Best Annuities
Based on In-Depth Reviews

Annuities all follow the basic principle that the purchaser pays now for benefits to be received later. But there are a number of variations on this principle, most of which concern how the annuity is funded and how it pays out. Annuities can be paid for either in a lump sum or through a series of payments over time.

People who have a lot of cash on hand—such as those who’ve cashed out a retirement account, saved diligently for years, received an inheritance, or had some other kind of windfall—may be good candidates for purchasing annuities with a one-and-done payment. Doing so pays off in the long run, since an annuity purchased with a lump sum will cost less in total than the same annuity purchased over time.

If you don’t have a large amount of cash on hand but can make monthly payments, you may be a good candidate for an annuity purchased over time. This makes it possible even for people of more modest means to afford an annuity by spreading out the purchase over a period of years.

Because we favor giving consumers a choice on how to manage their money and fund their retirements, we lean toward companies that give people a choice of how to purchase their annuities.

Annuities are offered by a number of different types of financial institutions, including banks, insurance companies, brokerages, mutual fund companies, and others. There’s a lot more variation in the ways that annuities pay out. On the surface, payout options mirror funding options—that is, they can be done in a lump sum or over time. But payout details are a lot more complicated than that.

A lump sum payout is fairly straightforward, though less common. At a specified time, the annuity company will make a one-time payment to the purchaser. That payment may be defined as a fixed number or it might be variable and dependent on market indexes. If you’re considering this option, however, you should be warned that there may be significant adverse tax consequences to taking an annuity payout this way, since you may be taxed on all the accrued interest and appreciation that comes your way.

The typical annuity pays out over a period of time. Payouts can be a fixed amount each month or quarter or a variable amount that fluctuates based on market conditions. Payouts can also be customized, with different amounts paid out at various points in time.

Another variation on annuity payouts concerns the question of survivorship: what happens to an annuity after the beneficiary dies? Some annuities periodically pay out a fixed sum of money to the beneficiary for the rest of his or her life and then cease with that person’s death. This is obviously beneficial to people who live long lives, but may shortchange people who die relatively young. Some annuities treat a couple as a beneficiary and continue regular payments until both partners are dead. This can be a way of ensuring that a spouse continues to receive benefits, but it comes at a cost of reduced payouts.

Other annuities make a fixed number of payments for a fixed period of time. If the beneficiary dies, the benefits are then paid to a survivor designated by the beneficiary for the rest of the term of the contract. This can be a way of ensuring that your heirs get some regular payments as part of their inheritance.

Still other annuities combine features of life insurance and/or long-term care insurance with an annuity. These annuities pay out over time and then pay a death benefit when the beneficiary dies or pay a long-term care benefit if the beneficiary is disabled.

As with most other consumer and financial products, we favor those that give consumers the most choice and offer the most control over their own assets. Purchasing an annuity is a significant step in your money management plan. But since each person’s situation is different, an annuity should be as customizable as possible to fit your needs. For this reason, we consider purchase and payout features to be an important factor in assessing which annuity company is the best for consumers overall.

Another important factor in assessing different annuities is their cost. This can be tricky, since the cost of an annuity is often expressed as a percentage of the total investment. Usually these figures look like a tiny fraction of what’s invested. This may lead some consumers to conclude that a 0.5% difference in fees isn’t going to make much difference. But when you consider that there may be a decades-long gap between the funding of an annuity and the time when it pays out, those fees add up. Further, they compound in the sense that money taken out of your annuity account to pay fees is not available to earn more interest or otherwise appreciate.

Annuities typically impose an annual administrative fee, a small percentage on the balance of the annuity. Some companies tack on additional fees, such as insurance charges and underwriting fees. Other companies charge a “surrender fee” for cashing out some or all of your annuity before it matures.

It’s important to understand that, unlike checking and savings accounts, annuities are not insured by the FDIC. However, most state insurance commissions provide some degree of a guarantee through the National Organization of Life & Health Guaranty Associations. The amount of coverage provided by these systems varies state by state. For example, New Jersey will cover only $100,000 of annuity funds, while New York will cover $500,000.

Historically, insurance companies don’t fail as often as banks do. And very few people have lost money on an annuity contract because of the insurer’s financial instability.

But of course, there’s no such thing as a 100% safe investment, which is why we consider the financial strength of the companies we look at. Standard & Poor’s, A.M. Best and Moody’s all rate the finances of the companies we consider, but these ratings are not infallible. For example, AIG Insurance Company was rated AAA just before it failed in the crash of 2007. But even then, holders of AIG annuities didn’t lose money because the company’s annuity division was a separate, financially solvent company.

We also consider the reputation of the companies we review by consulting BBB, CFPB, and Trustpilot ratings and looking at the firm’s age. Older doesn’t always mean better, but a firm that has a track record of survival through numerous economic downturns may have management that’s more farsighted than newer businesses. We also tend to favor firms that have numerous and easy ways to get in touch with them.

Since preservation of capital tends to be a key concern of people who buy annuities, and since some states only insure a modest amount of annuity payouts in the event of the collapse of an annuity company, we deem the company's financial strength and reputation to be the most important factor in deciding where to establish an annuity account.