Home › Invest › Annuities

Annuities: the facts and what cashing out costs

An annuity is a contract with an insurance company. You pay it money — all at once or over time — and it promises to pay you income later, or lets you take the money back out, often with charges. People usually buy them for retirement income. Here are the rules, costs and risks in plain words from the SEC, FINRA, the IRS and Tennessee's insurance safety net — with sources and dates. We don't sell annuities, rank them, or give quotes.

Checked October 13, 2026

Next step: if you own an annuity or are being offered one, use the What would it cost to cash out? check below with the numbers from your contract or statement. Before you buy, check the seller on FINRA BrokerCheck (variable annuities and RILAs) and your state insurance department.

On this page: Key rules · Cash-out cost check · The four kinds · What you pay · Taxes · If the insurer fails · Tennessee · Questions to ask · Downsides · Sources

Key rules at a glance

Free look: usually 10–30 days

State law gives you a set number of days after you get the contract to change your mind. The contract should say how long (SEC Investor.gov: Annuities · FINRA: Annuities)

Surrender charges for years

Taking money out in the early years can cost a percentage of what you take. The SEC's example starts at 7% and drops 1% a year until the 8th year (SEC: Variable Annuities: What You Should Know)

10% extra tax before 59½

Most taxable withdrawals before age 59½ owe an additional 10% federal tax on the taxable part, with some exceptions (IRS Publication 575 (2025): Pension and Annuity Income)

Gains come out first

For an annuity you bought yourself (not in an IRA or 401(k)), withdrawals count as earnings first — the taxable part — before your own money (IRS Publication 575 (2025): Pension and Annuity Income)

Not FDIC insured

Annuities aren't guaranteed by the FDIC, SIPC or any federal agency. The promise is only as good as the insurance company (FINRA: Annuities · SEC Investor.gov: Annuities)

Tennessee safety net: $250,000

If an insurer fails, Tennessee's guaranty association covers up to $250,000 in present value of annuity benefits per owner, per failed company (Tennessee Life & Health Insurance Guaranty Association: FAQ)

What would it cost to cash out? (arithmetic)

Type the numbers from your annuity statement and contract. We do the same math the SEC and IRS show in their examples: the surrender charge, the taxable part, and the possible 10% extra tax. It is not advice.

Contract value today ($) Total you paid in ($) Amount to take out ($) — empty = everything Surrender charge this year (%) Free withdrawal allowed (% of value) Are you under age 59½?

Try an official example:

The four kinds of deferred annuities (lowest risk first)

Fixed

Growth: at least a minimum interest rate the insurer guarantees.

Can you lose money? Generally no, except surrender charges if you take money out early.

Regulated by: your state insurance department.

Fixed indexed

Growth: partly tied to an index like the S&P 500, with limits on how much you can earn. The credited rate is never below zero.

Can you lose money? Generally no, except surrender charges.

Regulated by: your state insurance department.

Registered index-linked (RILA, "buffer")

Growth: tied to an index, with limits on gains and losses.

Can you lose money? Yes, if the index drops more than the protection, plus contract adjustments and surrender charges.

Regulated by: state insurance department and the SEC.

Variable

Growth: based on mutual-fund-like investments you pick.

Can you lose money? Yes, with no limit on losses, plus surrender charges.

Regulated by: state insurance department, the SEC and FINRA.

Source: SEC Investor.gov: Annuities · FINRA: Annuities. An immediate annuity starts paying within about a year; a deferred annuity grows first and pays later (Investor.gov).

What you pay

Fees you can see

Base contract fee: a percentage of your value each year. Investor.gov's example: 1.25% of $300,000 = $3,750 a year.
Mortality and expense risk charge (variable annuities): the SEC says typically about 1.25% a year of your account value. Part of it can pay the seller's commission.
Fund fees inside a variable annuity, on top of the insurer's fees.
Optional riders (extra death benefits, guaranteed income) cost more each year.

Costs that are harder to see

Surrender charges if you take money out in the early years. FINRA says variable annuity surrender periods can be eight years or more.
Caps and lower credited rates on fixed indexed annuities and RILAs. Investor.gov's example: the insurer credits you 3% while it earns 4%.
Market value adjustments on early withdrawals are often negative and come on top of surrender charges.
Withdrawals can shrink benefits like the death benefit — sometimes by more than you took out.

Sources: SEC Investor.gov: Annuities · SEC: Variable Annuities: What You Should Know · FINRA: Annuities.

Taxes (federal)

Growth is tax-deferred. You pay no tax on gains until you take money out, get income payments, or a death benefit is paid (Investor.gov).
Gains are taxed as ordinary income, not at lower capital-gains rates (FINRA; IRS Pub. 575).
Earnings come out first on an annuity you bought yourself. IRS example: you take $7,000 when the contract is worth $16,000 and you paid $10,000. $6,000 is taxable ($16,000 − $10,000) and $1,000 is a tax-free return of your money (IRS Pub. 575).
10% additional tax on the taxable part of most withdrawals before age 59½. Exceptions include payments after the owner's death, total and permanent disability, a series of substantially equal payments for life, and an immediate annuity (IRS Pub. 575).
Inside an IRA or 401(k), you get no extra tax break from an annuity — the account already defers taxes (Investor.gov; FINRA).
1035 exchange: swapping one annuity for another is generally tax-free if the annuitant stays the same (IRS Pub. 575) — but it can start a new surrender period (Investor.gov; FINRA).

Sources: SEC Investor.gov: Annuities · FINRA: Annuities · IRS Publication 575 (2025): Pension and Annuity Income. Not tax advice.

If the insurance company fails

Annuities aren't covered by the FDIC or SIPC. They depend on the insurer's financial strength and ability to pay claims (FINRA; Investor.gov).
Tennessee: the Tennessee Life & Health Insurance Guaranty Association covers up to $250,000 in present value of annuity benefits per contract owner, for all annuities with the same failed company. Its own example: three $100,000 annuities with one failed insurer are covered for only $250,000 total. The rest becomes a claim in the receivership.
The safety net does not cover the parts of a policy where you carry the risk, such as a variable contract sold by prospectus (Tennessee guaranty association notice).
Other states have their own guaranty associations and limits. Check yours before you put more than the limit with one company.

Sources: Tennessee Life & Health Insurance Guaranty Association: FAQ · Tennessee Life & Health Insurance Guaranty Association: Notice concerning coverage (eff. Feb. 1, 2020, PDF) · FINRA: Annuities · SEC Investor.gov: Annuities.

Tennessee

Free look: the NAIC's state chart (Spring 2024; Tennessee reviewed Jan. 2024) lists 20 days for an annuity that replaces another one (Tenn. Comp. R. & Regs. 0780-01-24). It lists no other Tennessee annuity free-look rule, so check the first page of your contract for its review period.
Guaranty association: $250,000 annuity present value per owner per failed insurer; $300,000 for life insurance death benefits (TN guaranty association FAQ).
Complaints: the Tennessee Department of Commerce & Insurance handles insurance complaints; for variable annuities and RILAs you can also contact the SEC (Investor.gov).

Sources: NAIC Model Laws chart LI-35: Annuity disclosure & free-look provisions by state (Spring 2024; TN reviewed 1/24, PDF) · Tennessee Life & Health Insurance Guaranty Association: FAQ · SEC Investor.gov: Annuities.

Questions the SEC says to ask before you buy

Which type is it — fixed, fixed indexed, RILA or variable — and how does my rate or return work?
What are all the fees: upfront, surrender, ongoing, and limits on gains?
Will I keep the money in long enough to avoid surrender charges, tax penalties and contract adjustments?
What is the death benefit, and how will my beneficiaries get it?
What do optional benefits cost, and how likely am I to actually use them?
How strong is the insurance company?
How is the seller paid? FINRA says to ask whether they get a commission and how much.

Sources: SEC Investor.gov: Annuities · FINRA: Annuities.

Downsides, and what we don't cover

Annuities are complex and can be costly, with surrender charges, fees and sometimes high commissions (FINRA).
Investor.gov says annuities are only appropriate for people with a long-term time horizon.
Fixed annuity payments usually don't rise with inflation; inflation protection costs significantly more (FINRA).
Choosing to "annuitize" (turn it into payments) is generally permanent (FINRA).
Variable annuities are a leading source of investor complaints to FINRA.
We don't sell annuities, rank them, or give quotes. Our check is simple arithmetic with your numbers.

Sources & as-of dates

SEC Investor.gov: Annuities, checked October 13, 2026
SEC: Variable Annuities: What You Should Know, checked October 13, 2026
FINRA: Annuities, checked October 13, 2026
IRS Publication 575 (2025): Pension and Annuity Income, checked October 13, 2026
Tennessee Life & Health Insurance Guaranty Association: FAQ, checked October 13, 2026
Tennessee Life & Health Insurance Guaranty Association: Notice concerning coverage (eff. Feb. 1, 2020, PDF), checked October 13, 2026
NAIC Model Laws chart LI-35: Annuity disclosure & free-look provisions by state (Spring 2024; TN reviewed 1/24, PDF), checked October 13, 2026

FAQ

What is a surrender charge on an annuity?

A fee for taking money out in the early years. The SEC's example: 7% in year one, dropping 1% a year until year eight; with 10% free each year, taking $5,000 of $10,000 in year one costs 7% of $4,000 = $280.

Is there a penalty for taking money out of an annuity before 59½?

Usually a 10% additional federal tax on the taxable part, with exceptions such as death, disability, substantially equal payments and immediate annuities (IRS Pub. 575). Surrender charges can apply too.

How are annuity withdrawals taxed?

For an annuity you bought yourself, withdrawals count as earnings first and are taxed as ordinary income until the gains are used up; then you get your own money back tax-free (IRS Pub. 575).

How long is the free look period on an annuity?

Usually 10 to 30 days, set by state law (Investor.gov; FINRA). The NAIC chart lists Tennessee at 20 days for replacement annuities; check your contract's first page.

Are annuities FDIC insured?

No. They aren't guaranteed by the FDIC, SIPC or any federal agency (FINRA). State guaranty associations have limits; Tennessee's is $250,000 in present value of annuity benefits per owner per failed insurer.

Is this advice?

No. VaultRubric republishes facts from the SEC, FINRA, IRS and state sources with dates. We don't sell or rank annuities.

Facts and arithmetic, not financial, tax or insurance advice. We don't sell or rank annuities; figures are from the SEC, FINRA, IRS and state sources with dates. Your contract, statement and Form 1099-R decide the real numbers.