What Is an Annuity, and How Much Does It Pay? A 2026 Guide With a Payout Estimator

An annuity is a contract with an insurance company: you pay a lump sum or a series of payments, and the insurer agrees to make periodic payments to you, either starting soon or years later. The simplest kind, an immediate life annuity, turns a lump sum into income for as long as you live. On the interest rates and mortality table the IRS sets for pension plans in 2026, $100,000 at age 65 works out to about $719 a month for life; real insurer quotes will differ. Below: the four main types and who regulates each, the costs, the tax rules, how much protection you have if the insurer fails, the pension lump-sum question, and an estimator for your own numbers.

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The Short Answer

• Immediate annuity: one payment now, income that typically starts within a year. Deferred annuity: money grows first, income later.
• Four main deferred types: fixed, fixed indexed, registered index-linked (RILA) and variable. Only RILAs and variable annuities are securities registered with the SEC; all are regulated by state insurance departments.
• Costs to know: surrender charges that usually last six to eight years or longer, and on variable annuities a mortality and expense charge "typically in the range of 1.25% per year" (SEC), plus fund and rider fees.
• Taxes: growth is tax-deferred; withdrawals from a deferred annuity are taxed earnings first, with a 10% additional tax before 59½ in most cases.
• Protection: if the insurer fails, state guaranty associations cover annuity benefits up to $250,000 in present value in most states.

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The Main Types, and Who Regulates Them

Source: SEC Investor.gov, "Annuities" and glossary entries. FINRA regulates the brokers who sell variable annuities and RILAs.

Any guarantee is only as good as the insurer: the SEC notes that an insurer's obligations "are subject to its financial strength and claims-paying ability." For the general trade-offs of owning one, see our pros and cons of annuities.

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How Much Does an Annuity Pay?

An immediate life annuity's payout depends on three things: your age (older buyers have fewer expected years, so get more per month), interest rates (higher rates mean more income), and whether payments continue to a spouse. To give a neutral benchmark, we price it the way pension plans value lifetime payments for lump sums: the IRS 2026 applicable mortality table and the August 2026 minimum present value segment rates of 4.65%, 5.75% and 6.73%.

Hypothetical single-life estimates, monthly payments for life with no inflation adjustment or guaranteed period, on IRS Notice 2025-40 mortality and Notice 2026-57 rates. Our arithmetic. Not insurer quotes.

Covering a spouse lowers the payment. For a 65-year-old buyer with a 65-year-old spouse, the same $100,000 gives about $634 a month if the full amount continues to the survivor, or $674 if the survivor gets half. Rates matter as well: on a flat 4% rate, $100,000 at 65 would pay about $609 a month; at 6%, about $728.

Insurers price with their own interest rates, costs and profit, and quotes vary between companies, so compare several before you buy. Adding an inflation adjustment or a guaranteed payment period lowers the starting payment.

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Annuity Payout Estimator

Enter the amount, your age and the payout option. By default the estimator uses the IRS pension rates for August 2026; switch to your own rate to see how sensitive income is to interest rates.

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Costs: Surrender Charges and Fees

• Surrender charges. Withdraw more than the contract allows in the early years and you pay a charge. For variable annuities the SEC says the period is "typically within six to eight years, but sometimes as long as ten years", with an example of 7% in the first year falling by one point a year. For indexed annuities, six to ten years or longer.
• Mortality and expense charge. On variable annuities, "typically in the range of 1.25% per year" of the account value, on top of the underlying funds' expenses.
• Riders. Optional living and death benefits, or cost-of-living increases on income annuities, carry additional fees or lower the payout.
• Free look. State law gives you a set period, usually 10 to 30 days after you receive the contract, to cancel.

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How Annuities Are Taxed

• Tax deferral. No tax on interest or gains until money comes out.
• Withdrawals from a deferred annuity before income starts are treated as earnings first, so they are fully taxable until all the gain has come out (IRC section 72(e)).
• 10% additional tax on the taxable part of withdrawals before 59½ (section 72(q)), with exceptions including death, disability, a series of substantially equal payments, and immediate annuities.
• Income payments from an annuity you bought with after-tax money are partly a tax-free return of what you paid. The IRS "exclusion ratio" divides your investment by the expected return; IRS Publication 939's life expectancy multiple at 65 is 20.0. Once you have recovered your cost, payments are fully taxable.
• Net investment income tax: distributions from a nonqualified annuity count as investment income for the 3.8% tax above its income thresholds.
• 1035 exchange. You can swap one annuity for another, or for a qualified long-term care contract, without tax. A new contract usually starts a new surrender period.
• Inside an IRA or 401(k), the account's own rules apply, and the payments are taxed like other distributions from it.

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What If the Insurer Fails?

Annuities are not FDIC-insured. If an insurer becomes insolvent, the life and health insurance guaranty association of the state where the owner lives steps in. According to the national association of these funds (NOLHGA), coverage in most states is $250,000 in present value of annuity benefits; above that, the annuity is covered in proportion, so a contract worth $300,000 would be 83.3% covered. Indexed annuities have special limits on index-linked value not yet credited. Spreading large purchases across insurers keeps each one under the limit.

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Pension Lump Sum or Monthly Annuity?

If your employer pension offers a lump sum instead of monthly payments, the plan must calculate it using the same IRS mortality table and segment rates used in the estimator, under section 417(e). On the August 2026 rates, a $2,000-a-month life pension starting at 65 is worth about $278,000 by our arithmetic; your plan's figure depends on the month its rates are fixed and its own terms. Because higher interest rates mean a smaller lump sum, the timing of your election matters.

Taking the monthly pension keeps the longevity insurance and, in single-employer plans, the backing of the PBGC, whose maximum guarantee in 2026 for a 65-year-old is $7,789.77 a month for a straight life annuity. Taking the lump sum gives flexibility and something to leave to heirs, but you take on the investment and longevity risk yourself.

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Before You Buy: A Checklist

1. Know which type it is and whether it is registered with the SEC.
2. Read the surrender schedule and every fee, including riders.
3. Check the insurer's financial strength and your state's guaranty limit.
4. Get quotes from several insurers for the same contract.
5. Ask how the seller is paid; surrender charges often fund the commission.
6. Use the free-look period to read the contract.

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Sources & Methodology

• SEC Investor.gov, Annuities and Variable Annuities: What You Should Know: types, regulators, surrender charges, M&E charge, free look.
• FINRA investor insights on annuities, immediate annuities and indexed annuities.
• IRC sections 72, 417 and 1035 (govinfo); Treas. Reg. 1.417(e)-1 (eCFR).
• IRS Publication 939 and Publication 575: annuity taxation.
• IRS Notice 2025-40 (2026 mortality tables) and Notice 2026-57 (August 2026 segment rates).
• NOLHGA: guaranty association coverage; PBGC: 2026 maximum guarantee.

Method notes. Payout estimates are the present value of level monthly payments for life, paid at the end of each month, using the IRS section 417(e)(3) unisex mortality table for 2026 and the August 2026 segment rates (first segment for payments in the first 5 years, second for years 6 to 20, third after that). Survival within a year assumes deaths spread evenly. They are a fair-value benchmark, not prices any insurer offers.

This article is educational and is not investment, tax or insurance advice. Wealthy Pot does not sell annuities and is not paid by any insurer. Figures were checked against the SEC, FINRA, the IRS, the U.S. Code, NOLHGA and PBGC on 2026-10-12. The payout figures are hypothetical estimates; get written quotes and consider an independent fee-only adviser before buying.

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FAQ

How much does a $100,000 annuity pay per month?
On 2026 IRS pension rates, about $719 a month for life at 65, $810 at 70 and $951 at 75, for a single life with no inflation adjustment. Insurer quotes will differ.

Is an annuity a good idea?
It depends on whether you need guaranteed lifetime income and can accept giving up access to the money. Our pros and cons guide walks through who annuities tend to fit.

Can you lose money in an annuity?
In variable annuities and RILAs, yes. Fixed and fixed indexed annuities guarantee you will not lose money to market losses, but surrender charges can still reduce what you get back if you leave early.

Are annuities insured?
Not by the FDIC. State guaranty associations cover annuity benefits up to $250,000 in present value in most states.

How are annuity payments taxed?
If you bought the annuity with after-tax money, part of each payment is a tax-free return of your cost until it is recovered; the rest is ordinary income. Annuities in IRAs and 401(k)s are taxed like other distributions from those accounts.

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"What Is an Annuity, and How Much Does It Pay? A 2026 Guide With a Payout Estimator." Wealthy Pot, 2026. https://wealthypot.com/what-is-an-annuity/