Can You Lose Money in an Annuity?

The short answer

Whether your annuity can lose value comes down entirely to which of the six main categories it falls into. Two of them carry real market risk. Four of them are structured so a market decline cannot reduce your principal, though fees and early withdrawals can still cost you money in other ways.

Variable annuities carry real market risk

A variable annuity puts your deposit into investment sub-accounts that behave much like mutual funds inside a 401(k). Because that money sits directly in the market, its value rises and falls with the funds you picked, and a bad stretch for stocks can leave you with less than you put in.

Variable contracts also tend to carry more layers of cost than other annuity types, including:

• Sub-account management fees, similar to a fund's expense ratio
• A mortality and expense (M&E) charge
• Extra charges for any rider you add, commonly a lifetime income or death benefit guarantee

Those fees keep charging whether the market goes up or down, which is part of why a variable annuity's downside can compound faster than the raw market drop alone would suggest.

RILAs can lose money, but within a limit

A registered index-linked annuity, often shortened to RILA, sits between a fixed index annuity and a variable annuity. Like a variable contract, a RILA can lose value in a bad year for its underlying index. Unlike a variable contract, that loss is capped by a floor or a buffer built into the contract.

A buffer absorbs the first slice of a loss, so you only feel what is left after the insurer eats that portion. A floor works differently: it sets a maximum percentage you can lose in a single year, no matter how far the index actually falls. Either way, you know your worst case in advance, even though a RILA can still end a contract year below where it started.

Income annuities: no market loss, but you give up access

A single premium immediate annuity (SPIA) and a qualified longevity annuity contract (QLAC) both work the same basic way: you hand over a lump sum, and the insurer contractually guarantees an income stream for the rest of your life, or for however many years the contract specifies. Once that trade is made, your income cannot shrink because of a market downturn.

The real risk with an income annuity is not market loss, it is liquidity. Once you annuitize, that lump sum is generally gone in exchange for the income stream, so weigh how much of your savings you are comfortable committing before you sign.

Fixed annuities cannot lose value

A fixed annuity pays a set interest rate for a set number of years, usually somewhere between two and ten. That rate does not move with the stock market, so your balance cannot go down from investment performance. Because the structure resembles a bank certificate of deposit, with a fixed term and a fixed rate, people sometimes call these CD-type annuities. Our fixed annuity guide covers how rates, terms and surrender schedules typically work.

Fixed index annuities cannot go below zero

A fixed index annuity credits interest based on the performance of a market index, but your money is never actually invested in that index. Every contract sets a floor, almost always 0%, for what you can earn in any single year. If the index climbs, you are credited a share of the gain, subject to a cap, spread or participation rate. If the index falls, you earn nothing that year, but you also do not lose anything you already had.

Long-term care annuities cannot lose value either

A long-term care annuity is a form of fixed annuity, so it follows the same no-loss structure. The difference is purpose, not risk: instead of being built primarily to accumulate interest, an LTC annuity is designed to stretch your money further if you need to pay for long-term care down the road, often through a multiple of your original deposit that is available tax-free for qualifying care expenses.

Fees and surrender charges are a separate kind of risk

Not being able to lose money to the market does not mean an annuity is free of cost. Two other things can reduce what you actually keep.

Surrender charges. Most annuities carry a schedule of declining charges, sometimes called a contingent deferred sales charge, that applies if you withdraw more than your penalty-free amount or cash out the whole contract before the surrender period ends. It works much like the back-end charge on a Class B mutual fund share, just built into an insurance contract instead. Our surrender charges guide breaks down how a typical schedule declines over time.

Rider fees. An optional income rider on a fixed index annuity can pay a meaningfully higher guaranteed lifetime income than annuitizing the base contract, with more flexibility besides. That benefit usually comes with an annual fee taken from your account value. In a year when the index credits nothing, that fee still applies, so your account value can dip even though the market did not technically "lose" you anything.

Risk is only one part of the decision. Our guide on whether an annuity is right for you walks through when one fits and when it does not.