What is an annuity?

Key takeaways:

• An annuity is a financial product designed to generate predictable income, typically during retirement.

• You can fund an annuity through a single lump-sum investment or over time with a series of annuity payments.

• Funds within a deferred annuity grow and aren’t taxed until you are ready to begin receiving distributions.

• Payouts can begin almost immediately or be scheduled for a future date, depending on your specific retirement timeline.

• Incorporating an annuity into a broader financial strategy helps diversify your income sources and manage the risk of outliving your savings.

How do annuities work?

At its core, an annuity works by turning the money you put into it into structured payments you receive later. Unlike a savings account, CD, stocks or mutual funds, an annuity is a contract with an insurance company. Depending on the type, an annuity can offer tax-deferred growth, more growth potential than traditional savings products or less direct exposure to market swings than some investments. You buy it from an insurance company, and in return, the company provides regular payouts, either starting right away or at a future date. Depending on the type, an annuity can help offer steady income in retirement or help your savings grow with protection of your principal.

In general, annuities work in four steps:

1. You choose an annuity type. Different annuities grow and pay income in different ways.

2. You fund the annuity. You can contribute a lump sum or make multiple payments over time.

3. Your money can grow tax deferred. With deferred annuities, you generally don’t pay taxes on earnings until you withdraw money or receive payments.

4. You receive payments. You decide when payments begin and how long they last; they can last for a set period or for life, depending on the contract.

It’s helpful to review the terms of your annuity with an insurance professional before deciding if an annuity fits your broader retirement income plan. Fees, surrender charges, payout options, riders and tax treatment can vary.

The roles in an annuity contract

To understand how an annuity fits into your long-term retirement planning, it helps to know the specific roles involved:

• Owner: The person who buys the annuity and pays the premiums. The owner retains control over the contract and makes key planning decisions, such as choosing payout options and naming beneficiaries.

• Annuitant: The person, usually the owner, who is entitled to receive the annuity payments. The insurance company uses the annuitant’s age and life expectancy to calculate the income benefits.

• Beneficiary: The person who receives the death benefit, or payout, when the annuitant dies (e.g., a surviving spouse). Naming a beneficiary creates a clear plan for passing on any remaining annuity assets to your family. However, not all annuities offer a death benefit.

The phases of an annuity

Depending on the type of annuity you choose, the contract typically operates in two main phases to help manage your premiums:

• Accumulation Phase (Potential Growth Period): This is the period when you are funding the annuity and your balance has the potential to grow. With a deferred annuity, any earnings grow tax-deferred during this time¹².

• Distribution Phase (Payment Period): This is the period when your annuity is converted into regular income back to you.³ You can customize your payment schedule to align with your retirement strategy, selecting payouts that last for a set number of years or for the rest of your life.

What are the benefits of annuities?

Across all annuity types, one consistent benefit is their ability to add structure and predictability to one part of your retirement income strategy. However, different types of annuities offer distinct advantages, including the ability to provide a predictable stream of income, tax-deferred growth on earnings, and long-term income planning features.⁴ This matters to many people, as 32% of adults say their primary financial goal is to keep their finances as easy to manage as possible.* To put it simply, adding an annuity to your retirement income plan allows you to focus on your lifestyle rather than active portfolio management.

As Nate DeBoer, VP and actuary at Mutual of Omaha notes, this simplicity is one of several advantages that can be difficult to replicate elsewhere in a retirement portfolio.

These advantages are typically delivered through a few core features:

Lifetime benefits

The primary function of many annuities is to provide a reliable stream of income that won’t run out if your retirement lasts longer than you planned for. “It’s protection against outliving your savings and outliving your assets,” explains DeBoer. This longevity protection acts as a type of personal pension, ensuring that your basic living expenses are supported regardless of how long your retirement lasts.

Tax deferral

With a deferred annuity, your interest earnings grow and your taxes are postponed for a later date, meaning you do not pay taxes on the growth until you begin taking distributions.¹

This allows your principal to grow more efficiently during your working years, helping you maximize the total value of your retirement income resources.

Types of annuities: income, deferred and fixed

While most annuities share the same core function, they can be structured differently based on your timeline and when you need to access the funds. The three main types of annuities are income, deferred, and fixed.

1) Income annuities

An income annuity, also known as an immediate annuity, is designed to begin distributions almost immediately after purchase. This structure may be a fit for individuals who are already retired and want to quickly convert a portion of their savings into a dependable income stream.

Benefits of income annuities

• Predictable, steady retirement income stream

• Customizable payout timelines (set years or lifetime)

• Consistent payments regardless of market volatility

• Built-in strategy to help manage the risk of outliving savings

• Simplified, hands-free income distribution

2) Deferred annuities

A deferred annuity is a contract you fund now, but you do not start receiving payments until a later date. Because this option is designed with a longer timeline in mind, Keith Lo, annuity product director at Mutual of Omaha notes, “People who buy deferred annuities are typically looking for a way to grow their money, which happens during the accumulation phase. Afterwards, policyholders can withdraw the accumulated value as a lump sum or to receive recurring income payments.”

Most deferred annuities allow you to delay your payment period for as little as one year or as many as 50 years. This flexibility gives your funds the potential for tax-deferred growth while you are still working, allowing you to schedule payouts to begin precisely when you plan to step away from the workforce and enter retirement.

Benefits of deferred annuities

• Tax-deferred growth potential during the accumulation phase

• Flexible options to schedule when future payouts begin

• Multiple ways to fund, including a single lump sum or payments over time

• Opportunity to help build retirement assets while you are still working

• Built-in feature to convert the accumulated balance into a dependable income stream later

3) Fixed annuities

If you decide to use a deferred annuity for accumulation, you will need to choose how those funds grow. A fixed annuity is one option that provides a set, guaranteed interest rate for a specific period, offering a highly predictable path for growth. With built-in principal protection, this option helps safeguard your investment while the insurance company manages the impact of market fluctuations. “A fixed annuity would more naturally cater to someone with less appetite for risk,” explains Lo.

What to consider about annuities

While annuities may be a good fit for you, there are certain considerations you should make sure you understand.

• Annuities are considered low risk in terms of market volatility but have less growth potential. Many annuities grow at a fixed rate, meaning that your potential return on investment could be lower than it would have been had you invested in other opportunities, like stocks.

• Inflation should be considered when investing in an annuity. An annuity will pay the same monthly income to you in 2026 as it will in 2046. Some annuities offer inflation protection that increases annuity payments as the years pass by, but it can reduce your payments early on.

• Annuities are not a flexible investment option. Once your money is invested and your payout structure is scheduled, you cannot retrieve your lump sum without paying a surrender fee. And if your lump sum grew while in the annuity, there is a tax penalty on the growth when you make your withdrawal.

• Annuities are backed by the financial strength of the issuing insurance company, making it important to choose an insurance provider that is fiscally conservative and financially stable.

Find out which annuity is right for your retirement

You can determine which annuity is right for you by talking to a licensed Mutual of Omaha insurance professional. For example, if you want monthly payments to continue after you retire from your job, an income annuity might be a good strategy to help secure your financial future with predictable payments. But if you are confident in your savings and won’t need guaranteed monthly payments until later, a deferred annuity could be best.

If you’re looking for more predictable income or planning to retire early, annuities can play a key role in your broader retirement plan. 

Frequently asked questions (FAQs) about annuities

Is an annuity a retirement account?

An annuity is a contract with an insurance company rather than a traditional savings account, though it is frequently used as a core component to help provide income predictability in a retirement plan.

What is the difference between annuities and life insurance?

While both are contracts with insurance companies, life insurance is primarily designed to provide a financial benefit to your loved ones after your death, whereas an annuity is designed to provide income for you during your lifetime. Life insurance helps protect your family from the loss of your income, while an annuity helps you manage the risk of outliving your own savings.

Who should get an annuity?

An annuity can be a fit for individuals seeking a predictable stream of retirement income or those who have already maximized their contributions to other tax-advantaged accounts like a 401(k) or IRA.

Disclosures:

Annuity guarantees are backed by the claims-paying ability of the issuer.

Registered Representatives offer securities through Mutual of Omaha Investor Services, Inc., Member FINRA/SIPC. Investment Advisor Representatives offer advisory services through Mutual of Omaha Investor Services, Inc.

Mutual of Omaha and its representatives do not provide tax and/or legal advice, and the information provided herein is general in nature and should not be considered tax and/or legal advice.

Not all Mutual of Omaha agents are registered representatives or financial advisors.

Sources:

*Mutual of Omaha Annuities Study. Mutual of Omaha worked with research vendor quantilope to conduct a 5-minute online survey of 400 consumers age 45+ with a stated household income of $50,000 or more per year. Research was conducted April 22-28, 2026. All study data cited in this article is based on Mutual of Omaha proprietary research unless otherwise noted.

1. U.S. Securities and Exchange Commission. (2026, March). Annuities. Investor.gov. https://www.investor.gov/introduction-investing/investing-basics/investment-products/annuities

2. Utah Division of Securities. (2026, January). Basic definitions: Annuities. Utah Department of Commerce. https://commerce.utah.gov/securities/communication-and-outreach/basic-definitions/annuities/

3. American Academy of Actuaries. (2025, March). Decumulation strategies: Creating lifetime income from defined contribution plans (Executive summary). https://actuary.org/wp-content/uploads/2025/03/IB.PayoutDCplans.pdf

4. U.S. Securities and Exchange Commission. (2026, March). Annuities. Investor.gov. https://www.investor.gov/introduction-investing/investing-basics/investment-products/annuities

5. U.S. Securities and Exchange Commission. (2026, March). Annuities. Investor.gov. https://www.investor.gov/introduction-investing/investing-basics/investment-products/annuities

6. Internal Revenue Service. (2026, February 24). Topic no. 410, pensions and annuities. U.S. Department of the Treasury. https://www.irs.gov/taxtopics/tc410