Are Annuities A Good Investment?

A few decades ago, I was in the life insurance business, so I had an opportunity to see how they make the sausage. Annuities are products sold by sales representatives through life insurance companies. The product is often complicated and laden with both up-front and ongoing commissions, fees, and expenses. Annuities come in many varieties: fixed annuities, variable annuities, and indexed annuities, and with so many potential riders, it is hard to keep up. What is most common to all is the lack of transparency. What you are paying in commissions, fees, and expenses is very difficult to extract and is rarely something the salesperson will discuss in any significant detail. Commissions can vary widely, but you will know there is one being paid when you learn there are surrender charges should you change your mind and want to get out of your annuity contract. Typically, the surrender charge is 3% to 10% of your account value and declines annually over 3 to 10 years. Why the broad range of variation in surrender fees and length of time the surrender charge is imposed? Look no further than the amount of commissions paid. Some agents will choose products with higher commissions to an unaware customer. To recover the higher commissions, the insurance company raises the surrender charge and extends the number of years the surrender-charge applies.

The ongoing annual expenses for an annuity product can easily exceed 2% to 3%, which means the opportunity for you to make a meaningful long-term return is going to be challenging.

An alternative to these high-priced products is no-load annuities sold through discount brokers such as Fidelity, Schwab, and Vanguard. Note that they will have both low expenses and no surrender charges. They still can be complicated products, so you will need some guidance from your professional advisor if this is a product that interests you.

Annuities in Retirement

One place to consider using an annuity is when you are retiring, and you want to secure a guaranteed stream of income. First, think of Social Security as an annuity and your first line of defense for a guaranteed income for covering necessary monthly expenses. If your basic expenses exceed your Social Security and you want another layer of guaranteed income, you might consider an ‘immediate annuity.’ With an immediate annuity, you give an insurance company a sum of money, and they give you a guaranteed lifetime income. For example, if you and your wife (both age 65) want an additional $833 per month of guaranteed income, you could give the insurance company $200,000, and they would pay that income as long as either of you is living. At the last of you to die, the contract ends.

Bottom Line: Annuities can have a legitimate place in a financial plan, but most of these products are so loaded with expenses that they are a poor choice for your investment. Before you purchase an annuity, consider getting a second opinion from an independent fee-only Certified Financial Planner. Visit to find one near you.


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Annuities: Are They a Good Investment?

The Bad

  • Often very high upfront and ongoing expenses
    • Best Choice: No Load Annuity
  • For fixed annuities: locking in historically low interest rates
  • You assume credit risks: insurance company solvency
  • Nothing for heirs

The Good:          

  • Can provide a lifetime of guaranteed income
    • Best choice: immediate annuity

Bottom Line: Get a 2nd opinion before buying an annuity



Stewart H. Welch, III, CFP, AEP, is the founder of THE WELCH GROUP, LLC, which specializes in providing fee-only investment management and financial advice to families throughout the United States. He is the author or co-author of six books, including  J.K. Lasser’s New Rules for Estate, Retirement and Tax Planning- 6th Edition (John Wiley & Sons, Inc.); THINK Like a Self-Made Millionaireand 100 Tips for Creating a Champagne Retirement on a Shoestring Budget.


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