The Pros and Cons of Annuities


What is an annuity? A really bad place to put your money to work!

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Index Annuities - Immediate Annuities

Life Insurance


alert2 One of the most expensive of all financial products (fees or baked into the product).

alert2 Unnecessarily and insanely locking your money in prison for many years if not for life.

alert2 Heirs may get nothing at the time of your death.

alert2 Past index annuity internal rates of return lack transparency. Cannot research on Yahoo Finance, etc.

alert2 Lacks liquidity due to an insurance company early withdrawal (surrender) penalty.

alert2 Lacks liquidity due to a Federal pre-age 59 1/2 early withdrawal tax penalty of 10%.

alert2 Lacks liquidity due to an additional State pre-age 59 1/2 early withdrawal tax penalty.

alert2 Lacks liquidity due to much higher and escalating ordinary income tax rate.

alert2 Are sold to investors who are ignorant of diversification (how bonds protect against stock loss).

alert2 Are falsely marketed based on unrealistic hysteria about market volatility that has never existed.

alert2 Are falsely marketed by comparing conservative (annuities) to aggressive (100% stocks)

alert2 Are falsely marketed by confusing accumulation value as being inheritance or cash surrender value.

alert2 Are falsely marketed by confusing income payment rate as being annualized return on investment (ROI).

alert2 Are falsely marketed by comparing fixed annuity income rate vs 4% rule, which increases with inflation.

alert2 You will never get the advertised guaranteed % "return" rate as a return on investment.

alert2 Your money is gone for life once you enter the income phase or "annuitize".

alert2 Your money is gone for good with most immediate annuities -- Beneficiaries get nothing or zero ROI.

alert2 "Income for life" really means "constricted for life".

alert2 "Guaranteed income for life" really means "guaranteed poverty later in life".

alert2 No ability to strategically rebalance after market declines (with SPIA's, fixed, indexed, immediate, etc).

alert2 A tax time bomb! Profit distributions will eventually be taxed at the higher ordinary income rate.

alert2 So-called "advantage" of tax deferral is over rated and usually negated (and then some) by higher taxes.

alert2 Distributions and withdrawals must be kept to a minimum each year due to the higher tax rate.

alert2 LIFO: By law, taxable gains must be withdrawn or distributed first -- untaxable principal last.

alert2 Extremely limited ability to use loses to write off taxable gains from annuity distributions.

alert2 "Guarantee" against loss of principal actually may not be guaranteed if insurance company fails.

alert2 Fixed accounts may not be guaranteed if insurance company fails.

alert2 All state guarantee funds have limits on how much they will actually guarantee.

alert2 Californians are particularly at risk of losing at least 20% of their so-called "guaranteed" money.

alert2 State guarantee fund may run out of money in the event of an industry wide systemic failure.

alert2 Terrible for heirs. No stepped up cost basis. Beneficiaries suddenly must pay taxes or may even get nothing.

alert2 Huge broker / adviser / insurance salesman conflict of interest: Obscene sales commissions.

alert2 Market timing not allowed with variable annuities.

alert2 Constricted by a complex, convoluted mess of insurance company contractual terms and conditions.

alert2 Constricted by a complex, convoluted mess of IRS and state tax rules.

alert2 Sales agents and insurance company reps don't fully understand annuities. False information is the norm.

alert2 You may have to hire lawyers and/or accountants to attempt to resolve various issues that may arise.


The sale of annuities is often a “breeding ground for fraud”
-- Bob Blumenfield, California Assembly Budget Committee Chair


"We don’t recommend an allocation to annuities for any portion of your portfolio. We believe an age-appropriate allocation to bonds provides a similar boost to the likelihood you will have sufficient assets in retirement." -- Forbes Magazine


"Fee-only financial planners are not fans of annuities" -- David Marotta


"There's almost never a circumstance when an annuity is called for" -- Clark Howard

"Index annuities are a danger to your financial health." -- Clark Howard


"Insurance needs to be insurance. Investments need to be investments. You should never combine the two ever, ever, ever!" -- Suze Orman


"The likelihood that we're going to find [an annuity product] that meets our standards for your benefit isn't there. So you have to ask yourself, why are the other guys pitching that product? It's because they're looking out for their own best interests rather than yours." -- Ric Edelman


"...if the sales hype is replaced with analysis, most astute individual investors will avoid [index annuities]. Giving up dividends plus imposing a cap on market capital gains is far too severe a penalty to pay for protection against periodic market losses. Astute investors seeking long-term tax-deferred accumulation are likely to have their investment returns substantially muted by investing in indexed annuities, if history is any guide." -- Peter Katt, CFP, a fee-only life insurance adviser


"[indexed annuity] contracts have really high hidden fees. That’s why they’re terrible ideas for older people even though they’re peddled to them." -- Kent Smetters, a former U.S. Treasury Department economic policy official and professor of insurance at the University of Pennsylvania’s Wharton School


"[Equity-indexed annuities] carry exorbitant and indeterminable costs, lack of federal regulation and an inability to decipher what the investments will earn... They are complicated investments sold to unsophisticated investors." -- Craig McCann, Ph.D. and CFA, and Dengpan Luo


INDEX ANNUITIES EXPOSED: Two University professors (Yale and UCLA) discovered that investors would be better off in a simple portfolio of U.S. Treasury bonds and large cap stocks – a whopping 97% of the time! Other studies have suggested that when someone buys an annuity this typically results in a wealth transfer of as much as 15% to 20% from the investor to the insurance companies and the sales agents. SOURCE


Ric Edelman's list of 15 investments to avoid includes fixed annuities and equity index annuities.


"As a general rule, annuities are an inferior investment vehicle" - White Coat Investor


"You never ever want to buy an annuity that has a surrender charge" -- Bob Brinker

"Surrender fees for the 10 top-selling indexed annuities averaged 11% in the first year" -- Fidelity


"So what to expect down the road with the big annuity providers? Well, that road should be a rocky one in the days ahead." -- Jim Cramer


"Almost always, anything that can be done with an annuity can be done a better way" -- Fisher Investments founder



"most investors would be far better served to invest in a short-term, high quality bond index fund [than a fixed annuity]" -- Frank Armstrong, founder and principal of a Miami-based NAPFA fee-only registered investment adviser with more than $550 million of assets under management.


"The only way I could make a really good living was by going against the interests of customers" -- A former annuity salesman


"Backdoor agent commissions have a negative impact on the returns [clients] get and lengthens the surrender period involved" -- Fool.com


The performance chart that the insurance industry DOESN'T want you to see...


Have a question about annuities? Ask the whistle-blower.


Non-fiduciary "advisers" aggressively sell annuities because of the lavish sales commissions, whereas fiduciary advisers will virtually never recommend annuities and for good reason

Avoid anyone who wants to sell you an annuity! Anyone who recommends that you buy an annuity is almost certainly not a fee-only fiduciary adviser (who legally works for you and your best interests, and does not earn back door commissions). Fee-only fiduciary advisers legally may not earn money from any source other than you! Fee-only fiduciary advisers know that annuities are terrible products in so many ways and so they will virtually never suggest that a client invest in an annuity (except in extremely rare situations described at the end of this article). What does this say about brokers, insurance agents and others who push annuities on senior citizens or just every day investors? These salesmen have their own best interests at heart! Legally they are in business for themselves or the company that they work for. Legally they do not work for you! When it comes right down to it they don't care about your best interests otherwise they wouldn't be pushing expensive, inferior investments like annuities, limited partnerships, life settlement investments, "actively managed" mutual funds and other high commission investments on everyone they meet. In fact "advisers" who push annuities are highly trained in the sales of insurance company products like annuities!


Chris Hansen from Dateline NBC exposed the truth about annuity salesmen in an undercover investigation. Agents are taught to scare senior citizens into fearing the stock market (Rule #11) while ignoring diversification into bonds. Typically these agents puff up their credentials, even by paying to have their faces on the covers of magazines as authors of ghost written articles. In his undercover investigation Chris caught insurance agent after insurance agent withholding critical information in order to convince seniors to buy index annuities.


This article details what over-zealous salesmen will conveniently never tell you about annuities because they just want to earn that huge sales commission (of anywhere from 5 to 20%) which comes indirectly at your expense through high management fees (even though you don't pay any front-end "load", fee or commission). The amount of commission that your broker earns is likened to the surrender period. For example an annuity with a surrender period of 7 years is likely to pay Mr. Annuity Salesman a lavish 6 to 7 percent commission. Few investors understand the complexities of how annuities work, but they get fed plenty of "happy talk" from crafty annuity salesmen who conveniently omit telling you about the cons of annuities. In fact calculating the long-term effects of annuity fees and taxation is so complicated that annuity salesmen themselves can't possibly understand annuities, yet salesmen continue to solicit annuities as if they are the best thing since sliced bread.


How much do broker / agents earn in commission money?

Fixed Index Annuities (formerly "Equity Index Annuities"): Usually 7% - 10% up front. Some have been reported to pay 20%. The commission is likened to the surrender period. In other words, the longer the surrender charge period, the higher the commission paid to the agent.

Variable Annuities: About 7% - 10% up front, plus a possible trailer commission of typically around 1/4% per year for as long as you hold the annuity or have the agent's name listed on your statements. The commission is likened to the surrender period.

SPIA's (Immediate Annuities): Usually 3% but may be as much as 4%. Source , Source

Index funds: No commission. Now you know why non-fiduciary 'advisers' never recommend index funds, even though they are the lowest cost and superior choice, and even though they should represent the vast majority if not all of your portfolio!

Sources: Kiplinger , ProbateLawyerBlog , TheREITAdviser , HighPassAsset , CrimesOfPersuasion , Quatloos , Forbes Magazine


QUESTION: Where does the insurer get the money from which to pay these exorbitantly high commissions? It must and can only come out of your investment in one way, shape or form. Usually it's baked into caps, spreads, participation rates and surrender penalties.


Trying to gain your trust

broker1Fee-based fiduciary or non-fiduciary brokers, insurance agents, bank employees, and other "advisors" will say anything they can to try to convince you that they have your best interests at heart and that they are the only person you need to talk to in order to make your investment decisions. They might say something to the effect of "We practice full disclosure of all pros and cons of annuities so that our clients have the information they need to decide whether or not annuities make sense for them". This is all deceptive and useless happy talk that gives investors a false sense of security. I have yet to encounter a fee-based fiducairy or non-fiduciary who practiced full disclosure of all of the negatives described on this website. The mere fact that they have selected an annuity for you should tell you everything you need to know about that advisor's priorities. Never make any financial decisions based on the recommendations of a non-fiduciary (commission-based advisor). Legally they don't work in your best interests. Fee-based fiduciaries are conflicted as well.


I came across a You Tube video called "Get the Basics on Annuities" which stated that most states mandate that no annuity is sold unless it is suitable for the customer's age, financial situation and goals. The operative word is "suitable" and the legal "suitability standard" is very very low and it will not protect you from being sold this crappy annuity product in the first place! Never ever confuse the low "suitability standard" for the high "fiduciary duty" that you want from an adviser (see page one for more).


Another ploy used in this video to gain your undivided trust is to invoke authority by stating that "annuities can only be sold by licensed professionals who are mandated to received product training". On the surface this might sound warm and comforting however this is still meaningless because only a fee-only fiduciary who legally works for you and your best interests can be trusted for any type of advice on selecting investments. Whoever it is that is urging you to buy and annuity is nothing more than a self-serving salesman. Car salesmen receive training on how cars work -- that certainly doesn't mean that you should heed their biased "advice" to buy what's on their lot.


In this video they also make the deceptive statement that "no sales compensation [paid to your adviser] is ever deducted from your annuity principal". This is true, but what they aren't telling you is that you are indirectly paying for Mr. Broker's lavish compensation from the insurance company through the high annual annuity fees that they charge you. It's a shell game. When you compare the fees of "retail annuities" with TransAmerica's low cost annuities (which pay no sales commissions) that's when you understand how much it's really costing you when you work with a non-fiduciary "adviser".


Click here to read a consumer reports article about these free seminars (skip to page 16).


Adviser blatant failure to disclose the many negative points (described on this website)

failureWhen any adviser fails to disclose or quickly glosses over the negatives described on this page, unless they are utterly incompetent (which they cannot be), consider it proof positive that they are trying to "make the sale" because of conflict of interest. And merely handing you a prospectus in lieu of verbally explaining it to you is absolutely not acceptable because the legal language inside of a prospectus is so complicated that only a lawyer can truly begin to understand it. Find a new adviser immediately! Again, you specifically need a fee-only fiduciary registered investment adviser for personalized investment advice, 2nd opinions, etc.


A sales pitch cleverly disguised as

an "informative seminar & free dinner" or "weekly radio show" or "free book"

mealA common ruse used by brokers and insurance agents is to advertise a "free retirement seminar". Sound too good to be true? It is! These "seminars" are nothing more than sales pitches to get you to lock your money up in an annuity, cash value life insurance or other high commission investment products described on this site. They may offer you a free steak dinner or brunch as a psychological ploy to make you feel guilty about saying "no". Don't ever waste your time going to these sales pitches. These events have been described as the most expensive free dinner you will ever eat!


radioAnother ploy is for brokers or insurance agents to buy airtime on radio stations. The program usually has the appearance of any other legitimate radio show. It may even be part of the weekly rotation of on-air talent, the host or hosts may take live calls, the radio station may list the hosts as part of it's "on-air staff", etc. Recently I was listening to a two hour show on a major AM radio station in which the host never actually said what investment product he was pitching. But when he said that the investments he recommends are "guaranteed by billion dollar companies" that confirmed it for me that it was in fact none other than annuities that he was selling! And you have to ask yourself why doesn't he just flat out say that it is annuities that he is pitching? This is because over the years word has been getting around that annuities are terrible investments. These "radio hosts" want unsuspecting investors to get sucked in before they have a chance to talk to knowledgeable friends and family.


Another ploy that annuity salesmen may use is to offer a free book on how to protect your money. It may be marketed specifically towards senior citizens through paid advertisements. The fact that you are finding out about it through a paid commercial should tell you that they certainly aren't doing it for charity! Nobody spends that kind of money without a plan to ultimately make money off of you (such as through selling annuities).

Another ploy brokers and insurance agents use is to go out of their way to come to your home or they may want to meet with you at a nice hotel conference room for a one-on-one "consultation". Make no mistake, this is not a financial planning "consultation" but rather a sales pitch! Again this has a psychological effect. "I went out of my way for you. Won't you buy this annuity by signing the papers now?" By the way it is completely unethical for anyone to get your to sign the annuity application papers on the spot. Keep in mind that it is perfectly normal that fiduciary fee-only financial advisers (the good guys) may routinely conduct financial advisory meetings with clients over the phone. So when someone eagerly volunteers to come to your home or pay a hotel to use their conference room, this should immediately trigger a red flag of suspicion no matter how "nice" and "professional" they appear.


Hidden Conflicts of Interest

And finally beware of anyone who claims to be "retired" or otherwise would appear to have no conflicts of interest, yet they want to go out of their way to help get you with your finances. They might be paying for radio airtime, might have an 800 number for you to call them after the show and be willing to drive out to meet with you. Chances are that "retired" advisor is going to direct you to someone from whom they will receive a kickback from once the annuity sale is made.


As another example Tony Robbins is not in the financial services industry, yet he is curiously pushing index annuities. As it turns out he is partners with an insurance brokerage company. Don't expect everyone to provide some sort of fine print that explains their conflicts of interest.


Never go to a salesman for money advice!

Retirement planning is a very serious matter! Estate planning is as much serious as it is a complex matter. Never under any circumstances tackle retirement planning or estate planning with a broker, insurance salesman, bank employee, seminar speaker, or any other commission-based non-fiduciary!!! All of these people legally do not work for you and by default should not be trusted for any type of personalized advice, financial or otherwise. This type of work is a job for a fee-only fiduciary adviser (who among other things directly charges you a fee for their services and has a written agreement with you).


CAUTION: There are bad fiduciary advisers out there who can't resist the urge to sell commission-based investments like annuities. It may not even be illegal, but is just plain terrible advice. And when the do sell you that annuity they "double dip" by charging you a fee and additionally pocketing a lavish commission! This is why you should only work with a fee-ONLY fiduciary adviser if you need help in selecting investments. Stick with bond and stock ETF's.


How are annuities sold?

Step 1: Gain your trust. This may include flashing their certifications such as Certified Financial Planner and /or simply going by a fancy trustworthy sounding title like "Wealth Strategist". Mr. Salesman may also boast about awards that he's won or books that he's published with the help of companies that guarantee that it will become a "best seller". Mr. Salesman may also talk about how many years he's been in the financial services industry. Or he may boast that he's a fiduciary without telling you that he's merely a fee-based fiduciary.

Step 2: Present lots and lots of anecdotes instead of presenting actual annuity contract data. Anecdotes leave it up to you to use your imagination to think that you're getting a good deal.

Step 3: Present strawman arguments. A common ploy is to bastardize other inferior investments or strategies in order to puff up annuities. For example: Bash expensive actively managed mutual funds, bash the returns of a portfolio that's too over allocated into stocks during the 2000's market crash, or bash traditional investing while taking out 5% per year instead of 4%.

Step 4: Lie by omission. Omit critical facts about annuities, such as the fact that the "return" they are talking about is merely "roll-up rate", or that annuities withdrawals are taxed at the higher ordinary income tax rate.

"I never change you a fee" -- Mr Annuity Salesman

"Annuity agent commissions are built into the [annuity] policy.... Don’t let them get away with semantic word games by saying such intellectually insulting phrases as ‘I never charge a fee.’ That is utterly ridiculous, and in some real world circles, would be called an absolute lie." -- the Balance.com

Blatant salesman lie / shell game:

"Annuities have no fees"

freeThere have been reports of some brokers trying to lure investors into buying annuities by saying that annuities have no fees. ALL annuities have either 1) extremely high and hidden fees or 2) your profit participation is much much less than it should be due to performance caps, participation rates, etc. In the end annuities are one of the most expensive of all investment products.


In the case of certain annuities such as variable annuities your broker is being sneaky by only referring to "front-end" load fees. What he's not disclosing is that with investments there are 3 types of potential fees. There are front-end fees, back-end fees and fees that you pay during the time you are invested.


Understand that somehow the insurance company must compensate your broker for the extremely high commission they pay him. And insurance companies are not doing this for charity! They have overhead and they are for-profit companies and so they too must skim money from your investment for themselves and to pay for their overhead. They do so by charging you very high annual fees (as described in great detail further down this page), lowering the index annuity "participation rate" and / or ceiling, and in other ways. If you surrender the annuity early they charge you a huge surrender penalty to pay for your broker's lavish commission, their advertising and administration costs, and for their own company profits. One way or another you will pay dearly! This is why studies have shown that the purchase of an annuity typically results in a wealth transfer of as much as 15 - 20% from the investor who buys the annuity to the insurance company.


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