Turning savings into income on a schedule.
Immediate and deferred annuities, fixed, fixed indexed and variable, explained before anyone recommends one: how each grows, what it charges and what it costs to take money out early.
Quick answer An annuity is a contract with an insurance company that promises to pay you income regularly for a period you choose, which can be the rest of your life.
- An immediate annuity starts paying soon after you buy it, while a deferred annuity builds value first and pays income or withdrawals later.
- A fixed indexed annuity earns interest based on changes in a market index, limited by caps, participation rates or spreads, and the interest credited can't be less than zero.
- Deferred annuity earnings are tax deferred, not tax free: ordinary income tax is due as money comes out, and withdrawals before age 59½ may add a 10% federal tax penalty.
- An annuity surrender charge is a percentage of what you withdraw from a deferred annuity during a set number of years, and it usually shrinks each year.
- Under NAIC's best interest standard, adopted in California and most states, an annuity recommendation must put the buyer's interest ahead of the seller's.
By Sam Alishahi · CA Insurance License #4348151 · Reviewed November 2026 · How this page is researched
A contract that pays you income
An annuity is a contract with an insurance company that promises to pay you income regularly for a period you choose, which can be the rest of your life. An immediate annuity starts paying soon after you buy it. A deferred annuity builds value first, and you take income or withdrawals later. Earnings in a deferred annuity are tax deferred, not tax free: ordinary income tax is due as money comes out, and withdrawals before age 59½ may add a 10% federal tax penalty.
Whoever recommends an annuity has to learn your age, income, assets, debts, tax status, risk tolerance, goals and how you plan to use it. Most states, California among them, have adopted NAIC's best interest standard for annuity sales, which says the recommendation must put your interest ahead of the seller's and the reasons must be explained and documented. Expect those questions from me. The answers decide whether an annuity fits at all.
- FixedEarns a rate the company sets for a period, never below the minimum in the contract.
- Fixed indexedInterest tied to a market index through caps, participation rates or spreads, and never less than zero.
- VariableValue follows subaccounts you choose, can rise or fall, and is sold as a security.
- ImmediateA lump sum turned into income that begins right away.
What underwriters will ask
Having these ready means I can go to market on the first call. The quote form asks for the same things, and anything you don’t know yet can wait.
- Age: yours, and your spouse's if income should continue for two lives.
- Goal: income now, income later, or growth with a guaranteed minimum.
- Amount and source: how much, and where it comes from, such as savings or a retirement account.
- Access: money you might need over the next several years, which affects surrender charges.
- Risk tolerance: whether you could accept any loss of value.
- Existing annuities: contracts you already own, with their surrender schedules.
Buying at 60 or older: the 30-day return window
In California, Insurance Code section 10127.10 covers individual annuities delivered to someone 60 or older on the date of purchase. The front of the policy jacket or the cover page must say you may return the contract to the insurer or the agent who sold it for cancellation, within a period the insurer states that cannot be less than 30 days. What comes back depends on the product:
- Fixed and other nonvariable annuities: the notice says a return within 30 days of receipt brings a full refund and warns that later cancellation may bring a substantial penalty.
- Variable annuities, no direction to invest: premium goes only into fixed-income investments and money-market funds during the 30 days. A return voids the contract, and all premium and any policy fee are refunded within 30 days of the insurer being notified.
- Variable annuities, money directed into the underlying funds: the refund is the account value plus any policy fee, which the notice warns could be less than the premium you paid.
- Immediate annuities: the notice adds that after 30 days you may get your purchase payment back only through annuity payments, if at all.
These notices must be in 12-point bold print with one inch of space on all sides. Section 10127.13 adds a bold 12-point notice telling you where to find any surrender or withdrawal charge, how long it applies, and related penalties. Write down the day the contract arrives. Rules vary by state; for the life side, see California free look and lapse notice rules.
The 10% additional tax and its exceptions
Under 26 U.S.C. 72(q), your federal tax goes up by 10% of the part of an amount received under an annuity contract that is includible in gross income, unless an exception applies. The exceptions in 72(q)(2) include distributions:
- made on or after the date you reach age 59½;
- made on or after the holder's death (or, when the holder is not an individual, the primary annuitant's death);
- attributable to your becoming disabled, as defined in section 72(m)(7);
- that are part of a series of substantially equal periodic payments, made at least annually, for your life or life expectancy, or the joint lives or life expectancies of you and your designated beneficiary;
- under an immediate annuity contract, as defined in section 72(u)(4);
- allocable to investment in the contract before August 14, 1982.
Other exceptions cover section 72(t) distributions, certain retirement-plan contracts, qualified funding assets and some employer-purchased annuities.
The equal-payment exception has a recapture rule. Under 72(q)(3), if the payments are modified (other than because of death or disability) before age 59½, or before the end of the five-year period beginning with the first payment, your tax for that year goes up by the tax the exception avoided, plus interest. A section 1035 exchange is not a modification if the combined payments still meet the equal-payment test. Ask a tax professional how this applies to you.
The guarantee association's limits, as written
California Insurance Code section 1067.02 caps what the state's life and health guarantee association may become liable for if a member insurer becomes impaired or insolvent. For annuities, benefits may in no event exceed the lesser of:
- 80 percent of the contractual obligations for each policy or contract; or
- $250,000 in the present value of annuity benefits, including net cash surrender and net cash withdrawal values, with respect to any one life, regardless of the number of contracts.
Each payee of a structured settlement annuity has a separate $250,000 present-value cap, and the association is not obligated to cover more than an aggregate of $300,000 in benefits with respect to any one life across the life insurance and annuity caps. The statute excludes any portion not guaranteed by the insurer or under which the owner bears the risk, unallocated annuity contracts, and certain charitable annuities.
Coverage depends on residency: California-resident owners and certificate holders, plus their beneficiaries, assignees and payees. Nonresidents qualify only under narrow conditions in the statute. Limits vary by state.
These are statutory caps, subject to the statute's conditions, not a promise of payment; compare them with the amount you are placing.
Annuities, answered
What is the difference between fixed, fixed indexed and variable annuities?
A fixed annuity earns a rate the company sets, with a guaranteed minimum. A fixed indexed annuity earns interest based on changes in a market index, limited by caps, participation rates or spreads, and the interest credited can't be less than zero. A variable annuity's value depends on the subaccounts you choose and can go down as well as up.
What is a surrender charge?
A charge for taking money out of a deferred annuity during a set number of years. It's a percentage of what you withdraw and usually shrinks each year until the period ends. Many annuities let you take a small amount each year, often up to 10%, without it.
How are annuities taxed?
Earnings are tax deferred while they stay in the annuity, then taxed as ordinary income when you withdraw them or receive payments. Withdrawals before age 59½ may also carry a 10% federal tax penalty, and survivors typically owe income tax on a death benefit. Ask a tax professional about your situation.
Who can sell a variable annuity?
Anyone selling an annuity needs a state insurance license. A variable annuity is also a security, so the seller must be registered with FINRA as a representative of a broker-dealer, and some states also require a securities license. You should receive a prospectus.
What is the best interest standard for annuities?
It comes from NAIC's Suitability in Annuity Transactions Model Regulation, revised in 2020. A recommendation must be in your best interest and can't put the seller's or the company's financial interest ahead of yours. The seller must disclose their role and compensation, explain the basis for the recommendation and document it in writing. As of August 2025, 49 jurisdictions, including California, had adopted the revision.
Can I cancel an annuity after I buy it?
Most states give you a free look period, usually 10 to 30 days after you receive the contract. Depending on the state, you get back either everything you paid or the current account value. The period should be stated prominently in the contract.
Is my annuity protected if the insurance company fails?
Annuity guarantees depend on the company's financial strength. In California, owners of annuities from insurers that hold a California license may be partly protected by the California Life and Health Insurance Guarantee Association, within limits set by law. In California, recommending an unnecessary replacement annuity to someone 65 or older is also prohibited.
Does California's annuity best-interest rule apply to an annuity in my 401(k)?
No, if the contract funds an employer-established 401(k), 403(b) or similar plan, or an ERISA-covered plan, under Insurance Code section 10509.9202, which also excludes government, church and 457 plans.
Do you offer annuities outside California?
Yes. Clients across the country send the same quote form. Sam Alishahi is licensed in all 50 states and Washington, DC and places policies there directly. The shopping across carriers works the same way. Rules, minimums and markets differ by state — see insurance requirements by state.
Official sources
- NAIC: Buyer's Guide for Deferred Annuities
- NAIC: Annuity Suitability Best Interest Model Regulation (#275) brief
- California Department of Insurance: Life Insurance and Annuities guide (annuity types, suitability, guarantee association)
- California Department of Insurance: Life Insurance and Annuities brochure (variable annuities and FINRA)
- California Insurance Code 10127.10 (senior return window and notices)
- California Insurance Code 10127.13 (surrender charge notice)
- California Insurance Code 10509.9204 (best interest obligations)
- California Insurance Code 10509.9210 (applies to sales on or after January 1, 2025)
- California Insurance Code 10509.9202 (contracts and plans excluded)
- 26 U.S. Code 72 (annuities; 72(q) additional tax), Cornell LII
- California Insurance Code 1067.02 (guarantee association coverage limits)
- FINRA: Annuities
- FINRA Rule 2330: Members' Responsibilities Regarding Deferred Variable Annuities
- SEC: Variable Annuities: What You Should Know
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Alishahi Insurance · Saman Alishahi, independent insurance broker, California License #4348151. General information, not a quote or a promise of coverage; coverage depends on underwriting and the terms, conditions and exclusions of the policy actually issued.
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