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Annuity sales are soaring, because retirees and pre-retirees want more guaranteed income and principal protection.

Annuity sales increased to $223 billion in the first half of 2025, 3% higher than in the first half of 2024. Quarterly annuity sales hit their highest level ever in the second quarter of 2025, a total of more than $116 billion and a 5% increase from a year earlier.

Annuities set quarterly and year-to-date sales records for three consecutive years, according to LIMRA, the Life Insurance Marketing and Research Association.

I recommend annuities, when people buy annuities that are right for them.

But I suspect many people do not fully understand the annuities they buy and do not buy annuities that are appropriate for them.

Most people think of annuities as one generic vehicle. That is a big mistake.

There are different types of annuities. It’s important to know the fundamental aspects of each type of annuity to assess which might best fit into your financial plans and help meet your goals.

The best-selling annuities recently are fixed-rate deferred annuities, also known as multi-year guaranteed annuities or MYGAs.

These are traditional, basic annuities. The owner deposits an amount with an insurer. The insurer guarantees the account will be credited with a certain rate of interest for a fixed period of time. After that period, the insurer resets the guaranteed interest rate for the next period, based on market interest rates.

MYGAs are like certificates of deposit in a tax-deferred insurance wrapper, though MYGAs often offer higher interest rates than CDs when the duration is two years or longer.

The value of the account principal is guaranteed not to decline, regardless of what interest rates do. MYGAs are a way to earn an interest rate similar that of intermediate-term bonds without the risk that the principal value will decline if interest rates rise.

MYGAs generally are for conservative investors who want a vehicle that protects their principal and earns steady income that usually is higher than money market funds pay. A pre-retiree might purchase a MYGA instead of bonds for the safe part of a portfolio, while a retiree might buy a MYGA with the intention of spending the income.

Usually, a MYGA owner can withdraw the interest as it is earned but faces restrictions on the ability to withdraw principal before the MYGA’s term expires.

While MYGA sales increased in 2025, sales of variable annuities declined.

In a variable annuity, the account owner chooses how the account is invested among funds offered by the insurer. The amount credited to the account is the return of the funds, minus fees and expenses.

A variable annuity account can decline or increase, depending on the returns of the funds. A variable annuity is similar to a traditional IRA, though with no contribution limit, fewer investment choices, and higher fees and expenses.

Various riders and other provisions often are offered with variable annuities to make them more attractive and limit some of the risks.

Registered index-linked annuities had the highest sales increase, rising 20% above 2024’s levels in both the first half and second quarter of 2025.

A RILA protects most of the owner’s principal while paying interest that is tied to a market index or combination of market indexes. Often, all or most of the accumulated returns are protected from subsequent market declines.

Because the interest income is tied to one or more market indexes, the interest credited to the account can exceed that of MYGAs. But the interest also can be less than that of a MYGA when the indexes do poorly.

In addition, the interest is based on the return of the index but is not the full return of the index. Formulas determine the amount of interest credited to the annuity account and limit the amount of interest that will be earned each year, regardless of how well an index performs. The formulas can be complicated.

The key thing to know about RILAs is that a salesperson often shows data and charts indicating the interest that would have been credited to the annuity over previous periods, based on the past returns of the indexes. But there is no guarantee the same amount of interest, or any, will be earned in future periods.

Fixed index annuities are similar to RILAs. FIAs were created before RILAs but gradually fell behind RILAs in sales. FIA sales declined from 2024 to 2025.

FIAs generally guarantee full protection of principal and sometimes a minimum rate of return.

FIAs pay interest based on the return of an index or group of indexes but generally offer less growth potential than RILAs. FIAs tend to have lower maximum annual interest earnings and reduce the extent to which the account participates in the returns of the indexes.

RILAs tend to participate in the markets to an extent that they are considered securities and must be registered with securities regulators. FIAs are insurance products that are not considered securities.

Some annuities are especially valuable for retirees seeking guaranteed income.

The single-premium immediate annuity pays guaranteed income to its owner for life or a period of years, whichever the owner selected. The income also can be paid over the joint life of a married couple.

The amount of income is fixed. When a lifetime payout is selected, the income will be paid for as long as the annuity owner lives.

Additional distributions are not allowed in the traditional SPIA. Most SPIAs now offer an option to withdraw part of the initial principal when the owner wants, but that is at the cost of lower guaranteed lifetime income payments.

The terms of a SPIA can be customized to meet the needs or goals of the owner, but the modifications usually reduce the amount of income paid.

In a deferred income annuity, the annuity owner deposits money with an insurer, and the insurer promises to begin paying a stream of lifetime income beginning at a point in the future selected by the owner. The payments can begin as soon as two years after the annuity is purchased.

Second quarter 2025 sales of SPIAs were equal to the same period in 2024, while sales in the first half of 2025 were 8% lower than in the first half of 2024. DIA sales in both periods of 2025 were lower than in the same periods in 2024.

I suspect the weaker sales of SPIAs and DIAs in 2025 were a reaction to lower interest rates. People probably are waiting for interest rates to increase a bit before they lock in lifetime income streams.

Both SPIAs and DIAs are good choices for retirees and near-retirees who want a stream of guaranteed lifetime income. They will know that income will be deposited in their accounts regardless of how long they live or what happens in the markets.

Research indicates that retirees who received guaranteed lifetime income, such as through SPIAs or pensions, tend to spend significantly more than other retirees each year. That is likely because the retirees receiving guaranteed income are not worried about spending down their principal or having a large part of it disappear in a market downturn.

One popular variation now for those seeking retirement income is to buy a RILA with an income rider. The attraction of the rider is that when it is time to receive lifetime income the annuity owner can switch on the rider and elect to receive a stream of guaranteed lifetime income.

A minimum amount of guaranteed lifetime income usually is guaranteed at the time the annuity is purchased. The income can increase if the indexes or investments tied to the annuity have good returns over the years.

Annuities can help achieve several goals in financial and retirement plans. But it is important to know the different types of annuities and the advantages and disadvantages of each.