Pulling the pros and cons together, here's the factual framing:

  • May be a good fit: people seeking guaranteed lifetime income and protection against outliving their savings; conservative savers who want principal protection with tax-deferred growth; and those who have already used up other tax-advantaged accounts.
  • May not be a good fit: people who need short-term access to the money (the surrender-charge window); those under 59½ who are likely to withdraw (the 10% IRS penalty on gains); and anyone who could meet the same goal more cheaply with a lower-cost option.

Our guide on who should and should not buy an annuity expands on this. And because North Carolina adopted a best-interest standard for annuity recommendations effective January 1, 2023, any agent recommending an annuity to you must act in your interest, disclose their role and compensation and any material conflicts, and document the basis for the recommendation. That's a consumer protection you should expect and can ask about directly.

How The Jordan Insurance Agency helps

The Jordan Insurance Agency is an independent, licensed insurance agency based in Charlotte, North Carolina, serving clients across the state. Because we're independent, we represent multiple carriers rather than a single company — so we can compare fixed and fixed-indexed Annuity contracts side by side and show you, in plain English, exactly where each one's pros and cons land for your situation.

We'll walk you through the surrender schedule and penalty-free withdrawal allowance, explain how any caps, participation rates, or spreads on an indexed contract limit upside, spell out what any optional rider actually costs, and be clear that the guarantees depend on the issuing insurer's claims-paying ability — backed, up to North Carolina limits, by the state guaranty association — and are not FDIC-insured. We'll also flag when an annuity is not the right tool, because acting in your best interest sometimes means saying so.

We are insurance agents, not financial planners, investment managers, or tax preparers, and this is education rather than advice for your specific circumstances — so for the tax side we'll encourage you to confirm details with a tax advisor. For any figure or contract detail not shown here, The Jordan Insurance Agency can confirm it and go over the specifics with you. When you're ready, reach out and we'll talk it through, one trade-off at a time — with no pressure.