7 Powerful Reasons To Buy Annuities And 7 To Run

Reading time: 15 minutes

Published: December 16, 2025

If you have ever tried to read about annuities and walked away more confused than when you started, you are not alone. Many people struggle to decide whether they should buy annuities or avoid them altogether. Annuities live in this weird space between investments and insurance, and the marketing around them often feels either too salesy or too scary. The truth sits somewhere in the middle: annuities can be very useful for some people and a poor fit for others. In this article, we’ll walk through both sides in plain English so you can decide whether annuities deserve a spot in your retirement plan or just a polite “no thanks.”

Before we dive in, it helps to remember that “annuity” is a big umbrella term. There are fixed, fixed indexed, variable, immediate, and deferred annuities, each with very different guarantees, costs, liquidity limits, and risk profiles. So when you hear someone say “annuities are great” or “annuities are terrible,” your first thought should be: “Which kind, and for whom?”

Key Takeaways

• Annuities are insurance-based contracts that can provide guaranteed income, but they are not simple or one-size-fits-all.
• You will see seven reasons you might consider an annuity and seven reasons you might avoid one, so you can weigh tradeoffs clearly.
• Common concerns like fees, commissions, surrender charges, and complexity are real, but they vary widely by annuity type and contract.
• Before buying, you should compare options, understand the fine print, and talk with a qualified, fiduciary financial professional.

What Annuities Actually Are (And What They Are Not)

At the most basic level, an annuity is a contract with an insurance company. You give the insurer money, either as a lump sum or through a series of payments, and in return they promise certain benefits. Those benefits might be guaranteed lifetime income, a stream of payments for a set number of years, or tax-deferred growth that you can tap later.

Here are the main flavors you will hear about:

• Fixed annuities: You earn a stated interest rate for a period of time, similar to a CD from a bank but issued by an insurance company.
• Fixed indexed annuities: Your return is linked to a market index (like the S&P 500) with a floor that protects you from losses, but a cap or formula that limits your upside.
• Variable annuities: Your money is invested in subaccounts that look like mutual funds. Your account value can go up or down with the market. Optional riders can add guarantees, usually for extra cost.
• Immediate annuities: You give the insurer a lump sum and payments start almost right away, often for life.
• Deferred annuities: You let money grow for years before turning it into income later.

Each type has different guarantees, costs, liquidity rules, and risk levels. That is why blanket statements like “annuities are always bad” or “annuities are always safe” are misleading. The real question is whether a specific contract, from a specific insurer, fits your goals and your risk tolerance better than the alternatives.

7 Reasons You Might Invest in Annuities

Reason 1: You Want Guaranteed Lifetime Income

One of the strongest arguments in favor of annuities is simple: guaranteed income you cannot outlive. With certain annuities, especially immediate annuities or deferred annuities with lifetime income riders, the insurer promises to pay you for as long as you live. That can feel a lot like creating your own personal pension.

If you worry about outliving your savings, this kind of guarantee can bring real peace of mind. Social Security already provides a lifetime benefit, and an annuity can layer on another predictable payment. Just remember: the guarantee is only as strong as the insurance company behind it, so financial strength ratings matter.

Reason 2: You Want Protection From Longevity Risk

Longevity risk is the risk of living a long, healthy life and running out of money in the process. It sounds like a good problem to have, until you are 88 and anxious about every withdrawal. Annuities that offer lifetime income are designed to transfer that risk from you to the insurer.

In effect, you are pooling longevity risk with many other policyholders. Some people will pass away earlier, some much later, and the insurer prices the contract based on those probabilities. If you live a long time, you can “win” that bet, receiving more in income than you originally contributed.

Reason 3: You Value Predictable Cash Flow Over Maximum Growth

As you move into retirement, your priorities often shift. Instead of chasing the highest possible return, you may care more about knowing what you can safely spend each month. Certain fixed and immediate annuities can provide a predictable payment stream that does not depend on daily market swings.

This stability can make budgeting easier. You might pair annuity payments with Social Security and pensions to cover your core expenses, then use investment accounts for discretionary spending. If you want more help thinking about how all your retirement income sources fit together, you might also find it useful to read about sequence of returns risk and how to secure your retirement.

Reason 4: You Want Tax-Deferred Growth Outside Retirement Accounts

Nonqualified annuities (funded with after-tax money) can grow tax deferred. You do not pay tax on interest, dividends, or gains each year like you would in a regular brokerage account. Instead, you pay tax when you withdraw earnings, usually at ordinary income tax rates.

This can be attractive if you have already maxed out your 401(k), IRA, and HSA, and you still want more tax-deferred space. It is not a free lunch: you trade lower current taxes for potentially higher ordinary income taxes later, and there are rules and penalties if you withdraw before age 59½. But for some high savers, that tradeoff is acceptable.

Reason 5: You Want to Transfer Some Portfolio Risk to an Insurer

Many retirees worry about what a bad market early in retirement could do to their nest egg. By using part of your portfolio to buy an annuity with guarantees, you shift some market and longevity risk to the insurance company. This can help reduce the pressure on the rest of your investments to perform every single year.

For example, you might use a fixed or fixed indexed annuity for a portion of your bond allocation, seeking more stable income and principal protection. Or you might choose a variable annuity with an income rider that guarantees a minimum income base even if markets perform poorly. These strategies are not free, but they can be one way to manage risk if market volatility keeps you up at night.

Reason 6: You Prefer a “Set It and Forget It” Income Strategy

Not everyone wants to manage a detailed withdrawal strategy in retirement. Some people love spreadsheets and safe withdrawal rate research, others would rather not think about it. Annuities can appeal to that second group by turning a lump sum into a formulaic payout schedule.

Once the contract is in place, the insurer handles the calculations and the payments arrive on schedule. You give up some flexibility, but in exchange you get simplicity. For people who worry they might overspend or mismanage their investments later in life, this built-in discipline can be a feature, not a bug (yeah, I know, spoken like an engineer!).

Reason 7: You Want Optional Benefits Like Joint Life or Legacy Features

Some annuities allow you to customize benefits for your spouse or heirs. For instance, you can choose a joint-life payout that continues as long as either you or your spouse is alive, which can be useful if one person has a much larger retirement account. Other contracts offer death benefit riders that guarantee a minimum amount for beneficiaries, even if markets fall.

These features can help you match the contract to your family situation. Just be aware: every extra rider usually comes with extra cost, and sometimes the added complexity outweighs the benefit. You will want to compare what the rider provides with what you could reasonably do using a simple investment portfolio and life insurance instead.

7 Reasons You Might Not Invest in Annuities

Reason 1: High Fees Can Eat Into Returns

One of the most common criticisms of annuities is also one of the most valid: fees can be high, especially for variable annuities. You might see mortality and expense charges, administrative fees, fund-level expenses, and optional rider costs. Together, these can add up to 2% or even more per year in some contracts.

Over time, that drag can significantly reduce your growth compared with a low-cost index fund portfolio. Not all annuities are expensive, and some newer “no-load” or low-cost options exist, but you need to read the prospectus or disclosure documents carefully. If you are not sure what you are paying, that is a red flag.

Reason 2: Complexity Makes Them Hard to Understand

Many annuity contracts are packed with technical language, formulas, and conditions. Fixed indexed annuities, for example, might use caps, participation rates, spreads, or multi-year crediting formulas that are not intuitive. Variable annuity income riders can have separate “benefit bases” that are not the same as your actual account value.

Complexity itself is not evil, but it raises the risk that you buy something you do not truly understand. If you cannot explain in plain English how your annuity works, what it costs, and what you are giving up, you might be better off with simpler tools like basic index funds and a withdrawal plan. You should never feel rushed or pressured into signing a contract you do not fully grasp.

Reason 3: Commissions and Sales Incentives Can Create Conflicts

Many annuities are sold with substantial commissions paid to the agent or broker. Those commissions are often built into the product, so you may not see a separate line item, but they can influence what gets recommended to you. A salesperson might earn more by selling you one annuity rather than another, or by steering you toward an annuity instead of a lower-cost solution.

This does not mean every advisor who recommends an annuity is acting against your interests. It does mean you should ask how they are paid and whether they act as a fiduciary. Fee-only planners who are paid directly by you rather than by product commissions may be more likely to give product-neutral advice.

Reason 4: Surrender Charges Limit Your Liquidity

Annuities are not designed for frequent trading or short-term access. Most contracts include a surrender period, often 5 to 10 years, during which you pay a penalty if you withdraw more than a limited amount. These surrender charges usually decline over time, but they can be steep in the early years.

If you might need flexible access to your money for large purchases, health costs, or changing plans, those liquidity limits can be a serious drawback. You do not want to find yourself paying a big penalty just to get at your own savings. A good rule of thumb: never put money into an annuity that you might reasonably need in the near to medium term.

Reason 5: Inflation Risk Can Erode Fixed Payments

Many annuities promise fixed dollar payments that never change. That can feel comforting in the short run, but over a 20 or 30 year retirement, inflation can quietly eat away at your purchasing power. A payment that feels generous at 65 might feel tight at 85 if prices for housing, healthcare, and everyday living keep rising.

Some contracts offer cost-of-living adjustments or inflation-linked benefits, but those usually start with lower initial payments or higher costs. You can also try to hedge inflation by keeping part of your portfolio invested in growth assets like stocks, as discussed in our blog, Stock Market History Proves One Simple Investment Truth. Either way, you need a plan for inflation; a fixed payment alone is rarely enough.

Reason 6: Limited Upside Compared With Market Investing

With fixed and fixed indexed annuities, you typically trade away some or all of the market’s upside in exchange for downside protection. For example, an indexed annuity might credit you a portion of an index’s gain up to a cap, but give you zero in a down year. Over long periods, those caps and formulas can result in lower returns than simply owning a diversified stock and bond portfolio.

Variable annuities can offer more upside since they invest in market-based subaccounts, but once you subtract all the fees, net returns may still lag lower-cost alternatives. If your primary goal is long-term growth and you have a strong stomach for volatility, a straightforward investment portfolio may serve you better.

Reason 7: They Are Not Magic Retirement Solutions

Sometimes annuities get marketed as the answer to every retirement worry: income, safety, taxes, legacy, you name it. In reality, they are just one tool among many. They do not fix under-saving, they do not eliminate investment risk entirely, and they do not replace the need for a thoughtful withdrawal and tax plan.

For example, annuity income is often taxed as ordinary income, and required minimum distributions (RMDs) from qualified annuities still need to be managed carefully. If you are exploring broader retirement tax planning, you might also want to read about how to follow RMD rules and make withdrawals easy. Annuities can play a role, but they do not remove the need for planning.

Clearing Up a Few Common Annuity Misconceptions

Because annuities are complex and heavily marketed, several myths float around that are worth clearing up. You might have heard some of these at a dinner seminar or in a scary headline.

“All annuities are full of hidden fees.” Many are expensive, but not all. Some fixed annuities, for example, work more like CDs and do not have explicit annual fees, although the insurer still makes money on the spread between what they earn and what they credit to you. Variable annuities and riders are more likely to have layered fees, so always ask for a full fee breakdown in writing.

“If I die early, the insurance company keeps everything.” That can be true with certain payout options, but not with others. You can often choose a period-certain payout, joint-life payout, or refund feature that ensures some value passes to your spouse or heirs. The tradeoff is usually a lower monthly payment.

“Annuities are always safer than investments.” Fixed and immediate annuities can offer strong guarantees, but variable annuities still expose you to market risk, and indexed annuities protect principal but limit gains. Safety also depends on the insurer’s financial strength. Annuities are not backed by the FDIC; instead, they rely on state guaranty associations with coverage limits that vary by state.

“Annuities are only for very old people.” Many people buy deferred annuities in their 50s or early 60s to start income later. Others use them as long-term tax-deferred savings vehicles. Age matters for pricing and suitability, but there is no magic “annuity age.” What matters more is your goals, risk tolerance, and overall plan.

How To Decide Whether Annuities Belong in Your Plan

So where does all this leave you? You have seven reasons in favor and seven against, which is another way of saying: it depends on you. Annuities can be powerful for someone who wants guaranteed income, has already saved a solid nest egg, and is willing to trade some flexibility and upside for peace of mind. They can be a poor fit for someone still building wealth, who values maximum control and low costs.

Here are a few practical questions to ask yourself:

• Do I actually need more guaranteed income, or could I meet my needs with Social Security, pensions, and a sensible withdrawal strategy?
• How comfortable am I with locking up money for years in exchange for specific guarantees?
• Have I already used simpler tools, like paying down debt or investing in low-cost funds, before turning to more complex products?
• Do I clearly understand the fees, surrender charges, and tax treatment of the annuity being proposed?

If you want a deeper dive into the tradeoffs, you might find it helpful to read this overview of the pros and cons of annuities ↗ as a companion to this discussion. And if you are still in the stage of strengthening your overall financial foundation, you may want to focus first on steps like paying down high-interest debt quickly and building a diversified portfolio before committing to any long-term insurance contracts.

Conclusion

Annuities sit at the crossroads of investing and insurance, which is why they spark such strong opinions and so much confusion. They are not inherently good or bad: they are a tool with real strengths, real weaknesses, and a lot of fine print in between. If you decide to explore them, treat it like any major financial decision: compare options, run the numbers, read the contract, and work with a qualified financial professional who is willing to explain everything in plain English and put your interests first.

Most of all, remember that annuities are not one size fits all, so the right answer is not what worked for your neighbor or the person on TV, but what aligns with your goals, your risks, and the retirement life you actually want to live.