Do you get your principal back from an annuity?

Before purchasing an annuity, consider what happens to your principal over time and at the end of the contract. Your principal is the money you contribute, and its treatment depends on the product type and contract terms. Annuities can either protect your principal or expose it to market risk in exchange for higher growth potential.

Fixed and multi-year guaranteed annuities (MYGAs), like Gainbridge’s SteadyPace™ preserve principal and offer predictable growth. By partnering with Gainbridge, your premium is protected from market losses and credited interest helps your account grow according to your contract terms.

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Understanding your principal in an annuity

Your principal is the initial amount you put in an annuity via a lump sum or through a series of premium payments. Think of principal as your starting balance. Every future outcome, such as interest earned, index credits, or market gains, builds on that contribution over time.

Insurers handle principal differently based on the type of annuity:

• Fixed annuities: Guarantee a specific interest rate on your premium for a set period. These annuities can provide predictable growth and reliable retirement income.
• Indexed annuities: Link potential growth to a market index and protect your principal from negative index years. Still, caps and participation rates limit growth.
• Variable annuities: Invest your principal in market-based subaccounts typically of your choosing like mutual funds and bond portfolios. As a result, your balance can rise or fall with market ups and downs.
• Deferred annuities: Allow your principal to accumulate over time through credited interest or market-linked growth. The account value can build during the deferral period, and income begins later, often at retirement.
• Immediate annuities: Convert your principal into a guaranteed income stream right away. Once annuity payments start, the insurer no longer holds your principal as an account balance but distributes income according to the payout option you chose.

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Do you lose your principal in an annuity?

There’s no loss of principal in most MYGA and fixed annuities. These products protect your contributions and guarantee it through the insurance company, as long as you follow the annuity policy contract and avoid early withdrawals.

That said, risk levels vary by the type of annuity contract:

• MYGA and fixed annuities: The insurer guarantees your principal and credits interest at a fixed rate, so market downturns don’t affect your balance. Your main risks come from reduced liquidity like surrender charges for early withdrawals, inflation outpacing your interest rate, and the financial strength of the issuing insurance company.
• Fixed indexed annuities: These protect your principal from market losses by preventing negative crediting. But the tradeoff is it limits your upside through caps, spreads, and participation rates.
• Variable annuities: Market fluctuations directly impact your account value, meaning your principal goes up or down depending on investment performance. You face higher risk from market losses, ongoing investment and insurance fees, and the possibility of locking in losses if you withdraw or annuitize during a downturn.

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How your principal works in different annuity phases

Most annuities have two distinct phases: accumulation and payout. Here’s how your principal behaves in both stages.

During the accumulation phase

In the accumulation phase, you fund your annuity and your principal can grow tax-deferred. Growth comes from interest, index credits, or market returns, depending on the product. Over several years, this stage can build your annuity’s account value for future income.

How your money grows and how well your principal is protected depend on your contract, contribution amounts, and any optional riders you choose. Because account growth can affect your retirement income, it's important to understand the rules for withdrawals and fees. You can usually take partial withdrawals during this phase, but early withdrawals may trigger surrender charges from the insurer and a 10% IRS penalty if you’re under age 59½.

During the payout phase (annuitization)

The payout, or annuitization, phase begins when your annuity reaches its maturity date. At that point, you can convert your principal and any accumulated gains into a guaranteed income stream. How much of your principal you recover depends on the type of annuity, the contract structure, and the payout option you selected. There are other options for your annuity at maturity that don’t include converting it into an income stream but for purposes of this guide we are discussing the annuitization phase.

MYGA and fixed annuities can deliver predictable payouts based on your accumulated value and payout structure. Variable annuities can adjust payouts according to market performance unless you purchase a guaranteed withdrawal benefit rider.

Taxes on withdrawals, ongoing fees, and the cost of optional riders all impact the total value you receive over time. While riders can add valuable protections, their costs can reduce the net amount available to you — and administrative or investment fees can further lower the portion of account value available for income.

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What happens to your principal when you die?

When an  owner dies, some annuities promise that any remaining principal goes to beneficiaries. Gainbridge, specifically, offers waivers for death, nursing home care, and terminal illness — ensuring your funds are distributed to beneficiaries and accessible in times of need without any surrender charges.* Some types of annuities pay income only for your lifetime and may leave little or nothing behind. Understanding how death benefits work before and after annuitization helps you plan for beneficiaries and manage estate considerations.

Before annuitization

Before annuitization, when your annuity is in the accumulation phase, your principal may include credited interest or market gains. If you die during this period, most annuity contracts pay a death benefit to your beneficiaries.

Standard contracts guarantee at least the total premiums you paid, which can protect your principal even if the account value falls in variable annuities. Optional riders can increase the death benefit or roll up the principal at a guaranteed rate, meaning the insurer grows your principal each year by a set percentage.

Many beneficiaries receive a lump-sum payment, although some contracts allow installments instead of a single payout. Taxes can vary based on the type of annuity.

After annuitization

After annuitization, your principal converts to a stream of annuity payments. What your beneficiaries receive depends on the payout option you chose.

If you purchase a life-only annuity and die shortly after payments begin, the insurance company keeps the balance and leaves no death benefit for beneficiaries. In contrast, period-certain and refund annuities continue making payouts after your death — for the remaining term — or return any unused principal to your beneficiaries. Keep in mind that taxes, fees, and optional riders still affect the net amount beneficiaries collect.

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Factors that can reduce your principal or payout

Most fixed annuities offer principal protection. However, there are a few factors that can reduce the amount you receive.

Surrender charges and early withdrawals

Insurance companies charge surrender fees to discourage early withdrawals. If you withdraw funds before the surrender period ends, the insurer may deduct a percentage of your account value as a penalty. These charges typically decline over time as you get closer to the contract’s maturity date, but early withdrawals can significantly reduce both principal and earned interest.

Market risk in variable annuities

Variable annuities invest your money in market-based subaccounts, exposing your account value to stock and bond fluctuations. Poor market performance can reduce your principal below what you originally invested — especially if you don’t add optional guarantees.

Even though variable annuities offer higher growth potential, they come with risks. Short-term market losses can shrink the amount available for retirement income or withdrawals, particularly if you take money out during a downturn.

Fees and optional riders

All annuities generally include some level of fees. These may cover administration, mortality and expense charges, and underlying investment costs. Optional riders, such as guaranteed income or enhanced death benefits, can also lower your net growth. Over time, these costs can meaningfully lower your effective growth and reduce the total payout you receive from your annuity.

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Here’s what Gainbridge annuities can do for you

Thinking about purchasing an annuity but not sure where to start? Gainbridge makes the process straightforward with principal-protected annuities that keep your initial contribution safe from market losses while offering stable growth. With our annuities, you’ll benefit from built-in downside protection and manage everything through an easy-to-use online dashboard.

Explore Gainbridge today and see how our flexible options and guaranteed protection can help you grow your retirement savings with confidence.

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This article is for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. For advice concerning your own situation please contact the appropriate professional. The Gainbridge® digital platform provides informational and educational resources intended only for self-directed purposes. Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company.

*Gainbridge Life Insurance Company is licensed and authorized to do business in 49 states (all states except New York) and the District of Columbia. Products and/or features may not be available in all states. Please visit gainbridge.com for current rates, full product disclosure and disclaimers and additional information. Withdrawals of taxable amounts are subject to ordinary income tax and if made before age 59½, may be subject to a 10% federal income tax penalty.

Distributions of taxable amounts from a nonqualified annuity may also be subject to an additional 3.8% federal tax on net investment income.

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