Are annuities a good idea?

It depends on which annuity, who is buying it and what for. A simple income annuity can be a sound way to turn savings into guaranteed lifetime income, while complex annuities with high fees, long surrender periods and heavy commissions are often a poor fit. Sales have been very strong: LIMRA reported a record $461.3 billion of U.S. annuity sales in 2025, but a record says what people are buying, not what is best for you.

What an annuity is for

An annuity swaps a sum of money for a promise from an insurer. It is mainly a tool against longevity risk, the chance of outliving your savings, which is the mirror image of what life insurance covers (life insurance vs annuities: opposite tools for opposite risks). The basics are in what is an annuity and how does it work?. Types differ greatly:

• Income annuities (SPIAs and Deferred income annuities (DIAs): longevity insurance explained) buy lifetime income and are the simplest and cheapest in fees.
• Fixed and multi-year guaranteed annuities (MYGAs) pay a stated rate for a term, like a bank CD with insurer backing and tax deferral.
• Indexed, RILA and variable annuities link returns to markets and add guarantees at a cost.

The case for annuities

• Guaranteed income for life. A life annuity is one of the few products that pays as long as you live. Pooled mortality means the insurer can pay more than you could safely withdraw yourself, since some buyers die earlier.
• Spending confidence. Knowing that essential bills are covered for life can make it easier to spend the rest of your savings without constant worry.
• Protection from market timing. Poor returns early in retirement hurt a portfolio most; a guaranteed floor of income avoids that.
• Relief from managing money. For someone who dislikes or cannot handle investing decisions, a steady check simplifies life, especially with cognitive decline.
• Tax deferral and no contribution limits on non-qualified annuities, if you have already used other accounts.
• Pension substitute. Few private workers now have pensions, so an annuity can fill the gap between Social Security and expenses.

The case against annuities

• Fees and commissions. Layered charges can drag returns, and sellers are often paid commissions that influence which product is recommended (annuity fees, explained).
• Loss of liquidity. Surrender charges and, for income annuities, no way back out (annuity surrender charges and free withdrawals). Money you may need for emergencies or long-term care should not be locked up.
• Inflation. A fixed payment loses purchasing power over decades unless you pay for an inflation feature, which lowers the starting payment.
• Counterparty risk. The guarantee is only as strong as the insurer. State guaranty associations step in up to limits that vary by state; per NOLHGA (as of June 1, 2025) most states cover $250,000 of annuity value, so check yours with the state guaranty association coverage lookup.
• Ordinary-income tax. Gains are taxed as ordinary income rather than capital gains, and heirs get no basis step-up (how annuities are taxed).
• Early death. A life-only payout stops at death. Refund and period-certain options reduce the payment.
• Complexity and sales abuse. Complex products have drawn regulatory attention and consumer complaints; see annuity sales abuses targeting seniors and best interest rules for annuity sales.
• Opportunity cost. A diversified portfolio may have higher expected returns, at the price of risk the annuity removes.

Who tends to benefit

Who tends to do better without one

• People with a large pension and Social Security already covering essentials.
• Those with poor health or short life expectancy, who may collect little.
• People whose emergencies or care costs may need a lump sum.
• Buyers being pushed into a complex contract with a long surrender period, especially at advanced age.
• Anyone who cannot explain, in a sentence, what the product does and what it costs.

Alternatives worth comparing

An annuity is one of several ways to cover a retirement income gap, and it is fair to price the others:

• Delaying Social Security. Waiting increases a benefit that is inflation-adjusted and paid for life, which works like a low-cost annuity. Compare it before buying a commercial one.
• Bond ladders and CDs. They give predictable income for a set period without insurer risk beyond the issuer, but they do not guarantee income for life.
• A flexible withdrawal plan. A diversified portfolio with a spending rule keeps liquidity and heirs' value, but it carries market and longevity risk.
• Partial annuitization. Many people put only the amount needed for essentials into an annuity, and keep the rest invested. That limits both the fee exposure and the lock-up.

None of these is right for everyone. The question to ask is which risk you least want to carry, and what you are paying to hand it to someone else.

A way to decide

Say a hypothetical retiree needs $4,000 a month; Social Security covers $2,600. The $1,400 gap is the "floor" a guaranteed product might cover, and the rest of the portfolio can stay invested. This frames an annuity as a purchase for a specific need, not as an investment. Use the annuity payout calculator to see what premium might fund such a gap, and compare several insurers. A fee-only planner paid by you, not by commission, is a good second opinion.

Key takeaways

• Annuities are best understood as insurance against outliving your money, not as high-return investments.
• Simple income annuities are the cheapest and most transparent; complex ones need careful cost review.
• The main downsides are fees, locked-up money, inflation and reliance on one insurer.
• They tend to suit retirees with an income gap and good health, and tend to suit poorly those needing liquidity.
• Get the fee schedule, surrender terms and seller compensation in writing before signing.