This article is for general education. It is not a recommendation to buy any specific product, and it is not a substitute for a conversation about your own situation.
When they work, when they don’t, and what to ask before you sign anything
Annuities generate more confusion than almost any other product in retail finance, and most of that confusion comes from where people get their information. Insurance companies market them as a guaranteed solution to every retirement fear. Critics dismiss them as a scam built on hidden fees and high-pressure sales. Both versions skip the part that actually matters: what the contract says, what it guarantees, and whether those terms fit your specific situation. Here’s the honest version.
An annuity is a loan to an insurance company, not an investment in the market
The most common misunderstanding about annuities is treating them like a market product. In a fixed or fixed-indexed annuity, you hand a sum of money to an insurance company, and the company contractually agrees to pay it back on specific terms: a floor that prevents your credited balance from dropping in a bad year, a ceiling (called a cap) on how much you can earn in a good one, and, if you choose it, an income stream the company is obligated to pay for the rest of your life regardless of how the underlying account math works out.
None of that money is invested in the stock market on your behalf. An index may be used as a benchmark to calculate what you’re credited, but you never own it and you’re never exposed to its losses. That distinction explains both what an annuity guarantees and what it can’t. A strong market year won’t be fully reflected in your return, because the product was never built to track the market. The insurance company’s ability to make good on the contract is what backs the guarantee. Market performance isn’t part of the equation.
Variable annuities are the exception here and behave much more like market investments, including the ability to lose principal. The rest of this article is about fixed and fixed-indexed contracts, which is where most of the public debate actually lives.
The product’s reputation problem traces back to two specific weaknesses
Annuities carry a worse reputation than most financial products, and the reasons are identifiable.
First, the licensing bar is low. The relevant state exam has a pass rate in the neighborhood of seventy percent, meaning roughly three out of four people who take it are licensed to sell the product. Passing demonstrates minimum competency, and a significant volume of annuity sales happen through organizations built around high-volume recruiting, with commission structures that reward bringing in new sellers as much as serving clients well.
Second, the paperwork gets skimmed. Insurance regulations require carriers to disclose the surrender schedule, the crediting formula, the rider costs, and the full year-by-year illustration, and carriers generally do disclose all of it. The material is dense and written in industry language, and most buyers glance at it and stop reading. The gap between technically disclosed and actually understood is where most bad annuity experiences originate.
Today’s contracts are meaningfully different from the ones that built the industry’s reputation
Interest rate history is usually left out of the annuity conversation entirely, and it matters. For roughly three decades leading up to 2021, the Federal Reserve kept interest rates low, and savings accounts and CDs paid almost nothing. Insurance carriers didn’t have to compete hard for retirement money, because the alternative was worse by default. Contracts written during that period tended to carry higher fees, lower caps, and no signing bonuses.
Starting in 2021, the Fed raised rates for the first time in a generation, and by 2023 and 2024, banks were offering CDs paying four to five percent. Banks became real competitors for retirement money, and carriers responded with better contracts: no-fee options, higher participation rates, and signing bonuses that didn’t exist on older paper. A contract written before 2021 and one written after it can carry the same product name and behave very differently.
Annuities solve for protection, not growth, and buyer’s remorse usually traces back to that mismatch
The most common source of dissatisfaction with annuities isn’t a bad contract. It’s a goal that was never actually protection in the first place. An annuity’s core function is limiting downside in exchange for limiting upside. If the real goal is still market-level growth, an annuity will underperform in strong years, and no amount of product quality changes that outcome. Annuities make sense for money earmarked for guaranteed lifetime income or principal protection. They make less sense for money meant to keep growing aggressively. Settle that question honestly before comparing any specific contracts.
Five questions determine whether a specific contract is fair
These aren’t exhaustive, but they’re the minimum before signing anything:
- Carrier credit rating. Ask for the rating from at least two of Moody’s, Standard & Poor’s, and Fitch. It should be A or better. You’re extending a long-term loan to this company, and its ability to pay matters more than any feature on the contract.
- Carrier age. A company that has written insurance for a century has been tested by the Depression, multiple recessions, and the 2008 financial crisis. A ten-year-old company hasn’t.
- The illustration, not the brochure. The illustration is the year-by-year contract math under multiple scenarios, on the carrier’s own letterhead. The brochure is a marketing summary written to sell the product. If someone won’t produce the illustration, that alone is disqualifying.
- Every fee and limit, explained in plain terms. The cap, the participation rate, the rider fees, and the annual costs, translated into what they mean for your specific numbers.
- The exact cost of leaving early. The surrender schedule should be walked line by line: what you’d receive in year one, year three, year five, and when the fee reaches zero. A “10-year annuity” means leaving inside that window costs a shrinking fee. It doesn’t mean you’re locked in for ten years.
The most useful second opinion answers a different question than most people ask
Most people who seek a second opinion on an annuity ask the wrong version of the question. They ask another advisor to review the specific contract they’ve already been shown, comparing rates and bonuses against a competing pitch. That’s a narrower question than the one that actually matters.
The more useful second opinion asks whether an annuity is the right category of product at all, given the full picture, everything you own, your income needs, your timeline, and your other goals, separate from any specific contract being pitched. That’s a suitability opinion, not a pricing comparison, and it should come from someone with no stake in whether you buy this contract or any contract. Anyone eager to jump straight to comparing rates and bonuses is skipping the decision that should have come first.
The bottom line
Annuities are not inherently good or bad. They are a contractual loan to an insurance company, with terms that vary enormously from one contract to the next and one company to the next. The real question is whether these specific terms, from this specific company, fit this specific goal. That question has a factual, checkable answer. Most people are simply never shown how to check it.
Deric Scott Ned is an income planner based in Pasadena, California, working with clients on retirement income planning under a Best Interest obligation, meaning he is legally required to act in his clients’ best interest. This article reflects his own views and general education. It is not personalized advice.
Frequently Asked Questions
What is an annuity, in plain English?
A contract with an insurance company. You provide a sum of money, and the company pays it back over time on agreed terms, which can include guaranteed income for life.
Are annuities a good investment?
It depends entirely on the specific contract, the carrier’s financial strength, and whether your goal is protection or growth. There’s no blanket answer for the category as a whole.
Can I lose money in a fixed annuity?
Fixed and fixed-indexed annuities include a floor that prevents your credited balance from dropping due to market declines, backed by the insurer’s ability to pay. Variable annuities work differently and can lose value.
What should I ask before buying an annuity?
At minimum: the carrier’s credit rating, how long the carrier has operated, the full illustration rather than a brochure, plain-English explanations of every cap and fee, and the exact surrender schedule for early withdrawal.
Should I get a second opinion before buying an annuity?
Yes, but ask the second opinion to evaluate whether an annuity fits your overall situation, not just to compare the specific contract you’ve already been shown against another rate.
