What Are the Disadvantages of Annuities?

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

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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.

If you have medical expenses or other emergencies, you can’t access your money without paying a surrender penalty.

A surrender penalty means you lose part of the principal. Some surrender penalties may be as high as 25 percent of the principal. You should know the long-term consequences of an annuity purchase.

High-Pressure Sales Tactics

Some agents use high-pressure seminars, telemarketing, and pitches. According to Minnesota Attorney General Keith Ellison, you should beware of agents who cold-call you or repeatedly contact you. They promote “limited time offers” to pressure you, or may show up at your house without an appointment.

Also, beware of estate-planning seminars that are actually designed to sell annuities.

Agents Make Commissions

Keep in mind that agents make a commission when they sell you an annuity. The amount of commission depends on the type of annuity you buy. According to Annuity.org, the typical commissions by annuity type are:

• Single premium immediate annuity: 1–3 percent
• Deferred income annuity: 2–4 percent
• Fixed-index annuity: 6–8 percent

The commission is built into the cost of the annuity. It’s essential to ask what commission amount the agent will receive, ensuring full disclosure. This is especially the case if the agent is recommending a specific type of annuity.

Temporary High-Yield Rates

Often, there’s a teaser rate that promises a high yield. But the problem is that the rate only lasts for a limited time.

You may purchase an expensive long-term plan with the hope of high returns for the duration of the plan, but typically, the returns fluctuate based on market performance after the first year.

Various Fees and Penalties

Annuities come with various fees and penalties. You can end up paying a lot of money just in fees, investment management, and insurance.

Sellers make large commissions when they sell you an annuity. According to Investopedia, some companies will offer you “bonuses” to make a purchase, but these are outweighed by increased fees and administrative costs.

Harder to Pass Benefits in Case of Death

It’s difficult to pass on the benefits of an annuity to someone close to you. Some plans allow payments to a spouse or family member if a death occurs, but these are usually more expensive with a lower monthly payout.

Paying Taxes Down the Road

An agent may focus on the tax-deferral aspect of an annuity. But that’s not always a good thing. According to Dividend, annuities use the last-in-first-out method with taxes. This means that your gains will be taxed at your ordinary income.

Opportunities Lost for Other Investments

Annuities offer the promise of guaranteed income and reduced risk. But annuities tie money up in a long-term investment plan. They also have poor liquidity. This denies you the opportunity for better investments if the markets are on the rise.

Little to No Inflation Protection

Most annuities provide a nominal benefit that isn’t indexed to the consumer price index (CPI). The result is that over the years, your purchasing power will decrease.

You can buy inflation-adjusted or inflation-protected annuities that increase payouts to reflect cost-of-living increases, but these are limited.

Some annuities have an inflation protection rider that adjusts monthly based on the CPI. But typically, your base payments will be lower than if you had bought the annuity without it.

Knowledge Is Power With Annuities

If you are considering an annuity, arm yourself with knowledge. The annuity insurance company or financial institution should be willing to give you all the information. If they don’t, that’s a red flag.

The Epoch Times copyright © 2025. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.