“Annuities Are Bad” — Untangling the Half-Truths
Almost every time someone tells me “annuities are bad,” they’re describing one specific product — and then painting the whole category with it.
That’s the trick the blanket criticism pulls, and once you see it you can’t unsee it. There isn’t “an annuity.” There’s an expensive variable annuity with three riders stacked on top, sold to a 68-year-old who didn’t need it. And there’s a plain immediate income annuity that does exactly one job — turn a lump sum into a paycheck you can’t outlive — with no ongoing fee to speak of. Those are not the same animal. Lumping them together is like saying “cars are bad” because you saw a lemon. Some cars are lemons. The category isn’t.
So let me do the thing the loud takes never do: take the criticisms one at a time, and give each one its honest due. What’s true about it. Where it’s overstated. Because most of these complaints are true about the complicated products and false about the simple ones — and the whole confusion lives in that gap.
“The fees are outrageous”
True — for some annuities. Not for others. And the difference is the entire point.
A variable annuity with an income rider, a death-benefit rider, and an underlying menu of sub-accounts can carry costs that stack up to 3% or more a year. Mortality-and-expense charges, rider fees, fund fees — layer by layer. On $300,000, 3% is $9,000 a year, every year, quietly skimmed before you ever see a statement line item. The critics are right to be angry about that. I’m angry about it too when it’s sold to someone who didn’t understand what they were paying.
Now look at a plain immediate income annuity — a SPIA — or a multi-year guaranteed annuity, a MYGA. A SPIA has no explicit ongoing fee. You hand over a lump sum, the insurer quotes you a monthly check, and that check is the deal. A MYGA works like a CD: a fixed rate for a set term, no annual drag. The insurer’s costs are baked into the rate they quote, the same way a bank’s costs are baked into a CD rate — and you judge it the only way that matters, by comparing the payout or the rate against the alternatives.
So “the fees are outrageous” is a fair warning about one corner of the market and a smear against another. The honest version is: some annuities are expensive, some are nearly free, and you have to know which one is in front of you.
“They lock up your money”
True. That one’s not a half-truth — it’s just the trade.
When you put money into most annuities, you give up easy access to it for a period of years. Pull it out early and you pay a surrender charge. With an income annuity, you’ve often converted the lump sum permanently — it’s now a stream of payments, not a balance you can call back. That’s real, and anybody who waves it away is selling you something.
But here’s the part the criticism skips: the lock-up is what you’re buying. You give up access in exchange for a guarantee. That’s the exchange. It’s a good trade for money you’ve already decided you won’t touch — the slice earmarked to cover your basic expenses for the rest of your life. It’s a bad trade for money you might need next year for a roof or a medical bill. Same product, opposite verdict, depending entirely on which money you put in it.
So the rule writes itself. You don’t annuitize the emergency fund. You don’t annuitize the money that needs to stay liquid. You annuitize the floor — the money whose job was never to be available on a Tuesday, but to keep the lights on for thirty years. Lock up the right money and the lock-up is a feature. Lock up the wrong money and it’s exactly the mistake the critics warn about.
Not sure which of your money — if any — belongs in something like this? Take the Fit Quiz → — a few questions, and it’ll tell you whether an annuity fits your situation before you talk to anyone.
“The insurance company keeps your money when you die”
This one depends entirely on the structure you choose — and most people complaining about it are describing a feature they could have turned off.
Here’s the true version. A life-only immediate annuity does work that way: you get the largest possible monthly check for as long as you live, and when you die, the payments stop, even if that’s two years in. The insurer keeps the remainder. That sounds like a ripoff until you understand why it pays more than anything else — it’s mortality pooling. The people who die early subsidize the people who live to 99. That’s not the insurer being greedy; that’s the exact mechanism that lets the contract promise a check you genuinely cannot outlive. The high payout and the “they keep it” risk are the same coin.
And here’s the part the criticism leaves out: you can choose otherwise. Want your heirs protected? You buy a period-certain option — payments guaranteed for, say, 10 or 20 years no matter what, so if you die in year three the rest goes to your beneficiary. Or a cash-refund option — if you die before you’ve gotten back what you put in, the balance goes to your heirs. You’ll get a smaller monthly check in exchange, because you’ve kept some of the money out of the pool. That’s the trade, stated plainly.
So “they keep your money when you die” is true of one option you can decline and false of the others. The honest framing isn’t avoid annuities — it’s know which option you’re signing, because the default isn’t always the one you want.
“They’re too complicated”
True — of some. Genuinely false — of others. And again the whole argument is in the gap.
A fixed-indexed annuity with caps, floors, participation rates, and a spread is complicated. I’ve watched people who sell them struggle to explain them in one sitting. A variable annuity with a benefit base that grows on a different schedule than your actual account value is complicated — and that gap between the two numbers is where a lot of buyers get genuinely confused. If a product takes a 40-minute presentation and a flip-chart to explain, that complexity is itself a reason to slow down.
But a SPIA is about as complicated as a paycheck. You give the insurer $200,000, they pay you $X a month for life. That’s the contract. A MYGA is about as complicated as a CD: this rate, this many years, done. These are not products that require a flip-chart. They’re products you can explain to your spouse over coffee, which is exactly the test a retirement decision should pass.
So when someone says annuities are too complicated to understand, the honest answer is: then buy the simple one. The complexity isn’t a property of the word “annuity.” It’s a property of specific products — and the simplest ones do the most important job.
“Salespeople just push them for the commission”
True. And I’m not going to dance around it, because we earn a commission too.
Commissions create an incentive to oversell. That’s real, and it’s the honest root of most of the horror stories — a complex, high-commission product placed with someone whose situation called for something simpler or for nothing at all. When the person recommending the product gets paid more for the expensive version, you should assume that incentive is in the room. Pretending it isn’t is how people get hurt.
Here’s the honest version, and it’s about us. OwnYourPension is paid a commission by the insurance carrier when an annuity is placed. Not a fee you write us a check for — a commission built into the product by the carrier. That’s how nearly the entire annuity business funds advice for people who’d never write a check for it, ours included. We’re telling you that on purpose, because the fix for the commission problem isn’t pretending commissions don’t exist. The fix is disclosure and a question: ask anyone recommending an annuity how they’re paid, and how much, and whether a different product would pay them more. A straight seller answers without flinching. A cagey one tells you something with the dodge.
So the criticism is correct about the incentive and wrong about the conclusion. The takeaway isn’t “never buy an annuity.” It’s “ask how the person across the table gets paid, and judge the recommendation knowing the answer.” That’s a test you can run on anyone — including us.
The honest synthesis
Put it together and the blanket take falls apart. Every one of these criticisms is true about complex products sold to people who didn’t need them — and overstated or flat wrong about the simple products that do one useful job. “Annuities are bad” is really “this expensive variable annuity was a bad fit for that person,” dressed up as a verdict on an entire category.
Now the other side of the honesty, because I’d be doing the same thing in reverse if I skipped it: plenty of people genuinely shouldn’t buy any annuity. If your guaranteed income — Social Security, a pension — already covers your basic expenses, you may not need to manufacture more. If you don’t have money you can afford to lock up, an annuity is the wrong tool. If your heirs are the whole point and lifetime income isn’t, there are better instruments. The simple annuities solve a real problem — a paycheck you can’t outlive — but only if you actually have that problem.
The bottom line: “Annuities are bad” isn’t an answer — it’s a category error. The fees, the lock-up, the death-benefit question, the complexity, the commission: every one of those is a fair warning about the wrong product sold to the wrong person, and most of them simply don’t apply to a plain income annuity or a MYGA. The honest question was never “are annuities good or bad.” It’s “does this annuity do a job I actually need done” — and that one has a real answer.
See whether an annuity fits your situation — or whether you’re better off without one: Take the Annuity-Fit Quiz →
It takes a couple of minutes and tells you which kind of annuity, if any, is worth a real conversation — before you sit across from a single salesperson. If one fits, a licensed specialist will walk through the fees, the lock-up, the options, and the commission question straight. And if the honest answer is “you don’t need one,” we’ll tell you that too. That’s the whole point of starting with the question instead of the pitch.
OwnYourPension is an education and resource brand. We are not a pension provider, and nothing here is PBGC- or FDIC-insured. Any “guaranteed” income or feature refers to the contractual promise of the issuing insurance company and depends on that carrier’s claims-paying ability and the specific contract terms. Annuities and insurance products are offered through partnered licensed agencies and are sold for a commission paid by the issuing carrier — as discussed openly above. We are not fee-only and we do sell products; that’s exactly why we tell you to ask how anyone, including us, is paid. Examples and figures (fee percentages, payout amounts, surrender terms) are illustrative and use round numbers for clarity; your actual product terms depend on the carrier, the contract, your age, and the rate environment. Any references to CDs, IRAs, rollovers, or tax treatment are general and not tax or legal advice — confirm specifics with a licensed professional and your own tax advisor. Nothing here is individualized financial advice.