Annuity & insurance-based income
Fixed Annuities
An insurer credits a stated rate of interest on your deposit for a set number of years, tax-deferred, and owes you the principal plus that interest at the end of the term.
A fixed annuity is a deferred insurance contract that credits interest at a rate the insurer declares, either fixed for a multi-year term in the version known as a MYGA or reset annually above a contractual minimum. The money sits in the insurer's general account, the interest compounds without current tax, and a surrender charge schedule plus a market value adjustment govern early exits. It is the annuity that compares most directly with a CD, but it carries no FDIC insurance, different tax mechanics and a longer lock-up.
Interest from lending Truly passive
The labels above place this income type before you read a word. The first is the mechanism — how the money actually reaches you, whether by lending it out, owning a slice of something, renting an asset, licensing a right, selling an option or owning a business somebody else runs. The second says whether the income keeps arriving on its own once it is running, or whether it needs work from you to keep coming. Both are descriptions of how the thing is built, not verdicts on it.
How it works
A deposit goes into the insurer's general account, and the contract credits declared interest. In a multi-year guaranteed annuity, that rate is locked for the entire term, commonly two to ten years. A traditional fixed annuity instead resets the current rate each contract year, but never below the guaranteed minimum interest rate printed in the policy. Interest compounds inside the contract without current taxation, which is the structural difference from a bank CD paying the same headline rate.
Exiting early has a cost. A surrender charge schedule declines annually across the term, and most contracts layer on a market value adjustment that raises or lowers surrender proceeds depending on whether interest rates have moved since issue. A free-withdrawal provision usually permits a stated percentage of value, or accrued interest only, each year without charge.
At the end of the guarantee term a short window opens in which the owner can take the cash, renew at the newly declared rate, annuitize into a payment stream, or move to another carrier through a 1035 exchange without triggering tax. There is no FDIC insurance behind any of this. The backstop is the insurer's general account and, in insolvency, a state guaranty association subject to statutory limits that vary by state. Distribution runs through insurance agents, bank platforms and annuity marketplaces, with fee-based versions available that carry no commission and shorter or absent surrender schedules.
What it pays
The product is quoted as an annual effective rate for a stated term, the same convention used for a CD, which is why a fixed annuity is the one annuity type that can be compared to a bank product on a single number. That rate is driven by the yield the insurer earns on investment-grade corporate bonds, structured credit and mortgages of matching duration, its capital position, its target spread over that portfolio yield, the length of the term, and the commission built into the product.
Longer terms usually carry higher declared rates, and some carriers pay a higher rate above a stated deposit threshold. Income can be drawn as periodic interest withdrawals during the term, within the free-withdrawal allowance, or the entire accumulated value can be annuitized later into a life payout.
After the guarantee term ends, the renewal rate is set unilaterally by the insurer and is frequently well below the initial rate; the contractual guaranteed minimum is the only floor. Deferred interest left untouched compounds on itself, so the eventual outcome over a multi-year term depends heavily on whether interest is withdrawn as income along the way or allowed to accumulate.
Costs and taxes
Most MYGAs carry no explicit annual fee visible to the buyer. The insurer's actual cost is the spread between what its portfolio earns and what it credits, and that spread is never disclosed as a line item. The real cost of leaving early is the surrender charge and market value adjustment, both applied to any amount taken above the free-withdrawal allowance. Optional riders, such as income riders, enhanced death benefits or nursing-home waivers, carry their own explicit annual charges where offered.
US tax treatment follows the LIFO rule for non-qualified contracts: withdrawals come out earnings-first as ordinary income, and untaxed basis is only reached after all gain has been withdrawn. A 10% additional federal tax generally applies to the taxable portion of withdrawals taken before age 59 and a half, subject to statutory exceptions.
Annuitizing the accumulated value instead converts it to exclusion-ratio treatment, spreading the untaxed basis proportionally across the payment stream. Gains receive no step-up in basis at death; a beneficiary inherits them as income in respect of a decedent and owes ordinary income tax. A 1035 exchange moves value between annuities tax-free but resets the surrender charge schedule on the new contract, and a few states levy a premium tax on the original deposit.
Liquidity and time commitment
Principal is locked for the guarantee term apart from the free-withdrawal provision, which is the only routine access without charge. In the early years, a surrender charge combined with an adverse market value adjustment can claw back more than all the interest credited to date, turning an early exit into a loss of principal rather than just forfeited earnings.
Many contracts waive surrender charges for qualifying events written into the policy, such as terminal illness, extended nursing-home confinement, or disability. At maturity there is usually a short action window, often around thirty days; missing it can auto-renew the contract into a new multi-year term with a fresh surrender schedule attached.
Death of the owner generally pays the full accumulated value to the named beneficiary without surrender charge and outside of probate. Day-to-day workload during the term is close to nil, with one genuinely consequential decision concentrated at maturity.
How it goes wrong
The most common failure is procedural: the maturity window is missed and the contract auto-renews at a low declared rate with a brand-new multi-year surrender schedule attached, locking the owner in again without any active choice. A thinly capitalized carrier attracting deposits with an above-market headline rate is another version of the same problem in reverse; the rate is only as good as the balance sheet behind it, and guaranty association coverage is per owner, per carrier, per state, and capped by statute.
A withdrawal before age 59 and a half on a contract sold informally as a savings substitute triggers the 10% additional federal tax on top of ordinary income tax on the gain. The product is frequently confused with a CD, but it carries no FDIC insurance, LIFO earnings-first taxation instead of simple 1099 interest reporting, and an early-exit cost that is not limited to forfeited interest, since a market value adjustment can reduce proceeds further after rates have risen.
Money that will predictably be needed before the term ends is deposited anyway, and the free-withdrawal allowance turns out to be far too small to cover it. Rate comparison shopping that focuses only on the initial declared rate, while ignoring the guaranteed minimum rate that governs every year after the first term, misprices what the contract is actually worth over time.
What to remember
- A fixed annuity credits a declared interest rate on a deposit for a set term, tax-deferred, inside an insurer's general account rather than a bank.
- There is no FDIC insurance; protection in insolvency comes from state guaranty associations with statutory, per-state caps.
- Withdrawals are taxed earnings-first as ordinary income, and a 10% additional federal tax generally applies before age 59 and a half.
- Surrender charges and a market value adjustment can erase more than accrued interest if the contract is broken before the term ends.
- After the guarantee term, the renewal rate is set unilaterally by the insurer and can fall well below the original rate.
- Missing the short maturity window can auto-renew the contract into a new multi-year term with a fresh surrender schedule.
This page explains how the income type works, which does not change from week to week, so it deliberately carries no rate and no price. The links below go to the pages that hold the current figures for it, each one stamped with the date the data was pulled. Read the mechanism here first: the numbers there are far easier to judge once you know what they are measuring.
See the live numbers: Cash Rates.
Frequently asked
What is a fixed annuity?
How is a MYGA different from a CD?
What is a market value adjustment?
How are withdrawals taxed?
What happens at the end of the guarantee term?
Written for information only. Nothing here is investment, tax or legal advice, and no page on this site recommends buying or selling anything. Rules and tax treatment change; verify anything that matters with a professional who knows your situation. This explainer was drafted by a language model (claude-sonnet-5) from an editor-approved outline and fact sheet, under the rules set out in our editorial policy, and carries no market figures. Last updated Jul 29, 2026.