If you mention annuities to most independent financial advisors, you will get a wince. The reason is not that the basic concept of an annuity is bad. The basic concept — give an insurance company a chunk of money in exchange for guaranteed income — is a perfectly reasonable financial tool, and economists have argued for decades that more retirees should consider it. The reason annuities have a bad reputation is that the products that get aggressively marketed and sold to most retirees are not the simple basic version. They are complex, fee-laden, commission-heavy variants that benefit the seller dramatically more than the buyer.
The annuity industry sold over $310 billion in products in 2024, an all-time record. Most of that was variable annuities, indexed annuities, and other complicated products that pay the selling agent commissions of 5 to 10 percent of the principal in the first year. That commission comes out of your money, even though most buyers do not realize it because the fee is hidden in the structure. If you give the company $200,000, the agent's commission of $14,000 is one of the first things to leave the account, even though you will not see a single line item showing it.
On top of the commissions, these complex annuities typically charge ongoing fees of 2 to 4 percent per year, far higher than what you would pay for a low-cost index fund. They have surrender charges that lock your money up for 7 to 10 years and impose penalties of 7 to 10 percent if you withdraw early. They have rider fees on top of the base fees. They have crediting formulas that look attractive on the marketing brochure but cap your upside in ways the small print explains. They are, in short, designed to be extremely profitable for the company that sells them, and only modestly useful for the person who buys them.
But there is one important exception, and the rest of this article explains it.
The annuity that has broad support from independent financial economists is called a single premium immediate annuity, usually shortened to SPIA. The structure is simple. You give an insurance company a lump sum of money. In return, the company pays you a fixed monthly amount for the rest of your life, no matter how long you live. If you live to 105, you keep getting paid. If you die at 70, the payments stop and the remaining money belongs to the insurance company.
The reason SPIAs make sense for many retirees is that they solve a real problem: longevity risk. Without an annuity, you have to plan your retirement spending around the possibility that you might live to 95 or 100, which means you have to spend less each year than you actually need, to avoid running out of money. With an annuity, you outsource that risk to the insurance company. They pool many people together, and people who die early effectively subsidize the payments to people who live long. You as the buyer get the security of knowing the income will not stop, no matter how long you live.
The numbers can be quite favorable. As of 2026, a 70-year-old man giving $100,000 to an insurance company for a SPIA can expect to receive around $7,000 to $7,500 per year for life. A 70-year-old woman gets slightly less because she is statistically expected to live longer. The exact rates depend on interest rates and the company, but the general principle holds: SPIAs let you turn a lump sum into guaranteed lifetime income at a rate that is hard to match safely with any other investment.
Most economists who study this stuff suggest that retirees consider using a portion of their savings — usually 25 to 40 percent — to buy a SPIA, while keeping the rest in regular investments for growth and flexibility. This gives you the best of both worlds: a guaranteed income floor that covers your essential expenses, and an investment portfolio that can grow and be drawn on for everything else.
Now for the ones to avoid. These are the products that get aggressively marketed at free dinner seminars, and they are almost always bad deals.
Type one: Variable annuities. These are essentially mutual funds wrapped in an insurance contract. The wrapper provides some tax-deferral benefits and usually a small death benefit, but the costs are enormous — typically 2 to 4 percent per year, sometimes more, plus rider fees on top. The same investments held in a regular taxable account or IRA would cost a tenth as much. The salesperson will pitch the death benefit and the income riders, but the math almost never works out in your favor compared to simpler alternatives. Walk away.
Type two: Indexed annuities (sometimes called fixed indexed annuities or FIAs). These products promise upside linked to a stock market index, with no risk of loss. The reality is that the upside is severely capped — by participation rates, spread fees, and complex crediting formulas — so you typically get a small fraction of any market gain, while paying high fees and being locked into surrender charges for years. They sound good in the brochure and rarely deliver. Walk away.
Type three: Long-term deferred annuities sold to people in their late 70s or 80s. Any annuity that locks money up for 7 or 10 years and has heavy surrender charges is inappropriate for someone who may need access to that money for medical expenses, long-term care, or simply because their needs change. Yet these products are aggressively marketed to exactly this demographic. If a salesperson is trying to sell a deferred annuity to anyone over 75, that is a red flag, not an opportunity.
If someone is pitching you an annuity and you want to know quickly whether it is worth considering, ask these five questions. Refusing to answer any of them clearly is a red flag.
Question one: What is the total annual fee, including all riders and management charges? The answer should be a single number, expressed as a percentage. If the answer is more than 1 percent, the product is probably not in your favor. SPIAs have effectively no ongoing fee — the cost is built into the payout rate at the start, and that rate is comparable across companies.
Question two: What is the surrender charge schedule? The answer should be a year-by-year list. If you cannot get your money out without penalty for more than three years, the product is too restrictive for most retirees.
Question three: What is the guaranteed payment, in dollars, that I will receive each year? Not the projected payment, not the historical performance — the guaranteed amount the company is contractually obligated to pay you. If the salesperson talks around this and points to projected returns instead, the product is one of the bad ones.
Question four: What is the credit rating of the insurance company? Annuities are only as safe as the company that issues them. Look for A.M. Best ratings of A or better. Avoid companies with B-level ratings or worse. If your money is at risk because the issuer goes under, the guarantees become much less valuable.
Question five: What commission are you receiving on this sale? This is the question salespeople hate, and the answer is the most useful piece of information you can get. Commissions of 5 percent or more are a sign that the product is structured to benefit the seller rather than the buyer. SPIAs typically pay commissions of 1 to 3 percent, which is one of the structural reasons they are not aggressively pushed even though they are the better product.
If you decide a SPIA might fit your situation, the next question is where to get one. The single most important rule is to shop multiple companies and compare quotes. Annuity payout rates can vary by 10 to 20 percent between companies for identical products, and there is no reason to take the first quote.
The simplest way to compare SPIA quotes is through an online quote service like ImmediateAnnuities.com or AnnuityAdvantage.com. These sites let you enter your age and the amount you want to invest, and they show you live quotes from multiple insurance companies. You can see the payout rates side by side and pick the best deal. There is no obligation to buy from the comparison sites — many people use them just to research and then go to the company directly.
If you want to work with a real person, look for a fee-only financial advisor (one who does not earn commissions) or a fiduciary planner. They will help you decide whether an annuity fits your situation and, if so, will recommend specific products without a financial conflict of interest. Avoid 'free retirement seminars' at restaurants — these are sales events, not education, and the products being pitched are almost always the high-commission ones to avoid.
Not everyone benefits from an annuity, even a good one. Here are the situations in which annuities are usually the wrong choice.
If you already have substantial guaranteed income from Social Security and a pension that covers your essential expenses, you may not need additional guaranteed income. Many retirees in this situation are better off keeping their savings invested and accessible for flexibility and emergencies.
If you have a serious health condition or a family history of short lifespan, an annuity is probably a poor deal — the insurance company is essentially betting that you will live a long time, and if you do not, the deal works in their favor.
If your savings are modest enough that you cannot afford to lock up a large portion of them, an annuity is risky. Annuities work best when you are converting a chunk of money you do not need access to, while still having significant other assets for emergencies.
If you have heirs who depend on your savings being passed down, an annuity reduces what they will inherit. SPIAs in particular generally end at your death, with nothing left for heirs. This is the trade-off for the lifetime guarantee, and for some families it is worth it; for others, it is not.
Annuities are not the universally bad financial product that critics sometimes paint them as, and they are not the magic solution that aggressive salespeople pitch them as. The truth is more nuanced. The simple version — the single premium immediate annuity — is a useful and underused tool that can solve a real retirement problem, and the complicated versions that get most of the marketing dollars are almost always bad deals.
If you are considering any annuity, take your time, ask the five questions above, get multiple quotes, and consider talking to a fee-only fiduciary advisor before signing anything. The salespeople will pressure you to decide quickly. Resist. A good annuity is still a good annuity next month, and the bad ones get more obvious the longer you look at them.
And if you are at a free dinner seminar listening to a pitch about an indexed annuity that promises stock market gains with no risk of loss, the most valuable thing you can do is finish your meal politely and leave without signing anything. The math has been worked out in dozens of independent studies, and the conclusion is consistent: the products being pitched at those seminars are designed for the seller, not for you. The simple SPIA, on the other hand, is rarely sold at dinner seminars, because the commissions are too small to make it worth the salesperson's time. That fact alone tells you something important about which products are actually in your favor.
