Once you’ve decided guaranteed income makes sense for your retirement plan, the next question is which annuity type actually fits. Before John Shedenhelm’s team recommends any specific contract, they run it through six questions, starting with the one most buyers never think to ask: what’s the guaranteed-minimum illustration, not just the projected one?
Start Here If You Haven’t Decided Whether You Need One
This comparison assumes you’ve already worked through whether an annuity fits your plan at all. If you haven’t, start with the gap-first framework for deciding whether guaranteed income is actually needed before comparing products.
The Four Main Annuity Types, Side by Side
| Annuity Type | How It Works | Best For | Watch Out For |
|---|---|---|---|
| Single Premium Immediate Annuity (SPIA) | Pays income starting almost immediately in exchange for a lump sum | Simplicity, maximum guaranteed income per dollar | No liquidity once purchased |
| Deferred Income Annuity (DIA) / QLAC | Income starts at a future date you choose | Bridging a known future gap, like delaying Social Security | Long wait before any access to funds |
| Fixed Indexed Annuity (FIA) | Credits interest based on a market index, with a floor against losses | Downside protection with some growth potential | Capped gains, long surrender periods, complex crediting formulas |
| Variable Annuity (VA) | Invests in subaccounts similar to mutual funds, with optional income riders | Market growth potential with an income guarantee rider | Fees often exceeding 2% annually, complexity |
Question 1: What Does the Guaranteed-Minimum Illustration Show?
Every annuity illustration comes in two versions: a projected illustration, based on assumed future performance, and a guaranteed-minimum illustration, showing what you’d get if performance is as poor as the contract allows. We ask for the guaranteed-minimum version first, every time.
Pro Tip: If an agent shows you only the projected illustration and hesitates to provide the guaranteed-minimum version, treat that as a warning sign. Every properly licensed annuity must be able to produce both.
Question 2: What’s the Full Surrender Schedule?
Surrender periods on indexed and variable annuities commonly run 7 to 10 years or longer, with penalties that can exceed 10% in the early years if you need to access funds. Ask for the exact surrender percentage in each year of the contract, not just the starting number.
Did You Know? Most contracts allow a free withdrawal of 10% of the account value per year, even during the surrender period, without penalty. That’s useful to know if you need partial access, but it’s not the same as full liquidity.
Question 3: What Is the All-In Annual Cost?
Fixed and immediate annuities typically have costs built into the crediting rate rather than a separate fee line. Variable annuities and annuities with income riders often carry mortality and expense charges, rider fees, and subaccount fees that can add up to 2% to 4% annually. Ask for every fee itemized, not a single blended number.
Question 4: How Is Growth Actually Calculated?
For fixed indexed annuities specifically, ask exactly how index-linked interest is calculated: a cap (maximum credited rate), a participation rate (percentage of index gain credited), or a spread (amount subtracted from index gain). These formulas can produce very different results in the same market environment, and marketing materials don’t always make the mechanics obvious.
Question 5: What Happens to Remaining Funds When You Die?
Some annuities, particularly simple SPIAs without a period-certain or cash-refund feature, keep all remaining funds if you die shortly after purchase. Ask specifically what your beneficiaries would receive in year one versus year ten, in writing.
Did You Know? Adding a period-certain guarantee (such as 10 or 20 years) or a cash-refund feature typically reduces your monthly income slightly in exchange for protecting against an early death eliminating the value entirely.
Question 6: Who Actually Backs the Guarantee?
Annuity guarantees are backed by the issuing insurance company, not the federal government. Check the insurer’s financial strength ratings, and understand that state guaranty associations provide a backstop, but with coverage limits that vary by state and generally don’t cover the full account value on larger contracts.
Laddering Annuities Instead of Buying One Large Contract
Rather than putting a large sum into a single annuity, some retirees split the purchase across two or three contracts, sometimes different types, sometimes different insurance companies, purchased at different times.
This approach, often called annuity laddering, spreads the interest-rate risk of buying everything when rates happen to be low, and it spreads insurer risk across more than one company for larger sums that might otherwise exceed a single state’s guaranty association coverage limit. It also allows some flexibility to start income at staggered ages rather than committing an entire sum to a single start date.
Did You Know? Annuity purchase rates are heavily influenced by prevailing interest rates at the time of purchase, similar to bond yields. Laddering purchases over several years can help smooth out the effect of buying everything at a single point in the rate cycle.
Matching the Right Type to the Right Job
A SPIA or DIA tends to fit best when the goal is maximizing guaranteed income for a known, fixed need, like covering essential expenses alongside Social Security. A fixed indexed annuity tends to fit when the priority is protecting principal from market drops while still capturing some growth. A variable annuity with an income rider fits a narrower case: someone who wants market exposure and a guaranteed income floor, and who understands and accepts the higher fee structure that comes with both.
None of these fit every situation, which is exactly why the six questions matter more than the marketing label on the contract.
Getting the Contract Reviewed Before You Sign
John Shedenhelm reviews annuity contracts against these six questions before any recommendation, working from the same guaranteed-income framework used to decide whether an annuity belongs in your plan at all. The team at Eagle Financial Solutions can walk through a contract you’re already considering, even one from another agent, before you sign.
The right annuity type depends entirely on the specific job you need it to do in your plan, not which product an agent happens to sell. Schedule a contract review with Eagle Financial Solutions before committing to any annuity purchase.
FAQ
What is the best annuity type for retirement income? The best annuity type depends on your goal. A SPIA or deferred income annuity maximizes guaranteed income for a known need, while a fixed indexed annuity offers principal protection with some growth potential and more flexibility.
What questions should I ask before buying an annuity? Ask for the guaranteed-minimum illustration, the full surrender schedule, all-in annual costs, how growth is calculated, what happens to remaining funds at death, and which insurance company backs the guarantee. These six questions reveal most of what marketing materials leave out.
What is the difference between a fixed indexed annuity and a variable annuity? A fixed indexed annuity credits interest based on a market index with a floor against losses, capping potential gains. A variable annuity invests directly in market subaccounts, offering higher growth potential but real downside risk, along with typically higher fees.
Are annuity guarantees backed by the government? No. Annuity guarantees are backed by the issuing insurance company, not the federal government. State guaranty associations provide some backstop protection, but coverage limits vary by state and may not cover the full contract value.
