Annuities have real advantages and real drawbacks. The pros include guaranteed lifetime income, principal protection, tax-deferred growth, and legacy options. The cons include surrender periods, limited liquidity, and complexity when sold wrong. Whether an annuity makes sense for you comes down to one question: what problem are you trying to solve? If it’s principal protection, guaranteed income, legacy planning, or long-term care coverage, an annuity might be the right tool. If none of those apply, it isn’t.
You’ve probably searched “annuity pros and cons” and found the same article recycled a hundred times. Half of them are written by people trying to sell you one. The other half are written by people trying to talk you out of one.
We’re not doing either.
After 30+ years in the insurance and financial services business, we’ve helped hundreds of clients work through this exact question. And the honest answer is this: annuities are the right tool for some people and the wrong tool for others. What matters is knowing which one you are before you sign anything.
Let’s walk through it straight.
What Annuities Actually Are
An annuity is a contract between you and a life insurance company. You hand over a lump sum of money. In exchange, the insurer guarantees something back to you, whether that’s a stream of income, a protected principal, a death benefit, or some combination.
That’s it. Not an investment. Not a savings account. A contract.
Every annuity on the market, regardless of what the agent calls it, solves for one or more of four things:
- Principal protection (keeping your money safe from market losses)
- Income for life (guaranteed payments you can’t outlive)
- Legacy (passing money to your beneficiaries)
- Long-term care or confinement care coverage
If you don’t need to solve for at least one of those, you don’t need an annuity. That’s not a sales pitch. That’s just how it works.
The Pros of Annuities
Guaranteed Income You Can’t Outlive
This is the main reason our clients buy annuities. Running out of money in retirement is a real fear, and it’s a legitimate one. People are living longer. Social Security wasn’t designed to cover everything. Pensions are nearly gone in the private sector.
A Single Premium Immediate Annuity, a Deferred Income Annuity, or a Qualified Longevity Annuity Contract can all provide guaranteed income for as long as you’re alive. It doesn’t matter if you live to 85 or 105. The check keeps coming.
No mutual fund, no stock portfolio, no CD can promise you that. Only an insurance contract can.
Principal Protection From Market Losses
Products like Multi-Year Guaranteed Annuities and Fixed Index Annuities protect your principal. Your account value won’t go backward because of a market crash. That’s contractual, not a hope.
For clients who’ve watched their retirement accounts drop 30% or 40% during downturns and don’t want to go through that again, principal protection is a serious benefit. You’re not chasing returns. You’re removing a risk you’ve decided you don’t want.
Tax-Deferred Growth
If you’re using non-qualified money (money outside of an IRA or 401k), annuity earnings grow tax-deferred. You don’t pay taxes on the gains until you take money out. That lets your money compound without being reduced by taxes every year.
For high earners putting money away above their retirement account limits, this is genuinely useful.
Legacy and Death Benefit Options
A lot of people avoid annuities because they’ve heard “the insurance company keeps the money when you die.” That’s one way to structure it. It’s not the only way.
Many annuities can be set up so that 100% of any unused funds pass directly to your named beneficiaries. You choose the structure. If protecting your family is part of the goal, there are options that do both: pay you income for life and still leave money behind.
Creditor Protection
This one gets overlooked. In most states, annuity assets are protected from creditors. If you’re a business owner, a medical professional, or anyone with personal liability exposure, that’s not a small thing.
Every state has different rules, so give us a call and we’ll walk through what applies in your situation. But for the right client, this benefit alone can justify a closer look.
Customization
You can structure an annuity around your life in ways most financial products don’t allow. Single life or joint life coverage. Income starting now or 10 years from now. Period certain options. Inflation adjustments. Liquidity riders. Death benefit provisions.
No index fund offers that level of flexibility.
The Cons of Annuities
Surrender Charges and Limited Liquidity
Every annuity has some form of commitment period. Surrender charges typically run anywhere from 3 to 10 years depending on the product. If you need to pull your money out early, you’ll pay a penalty.
This isn’t a hidden trick. It’s disclosed upfront in the contract. But it means annuities are the wrong tool if you need full access to your money at any time. Don’t put your emergency fund in an annuity.
Most annuities allow a free withdrawal of 10% per year without penalty. That’s not zero liquidity. It’s just not full liquidity.
They’re Not Growth Vehicles
Fixed Index Annuities get sold, badly, as if they offer pure market upside with zero downside. That’s not what they are. FIAs are principal-protected products with limited upside tied to an index. The cap rates and participation rates exist because the insurance company is covering your downside risk.
If you want real market growth, invest in the market. If you want guarantees, buy an annuity. Don’t expect both from the same product. It doesn’t exist.
Fees Vary Wildly by Product Type
Here’s where a lot of confusion happens. MYGAs and SPIAs have no annual fees. None. Fixed Index Annuities with income riders carry fees, typically in the range of 0.5% to 1.5% per year. Variable annuities can run 2% to 3% annually once you stack up all the charges.
The fee conversation depends entirely on which annuity you’re looking at. Blanket statements like “annuities are expensive” or “annuities are fee-free” are both wrong depending on context.
Complexity in the Wrong Hands
Annuities are actually simple when explained correctly. The problem is that some agents use complexity as a sales tool. They bury you in projections, illustrated rates, and bonus percentages that obscure what the contract actually guarantees.
Our rule: if you can’t explain an annuity to a 10-year-old, it’s too complicated. Walk away.
Pros and Cons by Annuity Type
Not all annuities are the same. Here’s how the main types stack up:
| Annuity Type | Best For | Key Pro | Key Con |
|---|---|---|---|
| MYGA (Multi-Year Guaranteed Annuity) | Principal protection, short to mid-term savings | Guaranteed rate, no fees, simple | No upside beyond the fixed rate |
| SPIA (Single Premium Immediate Annuity) | Income starting now | Highest income payout, no annual fees | Payments start immediately, less flexibility |
| FIA (Fixed Index Annuity) | Principal protection with index participation | Market participation with a protected floor | Cap rates limit upside, fees if adding income riders |
| DIA (Deferred Income Annuity) | Future income planning | Higher payouts from deferral period | Money is committed until income starts |
| QLAC (Qualified Longevity Annuity Contract) | Delaying RMDs, late-life income | Reduces taxable RMDs, guaranteed late-life income | Must use IRA money, income doesn’t start until later in life |
The right annuity type depends on what you need the money to do and when you need it to start. Those two questions drive everything.
“Fixed indexed annuities are right for clients who can’t afford to lose money in the market. You can participate in upside when markets do well, but you don’t lose value when they hit rough patches. It’s not the right place for 100% of your retirement savings, but it’s a solid safe bucket.” — Doug Mitchell, Ogletree Financial
When an Annuity Makes Sense
A client in her early 60s wants to retire but her portfolio is mostly in the market and she doesn’t have a pension. She needs $3,000 a month in guaranteed income to cover her fixed expenses. A SPIA or Deferred Income Annuity could solve that exactly. She puts a portion of her savings into guaranteed income, leaves the rest invested for growth, and stops worrying about sequence-of-returns risk.
A business owner in his mid-50s wants to protect a chunk of his savings from market volatility without locking it up long-term. He’s not ready to take income yet. Learning how a MYGA works gives him a guaranteed rate for a set term with no annual fees and no market exposure.
A couple in their late 60s wants lifetime income that covers both of them, with whatever’s left going to their kids. A joint life SPIA with a cash refund provision pays them for as long as either is alive, and passes any unused premium to their beneficiaries at death.
Those are real problems annuities solve cleanly.
“One client put the proceeds from a sale of a second home into an annuity with an income rider. He left that money alone for two years while he was still working. Now at 65, he and his wife are receiving $60,000 per year for life, and that continues until both of them are gone.” — Doug Mitchell, Ogletree Financial
When an Annuity Doesn’t Make Sense
If you’re 45 years old, still earning, and won’t touch this money for 20 years, locking it into an annuity is probably not the right call. The market has more room to work, and you don’t need the guarantees yet.
If you have a pension, Social Security, and enough guaranteed income to cover your monthly expenses, you may not need more lifetime income. Adding an annuity just to add one isn’t smart planning.
If you need flexibility, emergency access, or the ability to rebalance freely, an annuity creates friction that doesn’t serve you. Keep that money elsewhere.
The right question isn’t “are annuities good or bad?” It’s “does this solve a problem I actually have?”
How to Buy One Without Getting Burned
Work with us. As an independent agency, we represent multiple carriers and can shop the market on your behalf. A captive agent who only sells one company can’t do that for you. If someone can only show you one option, that’s not advice. That’s sales.
Get quotes from multiple carriers. Annuities are commodity products in many ways. The same income structure will pay different amounts at different companies. The difference can be meaningful.
Read the contract before you sign. Specifically: the surrender schedule, the guaranteed values, and any rider fees. Don’t rely on the projected illustration. Ask what the contract guarantees if the market returns nothing.
And if the product can’t be explained clearly, it probably shouldn’t be bought.
Frequently Asked Questions
Are annuities a good investment for retirement?
That depends on what you mean by “good.” If you need guaranteed income, principal protection, or legacy planning, annuities can be an excellent tool. If you’re looking for market growth, they’re not built for that. They’re contracts, not investments. Used for the right purpose, they work very well.
What is the biggest downside of an annuity?
Limited liquidity is the most common complaint. Once you commit money to an annuity, accessing it early triggers surrender charges. That’s a real tradeoff. It’s why annuities shouldn’t hold money you might need unexpectedly. Most products allow a 10% annual free withdrawal, but full access isn’t available until the surrender period ends.
Do annuities have high fees?
It depends entirely on the type. MYGAs and SPIAs have no annual fees. FIAs without income riders typically have no fees either. FIAs with income riders carry an annual rider charge, usually between 0.5% and 1.5%. Variable annuities tend to have the highest fees of any type. Always ask for a full fee disclosure before buying anything.
What happens to an annuity when you die?
It depends on how the contract is structured. You can set it up so that all remaining funds pass to your named beneficiaries. You can also choose options that maximize your income payment with nothing passing at death. Most people fall somewhere in between. The structure is your choice, and we’ll walk you through every option before you decide.
Can you lose money in an annuity?
With fixed and fixed index annuities, your principal is protected. You won’t lose money due to market performance. Variable annuities are invested in sub-accounts tied to the market, so those can lose value. That’s one reason we don’t recommend variable annuities for most clients. Principal protection is one of the primary reasons people buy annuities in the first place.
Key Takeaways
- Annuities are contracts, not investments. They transfer risk from you to an insurance company in exchange for a guarantee.
- There are four valid reasons to buy one: principal protection, lifetime income, legacy planning, and long-term care coverage. If none of those apply to you, skip it.
- Pros include: guaranteed income, principal protection, tax deferral, creditor protection in most states, and deep customization.
- Cons include: surrender periods, limited liquidity, fees on certain products, and complexity when sold by the wrong person.
- Not all annuities are the same. A MYGA, a SPIA, and a variable annuity are completely different products. Understand what you’re buying.
- Work with an independent agency that shops multiple carriers. One option isn’t advice.
Not sure which annuity type fits your situation? We’ve been helping clients make this decision for over 30 years. Give us a call at 800-712-8519 or schedule a free consultation and we’ll walk through it with you. No pressure, no pitch — just a straight conversation about what makes sense for your retirement.
