The criticisms that are true — and the ones that aren't.
Search "are annuities bad" and you'll find two walls of people who never talk to each other. On one side, index-fund purists who treat every annuity as a rip-off. On the other, commissioned agents who treat every retiree as a sale. Both are describing something real. Neither is describing the same product — because "annuity" isn't one product. It's a label stretched across at least five very different contracts, and most of the reputation comes from the two that are sold the hardest.
So the honest answer isn't "yes" or "no." It's: the reputation is half-earned. Some annuity criticisms are dead-on. Others are myths that survive because they make a good headline. Here's how to tell them apart.
Where the bad reputation actually comes from
The single biggest reason annuities get a bad name has less to do with the products than with how they're sold. Many annuities pay the selling agent a commission of 5% to 9% of your premium up front — and you never see it as a line item, because the insurer pays it out of its own margin. A product that pays the salesperson $7,000 to move $100,000 will get pushed, and it will get pushed to people who don't need it. That incentive is exactly why regulators acted: the NAIC's revised "best interest" annuity rule (Model #275) has now been adopted by roughly 48 states (New York runs its own, stricter, version), requiring agents to recommend what's actually suitable for you, not what pays best.
Keep that distinction in mind for everything below: the sales channel and the product are not the same thing. A criticism of one is not automatically a criticism of the other.
The criticisms that are true
1. Some annuities really are expensive. This is the strongest and most legitimate complaint, and it lands squarely on variable annuities. Loaded with the guaranteed-income and death-benefit riders that get them sold, a typical retail variable annuity runs 2% to 3.5% per year all-in — a ~1.25% mortality & expense charge, plus admin, plus the underlying fund fees, plus each rider (SEC Investor Bulletin: Variable Annuities). Low-cost, no-commission "investment-only" variable annuities do exist — but they're the exception, sold by fee-only advisors, not the ones driving the reputation. Fixed-index annuities hide their cost differently: there's usually no visible annual fee, but the insurer funds your commission and its profit out of the "spread" — the gap between what its bond portfolio earns and what it credits you. That's why your upside is throttled by caps and participation rates the carrier can reset each year. (Add an income rider and you'll see an explicit charge too, typically around 1%.)
2. You can get locked in. Most deferred annuities carry a surrender schedule — a declining penalty, often starting near 7% and running 6 to 10 years, for pulling money out early, sometimes with a market-value adjustment on top. Most contracts let you withdraw ~10% a year penalty-free, but the rest is genuinely stuck. And the income annuities people praise have the most extreme version of this: a single-premium immediate annuity is typically irrevocable once the free-look window closes. You've traded a lump sum for a lifetime paycheck, and there's no undo button.
3. Opportunity cost is real. For money you can afford to leave at risk and want to grow, a low-cost index portfolio usually beats an annuity on expected return after fees. Full stop. What that comparison leaves out is risk: a portfolio can be cut in half the year you retire, and an annuity's guaranteed floor can't. So "the market wins" is true for growth money and beside the point for the money you can't afford to lose — which is the whole reason to buy a guaranteed income floor in the first place.
4. Complexity you can't comparison-shop. A 200-page prospectus and a crediting formula with caps, spreads, and participation rates make it nearly impossible to compare two products side by side. Some of that complexity is unavoidable — the insurer really is hedging the risk of guaranteeing returns on volatile assets. But complexity a buyer can't price is complexity a sales channel can exploit, and it does. (A newer middle category, registered index-linked annuities — "buffer" annuities or RILAs — adds more upside than a fixed-index product in exchange for accepting some real losses, with its own layer of fine print.)
The criticisms that are mostly myth
Myth 1: "All annuities are high-fee." This is the most common error, and it comes from treating variable annuities as the whole category. An immediate annuity has no explicit annual fee at all. Its cost is baked into the payout rate, and for what it does — a paycheck you cannot outlive — it's cheap. Here's the trap that fools even careful people: the payout rate is not a yield. Our payout calculator shows a 65-year-old man getting roughly $625 a month per $100,000 — about 7.5% a year. That is not 7.5% interest. It's a blend of interest, your own principal being handed back, and "mortality credits" (the pooled money of buyers who die earlier). Comparing that 7.5% payout to the ~6.3% on a 5-year fixed-rate annuity — which is pure interest — is comparing two different things. Do it and you'll draw the wrong conclusion.
Myth 2: "You lose your money when you die — the insurance company keeps it." Only if you choose the option that does that. "Life-only" pays the most precisely because nothing is left to heirs — that's the trade. But you can elect a cash-refund, period-certain, or joint-life option that returns any unused principal to your beneficiaries. You'll get a smaller monthly check, but the "the insurer keeps it all" outcome is a choice on a form, not a law of nature.
Myth 3: "Annuities aren't safe." Annuities aren't FDIC-insured — that part's true — but they're backed by the issuing insurer and, behind that, by your state guaranty association, which covers at least $250,000 in present value in most states (some go to $300,000, a few to $500,000; California pays 80%). The practical rules that follow: buy from financially strong carriers, and don't stack more than your state's limit with a single insurer. Credit risk is real; it is not the same as "unsafe."
The real drawback the myths distract from: taxes
Here's a legitimate knock that rarely makes the headlines. Gains inside a non-qualified annuity are taxed as ordinary income, not at lower long-term capital-gains rates (IRS Publication 575), and withdrawals come out gains-first (last-in, first-out), so you're taxed before you touch your principal. There's also no step-up in basis at death — your heirs inherit the tax bill on the growth. For money that could otherwise sit in a taxable brokerage account, that's a genuine cost.
It's not entirely one-sided: the same contract grows tax-deferred until you withdraw, and you can move between annuities tax-free with a 1035 exchange. But if you're being sold "tax advantages" as the headline reason to buy, that's a flag — the tax treatment is usually a wash or a drawback, not the selling point.
So — are annuities a bad investment?
The framing is the problem. An income annuity isn't an investment at all; it's insurance against outliving your money, and judging it by "return" makes as much sense as judging your homeowner's policy by its return. As an investment, most annuities are mediocre. As insurance, the right one can be excellent — and the wrong one, sold for the wrong reason, can be exactly the ripoff the critics describe.
A workable rule: if you have a gap between essential expenses and guaranteed income (Social Security, a pension) and outliving your savings genuinely worries you, a plain immediate or deferred-income annuity is worth pricing. If you're being pitched a variable or indexed product as a way to "grow your money safely," slow down and read the fee page. Run your own numbers on the payout calculator, check where rates actually sit this month, and compare the product types before anyone compares them for you.
Common questions
Which annuity has the lowest fees? A single-premium immediate annuity or a deferred-income annuity — neither carries an explicit annual fee; the cost is inside the payout rate. Multi-year fixed-rate annuities are also cheap. Variable annuities with riders are the most expensive.
Are annuities ever a good idea for a healthy 60-something? Yes — to fill an income-floor gap, or to guarantee income you won't start drawing for years. Good health actually strengthens the case, because the longer you live, the more a lifetime payout pays out.
If I already bought an expensive annuity, am I stuck? Not necessarily. After the surrender period you can often 1035-exchange into a lower-cost contract without triggering tax. Check your surrender schedule and any rider guarantees you'd forfeit first.