What Are the Pros and Cons of Buying an Annuity?

Annuities have advantages and disadvantages.

The biggest mistake is pretending they do not.

They are insurance contracts designed to transfer specific financial risks to a life insurance company.

That can provide valuable guarantees.

The right decision comes from understanding both sides.

Key Takeaways

• Annuities are transfer-of-risk products.
• Their primary benefits include principal protection and contractual lifetime income.
• Some annuities have no annual product fees.
• The biggest risk is often buying an annuity for non-guaranteed growth rather than the actual contractual benefit.

Pro: Annuities Provide Contractual Guarantees

An annuity is a contract.

That means the insurance company is obligated to provide the guarantees written into the policy.

Those guarantees can address:

• Principal Protection
• Income for Life
• Legacy
• Long-Term Care

That certainty is one of the primary advantages.

Pro: Lifetime Income

Annuities have a unique ability to provide income for as long as you live.

That transfers longevity risk to the insurance company.

If you live longer than expected, the contractual lifetime income continues.

That can be valuable for retirees worried about outliving their assets.

Pro: Joint Lifetime Income

Lifetime income can also cover two lives.

A joint-life annuity can continue paying as long as either covered person is alive.

That can help protect a surviving spouse and maintain the household income floor.

Pro: Principal Protection

Fixed annuities can provide contractual principal protection.

MYGAs, for example, provide a guaranteed interest rate for a specified period.

That can be useful for money you do not want exposed to market losses.

Pro: Annuities Can Support an Income Floor

An income floor is the dependable money reaching your bank account every month.

It can include:

• Social Security
• pension income
• annuity income

Establishing that floor can reduce the need to sell investments simply because retirement expenses need to be paid.

Pro: Some Annuities Have No Annual Fees

It is incorrect to assume all annuities have high annual fees.

Products such as:

• SPIAs
• DIAs
• QLACs
• MYGAs

generally do not have annual product fees.

Other annuities may have fees if optional riders are added.

Con: Fear of Missing Out

Another challenge is psychological.

You may purchase an annuity for a guarantee and then watch the stock market rise substantially.

That can create fear of missing out.

But the annuity was not purchased to compete with the stock market.

It was purchased to solve a contractual problem.

Con: Bad Sales Pitches

Some of the biggest problems with annuities come from how they are sold.

Be cautious with pitches involving:

• large upfront bonuses
• market upside with no downside
• hypothetical growth
• back-tested returns
• free long-term care

Those claims can distract from the actual contract.

Annuities and Investments Can Work Together

The decision does not need to be annuities or investments.

Annuities can provide guarantees.

Investments can pursue growth.

If your income floor is covered contractually, you may feel more comfortable allowing the remaining portfolio to stay invested through market volatility.

The PILL Framework

Annuities generally solve four primary objectives:

• Principal Protection
• Income for Life
• Legacy
• Long-Term Care

That framework can help determine whether an annuity is even necessary.

Do Not Buy an Annuity for Growth

If the primary goal is market growth, use market investments.

Annuities should be evaluated for guarantees.

That keeps expectations aligned with what the contract is actually designed to provide.

Compare Multiple Carriers

Annuities are commodity products.

Compare different insurance companies for the contractual guarantee you need.

For lifetime income, compare the actual income.

For fixed-rate accumulation, compare MYGA rates and terms.

Understand the Trade-Offs

A good annuity recommendation should clearly explain:

• benefits
• limitations
• surrender period
• liquidity
• fees
• beneficiary provisions
• guarantees
• non-guaranteed elements

If you only hear the positives, you are not getting the full story.

Where to Compare Annuities

Use our annuity calculators to compare contractual guarantees from multiple insurance companies.

Run the numbers for the specific problem you are trying to solve rather than choosing a product because of a sales pitch.

The Bottom Line

The primary benefits of annuities are contractual guarantees such as principal protection and lifetime income.

The primary drawbacks include surrender charges, reduced liquidity, irrevocable decisions in some lifetime income structures, and the possibility of buying the wrong product because of an aggressive sales pitch.

An annuity can be useful when the guarantee solves a real financial need and you understand the limitations before buying it.