Annuities Demystified: A Texas Consumer's Guide to Lifetime Income

The four annuity types in plain English

Fixed annuity (MYGA): bond-like, locked rate, 3–10 year term, surrender charges. Job: beat a CD on an after-tax basis with a guaranteed rate.

Single Premium Immediate Annuity (SPIA): turn $200,000 into a check for the rest of your life starting next month. Job: replace a missing pension or fund a known recurring expense. See IRS Publication 575 for the federal tax treatment of annuity payments.

Deferred Income Annuity (DIA, sometimes called 'longevity insurance'): pay a lump sum now, income starts at age 75, 80, or 85. Job: cheap hedge against living past 90 — the income payout per dollar of premium is huge because the carrier expects you may not collect.

Fixed Indexed Annuity (FIA): credited interest tied to a market index (S&P 500, MSCI EAFE) with a cap (8–10% in 2026) and 0% floor. Job: principal protection with upside; only worth the complexity if paired with a Guaranteed Lifetime Withdrawal Benefit (GLWB) rider for future income.

Variable Annuity (VA): cash value invested in subaccounts that behave like mutual funds. Modern VAs are mostly used for tax-deferred growth with a death benefit guarantee. Job: niche — usually for high-income earners who have maxed every other tax-advantaged bucket.

Fixed-rate deferred annuities (MYGAs): 2026 Texas rates and the math

A fixed-rate deferred annuity — a multi-year guaranteed annuity, or MYGA — is the annuity equivalent of a CD: you deposit a lump sum, the carrier credits a guaranteed rate for a set term, and at maturity you withdraw, roll into a new contract with a tax-free 1035 exchange, or annuitize for income.

Mid-2026 rates from A-rated, Texas-licensed carriers run roughly 5.10%–5.85% on 5-year terms. The rate is contractual, not an illustration, and interest compounds tax-deferred at the federal level until you withdraw it.

Run the after-tax comparison, not the headline rate. A 5-year MYGA at 5.50% credited tax-deferred beats a 5-year CD at 4.40% taxed annually for any Texan in the 22%+ federal bracket — usually by 80–140 basis points a year. Texas has no state income tax, so the state-tax advantage treasuries carry elsewhere is a wash here; the only comparison that matters is federal after-tax yield.

Bond funds are a different animal entirely. A 5-year MYGA at 5.50% returns 5.50%, period. A bond fund quoting a 5.10% yield-to-maturity can still lose principal if rates rise, as Texas savers found out in 2022.

What "guaranteed" means on a MYGA in Texas

MYGAs are backed by the issuing carrier's statutory reserves, not the FDIC. The regulatory backstop is the Texas Department of Insurance on the reserve side and the Texas Life and Health Insurance Guaranty Association on the failure side, which covers $250,000 of present value per owner per insurer. Split larger deposits across two or three carriers so every dollar sits inside that limit.

Stick to AM Best A- or better. Carriers below A- have a materially higher historical impairment rate, and the extra 15–25 basis points they pay is not compensation for that risk. Avoid offshore-domiciled issuers and any contract not licensed in Texas.

Surrender charges are the real cost of the guarantee. A typical 5-year MYGA charges 7% in year one, declining roughly a point a year. Most contracts allow penalty-free withdrawal of the credited interest annually, and some allow 10% of the account value — confirm which before signing, because they are not the same thing.

Withdrawals before age 59½ also trigger a 10% federal penalty on the gain, on top of ordinary income tax. A MYGA is money you have decided not to touch for the length of the term.

How to ladder MYGAs instead of chasing one rate

Splitting a deposit across 3-, 5-, and 7-year contracts does for fixed rates what term laddering does for coverage: something matures every couple of years, so you are never forced to reinvest the whole balance into whatever rates happen to be that month.

A worked example on $300,000: $100,000 into a 3-year at 5.20%, $100,000 into a 5-year at 5.55%, $100,000 into a 7-year at 5.35%. Blended yield is about 5.37%, the first rung frees up in three years, and you keep partial liquidity without giving up the long-term rate.

At each maturity you have three real choices — roll into a new MYGA via 1035, take the cash, or convert to a SPIA or DIA for lifetime income using the income-floor logic in the next section. The rollover is the reason to keep the money inside an annuity chassis rather than a CD: the gain stays deferred instead of being taxed at each maturity.

The income-floor strategy most Texas retirees should consider

Most Texas retirees walk into retirement with Social Security, maybe a small pension, and a 401(k) or IRA. Social Security is roughly $30,000–$45,000 per year for a typical earner. Living expenses for a Houston, Dallas, or Austin retiree often run $70,000–$95,000 per year.

The classic 'income-floor' approach uses a SPIA or a MYGA-with-income-rider to fill the gap between Social Security and essential expenses (mortgage or rent, food, utilities, insurance, baseline healthcare). The remainder of the portfolio then stays invested for growth and discretionary spending, without the daily anxiety of a market-driven income source.

This is not novel financial theory — it is the central insight of every major retirement-income academic (Pfau, Milevsky, Finke). It works because it splits the portfolio into two jobs: floor (annuity) and upside (invested assets).

Where Fixed Indexed Annuities go wrong

FIAs are the most over-sold annuity product in Texas. The pitch is 'market upside without market risk.' The reality is that caps compress over time, participation rates fall in renewal years, and the surrender schedule often runs 10–14 years.

An FIA bought purely for accumulation rarely beats a 60/40 portfolio over 10 years on an after-fee basis. An FIA paired with a properly-priced GLWB income rider can be a reasonable income-floor tool, but only if you compare the GLWB payout per premium dollar to an equivalent SPIA — usually the SPIA wins on raw income per dollar, while the FIA-with-GLWB wins on legacy potential.

Ask the agent for the FIA's historical actual credited rates over the last 10 years, not the hypothetical illustration. Then ask for the same illustration assuming a 0% credit every year. If the policy still meets your need on the worst-case scenario, it is a legitimate fit. If not, it is a sales illustration.

Texas-specific protections

Texas Insurance Code §1108 makes life insurance and annuity values exempt from most creditors — a meaningful planning tool for self-employed Texans, physicians, and anyone in a liability-prone profession.

Texas Life and Health Insurance Guaranty Association covers $250,000 present value per owner per insurer on annuity contracts. Split larger sums across carriers.

Texas has no state income tax, so annuity gains are taxed only federally — no state offset to worry about in withdrawal planning.

Commission and how it affects the recommendation

Fixed Indexed Annuity commissions in Texas typically run 5–8% of the premium, paid up-front. Single Premium Immediate Annuity commissions are 1–3%. MYGA commissions are 1–2%. Variable Annuity commissions vary widely depending on share class.

Higher commissions almost always mean longer surrender schedules, because the carrier needs to recoup the up-front payout. A 10-year surrender schedule is the carrier protecting itself, not you.

Ask any agent: 'What is the commission on this product, and what is the surrender period?' An agent unwilling to answer is a signal to walk away.