In an annuity contract, the premium is the money you hand over to the insurance company to open the policy. For a fixed annuity or MYGA, this is usually a single deposit paid up front rather than an ongoing bill.
What is a premium?
Outside of annuities, "premium" usually means the recurring bill you pay for car or life insurance. Inside an annuity contract it means something different: the deposit that opens the policy. For most fixed annuities and MYGAs, you fund the contract with one payment at the time you buy it, and that single number becomes the base the carrier credits interest on for the life of the term.
Minimums, maximums and rate tiers
Carriers set a floor on how small that opening deposit can be, and the floor moves depending on the product. It is common to see minimums stretching from a few thousand dollars on one end up to $100,000 on the other, so always check the specific contract you are considering rather than assuming one number applies everywhere.
Many carriers also reward a bigger deposit with a better deal. Cross a set threshold, often $100,000, and you may land in a higher rate tier, sometimes called a premium band, than someone depositing less into the identical product. It pays to ask where your deposit falls before you sign anything, since moving a small amount of extra money in can sometimes bump you into a better rate.
On the other side, carriers also cap how much a single contract can hold. That ceiling commonly sits somewhere between $1 million and $5 million, though the exact figure depends on the carrier and the product, and some buyers split a larger sum across more than one contract or carrier for that reason as well as for added state guaranty association coverage.
How your premium affects taxes
Where your premium comes from changes how the IRS treats your money later. Fund the contract with after-tax savings and you hold a non-qualified annuity, where only the growth is taxed on the way out. Fund it with pre-tax retirement dollars, rolled from an IRA or an old 401(k), and you hold a qualified annuity, where the entire withdrawal counts as taxable income. In a non-qualified contract, your premium amount also becomes your cost basis, the number the carrier and the IRS use to figure out how much of each withdrawal is taxable gain versus a tax-free return of your own money.
Frequently asked questions
What does premium mean on an annuity contract?
It is the deposit you pay the insurance company to buy the contract in the first place, typically a single lump sum for a fixed annuity or MYGA rather than a recurring bill.
How much do I need to open an annuity?
Minimums vary a lot by product and carrier, and can run anywhere from a few thousand dollars up to $100,000 depending on what you buy.
Does a larger deposit get me a better rate?
Often, yes. Many carriers set rate tiers, sometimes called premium bands, where a deposit above a threshold, commonly $100,000, unlocks a higher credited rate than a smaller deposit in the same product.
Written and reviewed by
James Forren Warren
Licensed Retirement Income Strategist · License #20551202
James Forren Warren is a licensed Retirement Income Strategist with Tax Free Wealth Plan. For the past five years he has helped individuals and families turn their savings into retirement income they can count on. He writes and reviews the annuity research on this site and keeps it plain: what a product does, what it costs you, and who it actually fits.
Educational only, not investment, tax or legal advice. Tax Free Wealth Plan LLC is a licensed insurance agency, not a registered investment adviser or broker-dealer. Annuities are not bank deposits, are not FDIC insured and are not guaranteed by any government agency. Guarantees are backed solely by the claims-paying ability of the issuing insurance company. Features, rates and availability vary by state and change over time; the contract and disclosure documents govern.