Can You Lose Money in an Annuity?
It’s one of the most common questions people ask when considering an annuity: Can I lose money?
The answer depends on the type of annuity you own and how the contract is structured. Some annuities are designed to protect principal from market losses, while others may have investment-related risk. Withdrawals, surrender charges, and other contract provisions can also affect the amount you receive.
That’s why understanding what you own—and what protections it provides—matters.
Not All Annuities Work the Same Way
Annuities come in several forms, and the level of risk can vary depending on the type of contract. Understanding those differences is an important part of determining whether an annuity fits your financial goals.
Fixed Annuities
Fixed annuities generally provide a guaranteed rate of interest for a specified period and are not directly exposed to stock market losses. Guarantees are backed by the claims-paying ability of the issuing insurance company and are subject to the terms of the contract.
Fixed Indexed Annuities
Fixed indexed annuities credit interest based in part on the performance of a market index, but your money is not invested directly in that index. They are generally designed to protect principal from direct market losses, while features such as caps, participation rates, and spreads can affect how much interest is credited.
Variable Annuities
Variable annuities are different. Their value can rise or fall based on the performance of the investment options selected within the contract. Because of that market exposure, a variable annuity can lose value.
So, Can You Lose Money in an Annuity?
Yes, it is possible—but the circumstances depend on the type of annuity and the terms of the contract.
With a variable annuity, the contract value can decline because of market performance. Fixed and fixed indexed annuities are generally designed to protect principal from direct market losses, but that does not mean there are no circumstances in which you could receive less than you expect.
For example, taking withdrawals during a surrender-charge period, withdrawing more than the contract allows without penalty, or surrendering a contract early can reduce the amount you receive. Certain optional features may also have fees or charges.
That’s why it’s important to look beyond the word “guaranteed” and understand exactly what is guaranteed, for how long, and under what conditions.
Questions Worth Asking
- What type of annuity am I considering?
- How is my principal protected, and what is actually guaranteed?
- Are there surrender charges or limits on withdrawals?
- How does the insurance company determine the interest I may earn?
- What happens if I need access to my money earlier than expected?
The right questions can make a complicated financial product much easier to understand. Before making a decision, take the time to understand the contract, its guarantees, its limitations, and how it fits into your overall retirement strategy.
Want to better understand how an annuity may fit into your retirement strategy? CDA can help you explore the options and understand the differences.
This content is for educational purposes only and is not intended as financial, tax, or legal advice. Annuity guarantees are subject to the terms of the contract and the claims-paying ability of the issuing insurance company.