Episode Show Notes
So I had a conversation with my aunt over the holidays — she lives outside Knoxville, just turned sixty-seven — and she kept saying, ‘I just need to know my money isn’t going to run out.’ And I thought, that’s the thing, right? That’s the actual question driving all of this.
That’s the question. And it’s not unique to her — I hear that framing constantly. Not ‘how do I grow my money’ but ‘how do I make sure it lasts.’ And that’s actually a really important distinction because it changes which products even make sense to look at.
And more people in Tennessee specifically seem to be landing on annuities as at least part of the answer. Why is that happening right now?
A few things converged. Interest rates moved significantly over the last couple of years, which means carriers can offer more competitive crediting rates than they could when rates were near zero. So the product that maybe looked kind of boring five years ago suddenly looks a lot more interesting when the numbers are higher.
Right, because the rate environment affects what the insurance company can actually offer you.
Exactly. And I want to be precise about that — annuities are insurance contracts, not investments. The insurer takes your premium, puts it largely into bonds and fixed-income instruments, and the yield on those assets is a big driver of what they can credit back to you.
Okay, so before we get into the rate mechanics, can we just do a quick plain-English version of what an annuity actually is? Because I think a lot of people in Nashville or Memphis who are hearing this word for the first time — or the hundredth time but still feel fuzzy — need that foundation.
Sure. At its core, it’s a contract between you and an insurance company. You give them money — either all at once or over time — and they either let it grow tax-deferred, or they convert it into an income stream, or both, depending on the type you choose.
And it’s regulated in Tennessee specifically, right? It’s not like a federal thing.
Insurance is state-regulated. So the Tennessee Department of Commerce and Insurance oversees the carriers operating here. That matters because it means there’s a layer of oversight on what products can be sold and how.
Okay. So let’s talk about the types, because I think this is where people get lost. There are basically three main categories of fixed annuities that most Tennessee buyers are looking at.
Right, and I’ll say upfront — there are variable annuities too, but we’re not covering those today. We’re focused on the fixed side, which is where most of the conversations around Tennessee annuity rates are happening.
So walk me through the first one.
The most straightforward is the traditional fixed annuity — often called a MYGA, which stands for Multi-Year Guaranteed Annuity. You put in a lump sum, the carrier declares a specific interest rate, and that rate applies for a set term. Three years, five years, seven years — it varies.
And the rate is written into the contract.
It’s contractual. That’s the key word. It’s not a projection, it’s not an estimate — it’s what the contract says. Now, that rate varies a lot from carrier to carrier, which is why shopping around matters enormously.
That’s actually something my aunt didn’t realize. She assumed rates were kind of standardized, like a government thing.
Super common misconception. There’s no central authority setting Tennessee annuity rates. Every carrier files their own. So two companies could offer five-year MYGAs and the rates could be meaningfully different.
And the deposit amount can matter too, right? Like, someone putting in fifty thousand might get a different rate than someone putting in two hundred thousand?
Some carriers have rate tiers based on premium size, yes. It’s not universal, but it’s common enough that it’s worth asking about when you’re getting quotes.
Okay. So that’s MYGAs. What’s the second type?
Fixed indexed annuities, or FIAs. This is where it gets a little more nuanced. Instead of a flat declared rate, the interest you earn is linked to the performance of an external index — like the S&P five hundred.
Wait — so you’re in the market?
No, and that distinction is really important. Your money is not directly invested in the index. The carrier uses the index as a reference point to calculate how much interest to credit to your account. It’s more like the index is a measuring stick than a vehicle.
Oh, that’s a good way to put it.
And because you’re not directly in the market, if the index has a bad year, you typically receive zero interest for that period rather than a loss. But — and this is the other side of that — when the index does well, you don’t capture all of it. There are caps and participation rates that limit the upside.
So it’s kind of like… you’re agreeing to take the floor but give up some of the ceiling.
That’s actually a really clean way to describe it. You’re trading uncapped upside for downside protection. Whether that trade-off makes sense depends entirely on the person’s situation and what they’re trying to accomplish.
And I know we have to be careful here — past index performance doesn’t tell you what you’ll actually get credited.
Exactly right. The caps and participation rates can change at renewal, and the credited interest in any given period depends on how the index actually performs. You really need to sit down with a licensed agent and go through the contract disclosures, not just a headline number.
Okay, third type — and this one I think is the most different from the other two.
Single premium immediate annuities — SPIAs. Completely different purpose. You hand over a lump sum, and income starts almost immediately. We’re talking within thirty days to a year of purchase.
So this isn’t about accumulation at all. This is for someone who needs income now.
Right. Picture someone who just retired, they’ve got, say, three hundred thousand dollars sitting in savings, and they want a portion of it to just become a monthly check. A SPIA does that. The rate — and really the payout amount — is influenced by your age, the payout option you pick, and what interest rates look like at the time you buy.
And there are different payout options, like you can set it up to cover just yourself or a spouse too.
Life-only, joint life, period-certain — there are several variations. Life-only gives you the highest monthly payment but nothing goes to heirs if you die early. Joint life covers both spouses but the payment is lower. Period-certain guarantees payments for a set number of years regardless of what happens.
And once you lock in a SPIA, that’s pretty much it, right? You can’t undo it.
Generally, yes. That’s one of the biggest considerations. You’re exchanging liquidity for predictability. So it’s not a decision to make lightly, and it’s definitely one where talking to an agent who can model different scenarios is really valuable.
Let’s talk about the CD comparison, because I know this comes up constantly — especially for people in Tennessee who are used to just parking money at a bank.
It’s probably the most common comparison I see people make. And on the surface it makes sense — both can offer a fixed rate for a set term. But there are some real differences that matter.
The big one being taxes.
Tax treatment is huge. With a CD, the interest you earn is taxable in the year you earn it, even if you’re not touching the money. With an annuity, that interest accumulates tax-deferred — you don’t owe federal income tax on the growth until you withdraw.
So for someone in a higher tax bracket who’s just trying to let money grow for several years, that deferral could actually be meaningful.
It compounds over time, literally. The money that would have gone to taxes stays in the account and keeps earning. Now, you will pay taxes eventually — this is deferral, not elimination — but the timing can work in your favor.
What about the safety question? Because I know people always ask about FDIC insurance.
This is where I want to be really precise. CDs are FDIC-insured up to the applicable limits — that’s a federal backstop. Annuities are backed by the issuing insurance company, and in Tennessee there’s the Life and Health Insurance Guaranty Association, which provides coverage within certain limits if a carrier becomes insolvent.
So it’s not FDIC, but it’s not nothing either.
Correct. It’s a different protection mechanism. And that’s why carrier financial strength matters — you want to look at the insurer’s ratings, not just the rate they’re offering.
And the other thing CDs just can’t do is lifetime income.
Right. A CD matures, you get your money back, and you figure out what to do next. Certain annuity contracts can provide income you literally cannot outlive. That’s a fundamentally different capability.
Which brings us back to my aunt’s question — will my money last.
Exactly. A CD can’t answer that question. An annuity with a lifetime income option can at least address it contractually.
Okay, let’s do the Tennessee tax picture, because this is actually kind of interesting and I don’t think people always know this.
So Tennessee is in a pretty favorable position for retirees from a state tax standpoint. There’s no state income tax on wages or retirement income. So when you start taking distributions from an annuity, you’re not dealing with a state income tax layer on top of everything else.
Which is genuinely nice compared to a lot of states.
It is. But federal income tax still applies to the earnings portion of withdrawals. So the growth inside the annuity — when you pull it out — that’s ordinary income for federal purposes.
And there’s the age fifty-nine and a half thing.
Yeah, if you take money out before fifty-nine and a half, you’re potentially looking at a ten percent federal early withdrawal penalty on top of ordinary income tax. Same rule as IRAs, essentially.
So annuities are really not designed for people who might need that money soon.
That’s one of the core suitability questions. If you have a real chance of needing that money in two years, an annuity with a seven-year surrender period is probably not the right fit. That’s not a knock on the product — it’s just the wrong tool for that situation.
Speaking of surrender periods — can you explain that for people who haven’t heard the term?
Sure. When you buy an annuity, there’s typically a period — could be three years, could be ten — during which if you withdraw more than a certain amount, you pay a surrender charge. It starts higher in the early years and usually steps down to zero by the end of the surrender period.
So it’s not like you’re locked out completely, but there’s a cost to leaving early.
Most contracts have a free withdrawal provision — often ten percent of the account value per year — that you can take without triggering the charge. But beyond that, yes, there’s a cost. And that cost is why the carrier can offer you a competitive rate — they need some assurance you’re going to stay in the contract.
It’s kind of like a long-term parking garage. The rate’s better because you’re committing to the space.
Ha — I like that. Yeah, you’re not paying for hourly parking. You’re in the monthly rate. And the garage can plan around that.
Okay, who should actually be considering this? Because I think there’s a tendency to either say ‘annuities are for everyone’ or ‘annuities are a scam’ — and both of those are wrong.
Both are completely wrong. Annuities are a tool. They work really well for specific situations and they’re not the right fit for others.
So who’s the right fit?
Someone who’s already maxed out their four-oh-one-k and IRA contributions and wants additional tax-deferred accumulation — that’s a classic use case. Someone approaching retirement who wants to convert a portion of savings into predictable income. Someone who’s genuinely worried about outliving their assets.
And the death benefit piece — that comes up a lot too.
Yeah. Annuities typically pass to named beneficiaries outside of probate. So if you have a spouse or kids you want to leave something to, that can be a meaningful feature. It’s not the primary reason to buy one, but it’s a real benefit.
And who’s probably not a good fit?
Someone who needs liquidity — like, genuinely might need that money in the next year or two. Someone in poor health looking at a lifetime income option, because the pricing on those is partly based on life expectancy. And someone whose time horizon is shorter than the surrender period they’d be committing to.
That last one is interesting. I’ve heard of situations where someone in their mid-eighties was sold a ten-year surrender period product, and that’s just — that doesn’t make sense.
That’s exactly the kind of thing the suitability review is supposed to catch. In Tennessee, a suitability review is required before an annuity is sold. The agent has to document that the product fits the buyer’s financial situation, time horizon, and needs. It’s not just a formality.
Right. And that’s actually a good segue into the questions people should be asking before they buy.
This is where I’d slow down and really push people to get specific answers in writing. The first thing I’d ask is: what is the contractual crediting rate, and for exactly how long does it apply? Because sometimes a rate is only locked for the first year and then it resets.
Oh, that’s a trap people fall into.
It can be. With a true MYGA, the rate holds for the full term. But not every product works that way, so you need to ask directly.
What else?
Surrender charges — what’s the schedule, year by year. Annual fees, especially if there are income riders attached, because those have their own cost that comes off the account. How the death benefit is calculated. And what your options are if you genuinely need to access money early — some contracts have hardship provisions for things like nursing home care.
And the carrier itself — is it actually licensed and in good standing in Tennessee?
Always. You can verify that through the Tennessee Department of Commerce and Insurance. A legitimate agent will not be bothered by that question. If they are bothered by it, that’s information.
I want to come back to something you said earlier about shopping across carriers, because I think people underestimate how much rates can vary.
It can be significant. On a five-year MYGA, the spread between the lowest and highest rates available in Tennessee at any given time can be a full percentage point or more. On a hundred thousand dollar deposit over five years, that’s a real difference in what you walk away with.
And a licensed agent who works with multiple carriers can pull those comparisons for you.
That’s the value of working with someone who isn’t captive to a single company. They can show you illustrations from multiple carriers side by side. You’re not just getting one option presented as if it’s the only option.
Let me ask you something that I think people wonder but don’t always say out loud — is there any scenario where an annuity just doesn’t belong in a retirement plan at all?
Sure. If someone has a pension that already covers their essential expenses, Social Security coming in, and they have enough liquid assets to handle emergencies — they might not need the income-certainty piece that an annuity provides. The annuity is solving a problem. If the problem’s already solved, you don’t need the solution.
That’s a really clean way to frame it.
And honestly, a good agent will tell you that. If you go in and lay out your full picture and the annuity doesn’t fit, the right answer is to say so. The suitability requirement exists partly for that reason.
One thing I want to make sure we touch on — qualified versus non-qualified annuities. Because the tax treatment is different and I think people get confused.
Good catch. A qualified annuity is funded with pre-tax dollars — like inside a traditional IRA or a rollover from a four-oh-one-k. When you take money out, the whole amount is taxable because none of it has been taxed yet.
Versus a non-qualified annuity where you funded it with after-tax money.
Right. With a non-qualified annuity, only the earnings portion is taxable when you withdraw — your original contribution already had taxes paid on it. The IRS has a formula for figuring out which part of each payment is return of principal and which is earnings.
And this is definitely a ‘talk to a tax professional’ area.
Absolutely. Tax laws change, individual situations vary enormously, and the interaction between annuity distributions and things like Medicare premiums or Social Security taxation can get complicated fast. An insurance agent can explain the general framework, but you want a qualified tax professional in the room for the specifics.
Okay, I want to do a quick scenario just to make this concrete. Let’s say a couple — both sixty-five, living in Memphis — they’ve got a hundred thousand dollars they want to do something with for retirement. How do they even start thinking about which type of annuity makes sense?
Great scenario. First question is: do they need income now, or are they still in accumulation mode? If they’ve got other income sources — Social Security, maybe a pension — and they don’t need that hundred thousand to pay bills right now, they might be looking at a MYGA or an FIA to let it grow tax-deferred for a few years.
And if they do need income now?
Then a SPIA becomes worth looking at. They put in the hundred thousand, and depending on their ages and the payout option they choose, they start receiving monthly payments. The trade-off is they’ve given up access to that lump sum.
So they might not want to put the whole hundred thousand into a SPIA.
That’s a really common approach — using a portion of assets for guaranteed income and keeping the rest accessible. You don’t have to make it all-or-nothing. A licensed agent can help model what different allocations look like.
And the annuity income — does that affect Social Security?
Annuity payouts generally don’t affect your Social Security benefit calculation. They can, however, affect how much of your Social Security is subject to federal income tax, depending on your total income picture. Which again — tax professional territory.
Right. The pieces interact in ways that aren’t always obvious.
That’s actually the biggest thing I’d want someone listening to take away. No single piece of your retirement income plan exists in isolation. The annuity decision affects your tax situation, your liquidity, your estate plan. You want to look at the whole picture.
And that’s really why the conversation with a licensed agent matters — not just to get a rate quote, but to actually stress-test whether the product fits.
Exactly. A rate illustration is a starting point, not an answer. The answer comes from understanding your specific situation — your timeline, your other income sources, your health, what you want to leave behind — and then seeing whether the product solves the right problem.
And for people in Tennessee specifically — Nashville, Knoxville, Memphis — the state tax environment is actually pretty favorable going into this.
It is. No state income tax on retirement income is a real advantage. It means the tax deferral inside an annuity is working against a lower overall tax burden when you eventually take distributions. That doesn’t mean annuities are right for everyone in Tennessee, but the environment isn’t working against you the way it might in some other states.
Caleb, if someone’s listening to this and they’re thinking ‘okay, I want to at least explore this’ — what’s the actual first step?
Talk to a licensed agent who can access multiple carriers — not just one. Ask them to pull current rate illustrations for whatever term and type you’re considering. And before you sign anything, go through every one of those questions we talked about. Surrender schedule, fees, crediting rate duration, death benefit, early access options. Get the answers in writing.
And don’t let anyone rush you.
Do not let anyone rush you. A legitimate agent will give you time to review the contract. High-pressure tactics around a product with a multi-year commitment are a red flag, full stop.
I think the thing I keep coming back to is that the question my aunt asked — will my money last — is actually a really good question to start with. Because it points you toward what you actually need the product to do.
And that’s the right frame. Start with the problem, then find the product that addresses it. Not the other way around. If the answer to ‘will my money last’ is ‘I need predictable income I can’t outlive,’ then certain annuity contracts are worth a serious look. If the answer is something else, maybe it’s a different tool entirely.
And either way, you’re better off knowing what the options actually are — and what the fine print actually says — before you decide.
That’s the whole point of doing the homework. Tennessee annuity rates are competitive right now, the state tax environment is favorable, and the products have real capabilities. But none of that matters if the contract doesn’t fit your situation. Know what you’re buying.