Can I Lose Money in an Annuity?

"Annuity" is a category, not a single product. Two retirees can each own something called an annuity and have completely different exposure to market losses. Understanding which structure you are looking at is the first step toward an informed decision.

Unlike an investment whose value may fall with the market, a properly structured fixed or fixed indexed annuity can provide contractual protection from market losses, subject to the terms of the contract and the claims-paying ability of the issuing insurance company.

At the same time, principal protection from market losses does not mean that nothing can ever reduce the amount of money you receive from an annuity. Surrender charges, withdrawals, contract adjustments, fees or optional features, liquidity limits, inflation and the financial strength of the issuing insurance company can all affect your outcome.

Fixed Annuities

A fixed annuity credits interest at a rate declared by the insurance company. Because that rate is not tied to the performance of an index or an investment portfolio, a market downturn does not directly reduce the contract value.

The trade-off is that the growth is defined by the declared rate. If markets rise sharply, a fixed annuity is not designed to capture that increase. And the guarantee itself depends on the claims-paying ability of the issuing insurance company.

Fixed Indexed Annuities

A fixed indexed annuity credits interest based on the performance of an external index, such as a broad stock market index. The contract does not invest in the index directly. Instead, the insurance company applies a crediting formula that typically includes a cap, a participation rate or a spread, which limits how much of the index gain is credited.

In exchange for that limited upside, these contracts are generally designed with a floor so that a decline in the index does not reduce the principal because of market performance.

A fixed indexed annuity is not a direct investment in the market index. The index is only used as a reference to calculate interest, so negative index performance generally does not create a negative index-linked interest credit. Zero interest for a period means the contract did not grow from index performance during that period — it is different from a contract whose value falls with the market. It is still important to read how the contract treats fees, riders and withdrawals, because those can reduce value regardless of index performance.

Registered Index-Linked Annuities (RILAs)

A registered index-linked annuity sits between a fixed indexed annuity and a variable annuity. It offers more upside potential than a typical fixed indexed annuity, but it does so by accepting a defined amount of downside.

RILAs generally use a buffer or a floor. A buffer absorbs a stated percentage of an index decline, and losses beyond that percentage reduce the contract value. A floor limits losses to a stated maximum. In both cases, market declines can reduce value. RILAs are registered products, so they are accompanied by a prospectus that describes the terms, limitations and risks.

Variable Annuities

A variable annuity allocates premium to investment subaccounts chosen by the contract owner. The contract value rises and falls with those investments, which means market losses can and do reduce value.

Some variable annuities offer optional guarantees, such as living benefit or death benefit riders, that are designed to provide certain protections for an additional cost. Those guarantees are contractual promises from the insurance company and typically apply to a specific benefit, not to the underlying investment value. Variable annuities are registered products and are sold with a prospectus.

Reducing one risk usually means accepting more of another. A contract built to limit market risk may accept more liquidity constraints or more limited growth. A contract built for market participation accepts more market risk. Good retirement decisions come from understanding those trade-offs, not from labeling a product safe or risky.

The Bottom Line

So, can you lose money in an annuity? Yes, with certain types—but one of the distinguishing features of fixed and fixed indexed annuities is their ability to provide contractual protection from market losses.

That doesn't mean every annuity is the same or that annuities are free of risk. RILAs can expose consumers to a defined degree of market loss, while variable annuities can rise or fall based on investment performance. Surrender charges, withdrawals, fees, contract provisions, liquidity and the financial strength of the issuing insurance company can also affect your outcome.

The key isn't simply asking whether an annuity is "safe." It's understanding which risks you're trying to protect against, which risks you're willing to accept, and whether the guarantees and trade-offs of a particular annuity align with your retirement goals. That's why there is no one-size-fits-all annuity.

Important Information: This article is provided for educational purposes only and is not tax, legal or investment advice, nor a recommendation of any specific product, insurance company or strategy. Annuities are contracts issued by insurance companies, and their features, crediting methods, limitations, charges and availability vary by contract and by state. Guarantees are subject to the claims-paying ability of the issuing insurance company. Variable annuities and registered index-linked annuities are registered products offered by prospectus; investors should read the prospectus carefully before investing. Withdrawals may be subject to surrender charges, contract adjustments and income taxes, and withdrawals before age 59½ may be subject to an additional 10% federal tax. Consult a licensed insurance professional and your tax or legal advisor about your individual circumstances.