Why people hate annuities — and when they're right.
We research annuities for a living and we think most of the criticism is earned. Here's which parts hold up, which don't, and how to tell them apart.
The criticisms that are completely fair
The commissions are large and invisible
Annuity commissions are paid by the carrier, which means you never see a line item. That doesn't make them free — it makes them opaque. A product paying the seller substantially more than an alternative creates a conflict, and no amount of "it doesn't cost you anything" changes the arithmetic. Ask what the commission is. A straight answer tells you a lot about who you're dealing with.
They're more complicated than they need to be
Caps, spreads, participation rates, benefit bases, roll-ups, MVAs, riders on riders. Some of this reflects genuine mechanics. A lot of it makes products hard to compare, which is convenient for whoever is selling one. If you can't explain the product back in two sentences, that's a finding about the product, not about you.
Your money is genuinely stuck
Surrender schedules of seven to ten years are normal. Free withdrawals are usually capped near 10% a year. If your circumstances change, getting out costs real money. Anyone glossing over the surrender schedule is glossing over the main risk.
They're sold to people who shouldn't have them
This is the most legitimate complaint of all. Annuities get sold to people with high-interest debt, to people who need liquidity within a few years, and to people whose retirement accounts aren't yet maxed. In each case a simpler, cheaper option existed. That's a distribution problem, and it has damaged the whole category's reputation.
The criticisms that are unfair
"Annuities are a scam." They're regulated insurance contracts with enforceable terms. Bad ones exist, and bad sales practices are common, but the structure isn't fraudulent. Conflating a mis-sold product with a fraudulent one makes it harder to talk about the real problems.
"You always do better in the market." Usually true on average, and irrelevant to the specific risk an annuity addresses. Averages don't help someone who retires into a bad decade or lives to 98. Insurance isn't supposed to beat the market; it's supposed to remove an outcome you can't afford.
"The fees are always terrible." Fees vary enormously. A no-frills MYGA has no explicit annual fee at all. A variable annuity with three riders can stack several layers. Judging the category by its worst example is like judging cars by the most expensive one on the lot.
What actually reduces the problem
Two things, mostly.
Simpler products. The fewer moving parts, the less room for a bad deal to hide. A plain MYGA can be compared on rate and term alone. A variable annuity with a stacked rider set cannot be meaningfully compared to anything without reading both contracts.
No-load and low-commission options. A small but growing set of carriers sell annuities with no commission, priced for fee-based advisors and direct buyers. They're less widely promoted precisely because nobody earns much from promoting them, and they're worth asking about specifically — an agent has no incentive to mention one unprompted.
"How are you paid on this, and what would you earn if I bought something else instead?" You are entitled to a straight answer. The reaction to the question is often more informative than the answer.
This page is educational and general. It is not a recommendation, and it is not tax or legal advice. Contract terms vary by carrier, product, and state. Annuity guarantees depend on the financial strength and claims-paying ability of the issuing insurer. Read your own contract, or bring it to us and we'll read it with you.
Sceptical? Good.
Bring what you've been pitched and we'll look for the problems above. Roughly half these conversations end with 'don't buy this.'
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