When you hear the word "annuity," what comes to mind? For many, it's confusion, skepticism, or the vague idea of guaranteed income in retirement. But if you’re considering buying one, chances are someone brought it up to you—perhaps an insurance agent, a financial advisor, or a family member. The more important question is: Are annuities good investments?

Let’s explore the pros and cons of annuities, the various types available, and the key red flags to watch for when someone offers you one. Spoiler alert: annuities aren’t all bad—but many are sold in ways that put the seller’s interest before yours.

The Two Big Reasons People Consider Annuities

If you’re exploring annuities, you likely fall into one (or both) of these categories:

1. You want to reduce or eliminate risk from your investment portfolio.
2. You’re looking to generate a pension-like income from your retirement savings.
   

Both are reasonable goals, and annuities can help with them. But the way you achieve those goals (and which type of annuity you choose) makes all the difference.

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Understanding the 3 Main Types of Annuities

Annuities come in different shapes and sizes, but they generally fall into three broad categories: fixed, indexed, and variable. Let’s break each one down, including what they offer and where the pitfalls often lie.

#1. Fixed Rate Annuities: Simple, but Often Overlooked

Think of fixed-rate annuities like a certificate of deposit (CD) at your bank. You deposit a lump sum, and in return, the insurance company pays you a fixed rate of interest over a set period.

Pros:

• Guaranteed interest rate
• No market risk
• Tax-deferred growth (unlike CDs, which generate taxable income yearly)
  

Cons:

• Typically lower returns than other investment options
• Not heavily promoted because agents earn smaller commissions
  

Fixed-rate annuities are straightforward and safe. But because they don’t earn advisors big commissions, they’re rarely pushed as the first option, even when they might be a good fit.

#2. Indexed Annuities: More Complex, Potentially More Rewarding

Indexed annuities combine the safety of fixed annuities with the potential for higher returns by linking your gains to a market index like the S&P 500 or Russell 2000.

How they work: Instead of earning a fixed rate, your returns are tied to how well the index performs, up to a certain cap or with a specific participation rate.

What to watch out for:

• Caps and participation rates: These limit how much of the market gain you actually receive.
• Commissions: These products often pay higher commissions, which can lead some advisors to favor them regardless of whether they’re the best fit.
• Complexity: The contract terms can be dense and full of fine print.
  

Despite their drawbacks, indexed annuities can be excellent tools, especially if chosen carefully. You may even achieve double-digit returns in strong market years, without risking your principal. But only if the advisor selects a product that prioritizes your interests over their commission.

#3. Variable Annuities: High Risk, High Fees, and High Controversy

Variable annuities are investment products wrapped in insurance contracts. Your money is invested in subaccounts, which are basically mutual funds. Your returns vary with the market, and so do your losses.

Pros:

• Potential for higher returns than fixed or indexed annuities
• Optional income or death benefit riders

Cons:

• Market risk—you can lose money
• Layers of fees that eat into returns
• Often sold as a “safe” option even when they aren’t
  
  

Here’s the kicker: Variable annuities often come with ongoing annual fees of 2–3% once you add up all the costs. These include mortality and expense (M&E) fees, rider fees, subaccount fees, and administrative charges. Unfortunately, many of these costs are buried in the fine print or glossed over in conversations.

In practice, the high fees often offset the potential for higher returns. What you're left with is an expensive product that performs similarly to lower-risk annuities, but with more volatility and less clarity.

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The Real Problem: Misaligned Incentives

The biggest issue with annuities isn’t the products themselves—it’s how they’re sold. Many agents and financial professionals are incentivized to promote products that offer higher commissions, not better outcomes for their clients.

That means:

• Products with higher fees and lower client value often take center stage
• Contracts with long surrender periods (locking up your money for years) are pushed on retirees
• Consumers rarely receive a clear, side-by-side comparison of annuity types

If your advisor is recommending an annuity, ask questions like:

• What’s your commission on this product?
• What are the total fees I’ll pay (including riders, M&E, admin, subaccounts)?
• Are there surrender charges, and for how long?
• What are my alternatives?
  

A good advisor will be transparent and help you evaluate whether an annuity is the right fit—without pressure.

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When Annuities Can Be a Good Investment

Despite all the pitfalls, some annuities do serve a meaningful role in a well-constructed retirement plan.

Here’s when they might make sense:

• You’re looking for guaranteed lifetime income and want to replicate a pension.
• You’re risk-averse and want principal protection with better returns than a CD.
• You need a tax-deferred growth option outside of an IRA or 401(k).
• You want to simplify your portfolio and reduce market exposure.
  

In these cases, a properly structured annuity—particularly a fixed or low-fee indexed annuity—can provide peace of mind and steady income.

But remember: the keyword here is properly structured. That means avoiding high-commission, high-fee products and working with someone who understands your needs, not just the commission tables.

Final Thoughts: Are Annuities Good Investments? Sometimes!

If you take one thing away from this article, let it be this: annuity quality depends more on who’s selling it and how they select the product than on the annuity itself.

Yes, there are annuities that can deliver reasonable, stable returns with no fees and no market risk. There are also annuities that are borderline predatory, locking consumers into long, expensive contracts that benefit everyone except the buyer.

So, are annuities good investments? The honest answer is: some are, many aren’t.

It comes down to asking the right questions, avoiding high-fee traps, and working with someone who prioritizes your financial goals, not their paycheck.

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Need Help Evaluating an Annuity?

Whether you’ve already been offered an annuity or are just exploring your options, we’re here to help. We’ll walk you through the contract, break down the fees, and compare it to other options—so you can make an informed decision with confidence.

Let’s talk. Your retirement deserves better than guesswork.