What Are the Disadvantages of Annuities?

Understand the risks, fees, and limits before committing to annuities.

kamitana/Shutterstock

Many people have mixed feelings about annuities. The plus side is that they offer a reliable income stream. But they also come with a complex fee structure and limited access to money.

When insurance agents are trying to sell you an annuity, they may emphasize the good parts and downplay the bad. What are the disadvantages of buying an annuity? And does it ultimately make sense for you?

Buying an Annuity

Insurance companies typically sell annuities. You buy an annuity plan with one large payment or a series of contributions. The company then distributes the money back to you for a specific time frame, depending on what kind of annuity you bought.

Annuities Are Complicated

Understanding the three types of annuities can be challenging. They include:

• Variable: Payouts are based on the investment’s performance.
• Fixed: You’re guaranteed your original investment as well as earnings. The payout remains constant for the term of the contract.
• Fixed indexed: Payouts are based on the performance of a specified equity-based index.

Due to the complexity of these products and the fact that they are large transactions, it can often take a while to set up an annuity. You will be asked to share in-depth financial information during the process, according to Annuity.org.

Deferred Payments Lock Up Your Money

There are immediate annuities and deferred annuities. Immediate annuities may begin payments within the first year of purchase. In contrast, deferred annuities may lock up your money for years before you can receive a payment.