Are Annuities a Good Investment? A Fee-Only Firm's Honest Answer

Annuities are usually a mediocre investment but can be excellent insurance. A simple income annuity that converts savings into lifetime income solves a real problem, outliving your money, that no portfolio can solve with certainty. Complex annuities sold as investments, particularly many variable and fixed indexed contracts, often carry fee stacks of 2 to 3 percent or more per year that overwhelm their benefits. The answer depends entirely on which annuity, for which job, at what cost.

Why our answer is different from most answers you will read

Most writing about annuities comes from one of two camps. People who sell annuities earn commissions when you buy one, and those commissions can run several percent of the contract value. People who sell portfolio management earn fees on assets they manage, and money that moves into an annuity is money they no longer manage. Both camps have a financial stake in your decision, which is worth remembering whichever conclusion they reach.

Atlatl Advisers sells no annuities. We are a fee-only, SEC-registered investment adviser, we hold no insurance licenses for product sales, and we receive no commission, referral fee, or other compensation whether a client buys an annuity, surrenders one, or never touches one. When we analyze an annuity for a client, the analysis is the service. That independence does not make us automatically right, but it does mean we can follow the evidence without a thumb on the scale.

The evidence, in short: annuities are neither the scandal their critics describe nor the miracle their marketers promise. They are insurance contracts, and like all insurance, they make sense when you are paying a fair price to transfer a risk you truly cannot bear yourself.

What are the main types of annuities?

The word annuity covers products so different that no single verdict can apply to all of them. Four categories cover most of what is sold today.

Single premium immediate annuities (SPIAs) and deferred income annuities (DIAs)

These are the original annuity: you hand an insurer a lump sum, and it pays you a fixed monthly amount for the rest of your life, starting now (SPIA) or at a future date you choose (DIA). There is no account value, no fee schedule to decode, and usually no liquidity. You are buying longevity insurance, pure and simple.

This is the most defensible corner of the annuity market. Because the insurer pools thousands of lives, it can pay each annuitant more than a conservative portfolio could safely distribute, since those who die early effectively subsidize those who live long. Economists call these mortality credits, and they are the one ingredient an investment portfolio cannot replicate. The costs are real but mostly implicit: you give up liquidity, you give up any remaining balance at death unless you pay for a refund or period-certain feature, and the income is only as secure as the insurer's claims-paying ability.

Multi-year guaranteed annuities (MYGAs)

A MYGA is the insurance industry's competitor to a bank certificate of deposit. It credits a fixed rate for a set term, commonly three to seven years, with the rate locked at purchase. As of June 2026, annuity rate aggregators such as Blueprint Income quoted top five-year MYGA rates above 5 percent, meaningfully higher than comparable CD rates.

MYGAs have genuine appeal for conservative money: tax deferral on the interest until withdrawal, and rates that often beat CDs. The trade-offs are surrender charges if you exit early, no FDIC insurance (you rely on the insurer and, secondarily, on state guaranty associations with coverage limits that vary by state), and ordinary income tax plus a 10 percent federal penalty on earnings withdrawn before age 59 1/2. For money you will not touch and do not need before 59 1/2, a MYGA from a highly rated insurer can be a reasonable tool.

Fixed indexed annuities

Fixed indexed annuities credit interest linked to a market index, typically the S&P 500, with a floor of zero in down years. The pitch is market upside with no downside. The reality is governed by caps, participation rates, and spreads that limit how much of the index return you receive, and the insurer can usually reset those limits annually.

A contract with a 9 percent annual cap, for example, credits at most 9 percent even if the index rises 25 percent, and index crediting typically excludes dividends, which have historically contributed a meaningful share of equity returns. These products are not frauds, but they are routinely sold with illustrations that imply equity-like returns, and their long-run performance tends to resemble a bond alternative, not a stock substitute. They also commonly carry surrender schedules of seven to ten years and pay among the highest commissions in the industry, which explains some of the sales enthusiasm.

Variable annuities

A variable annuity wraps mutual-fund-like subaccounts inside an insurance contract, with optional riders that promise minimum income or death benefits. Here the fee stack deserves close attention, because the layers compound.

Industry data give a consistent picture. An analysis by Fisher Investments of more than 26,500 variable annuity contracts from 2020 through 2024 found an average mortality and expense (M&E) charge of 1.19 percent, average administrative fees of 0.18 percent, average underlying subaccount expenses of 0.94 percent, and average rider costs of roughly 1.06 percent for a guaranteed lifetime withdrawal benefit. Morningstar data have long put the industry average M&E charge near 1.25 percent. Stack those layers and a commission-sold variable annuity with a living-benefit rider commonly costs 2.5 to 3.5 percent per year, while a low-cost, advisory-friendly contract with index subaccounts and no riders can run well under 1 percent. Same product category, several times the cost.

A hypothetical example: what a 2 percent fee gap does to $1 million

Consider a hypothetical 60-year-old with $1,000,000 to invest for fifteen years. Option one is a commission-sold variable annuity with all-in annual costs of 2.9 percent, consistent with the averages above for a contract carrying an income rider. Option two is a diversified taxable portfolio with all-in costs of 0.9 percent.

The fee difference is 2 percentage points, or about $20,000 per year on the initial balance. If both options earned the same 6 percent gross return (a hypothetical assumption, not a projection), the annuity would compound at roughly 3.1 percent net and the portfolio at roughly 5.1 percent net. After fifteen years, that is approximately $1.58 million versus $2.11 million, a gap of more than $500,000. The annuity's rider provides an income floor the portfolio does not, and for some investors that floor has real value. The point is not that the annuity is always wrong; the point is that the floor has a price, and you should know the price before deciding whether the insurance is worth it.

When does an annuity actually make sense?

There are situations where the insurance is worth buying, and a fiduciary should say so plainly.

• You have no pension and durable longevity in the family. A SPIA or DIA covering essential expenses, layered on top of Social Security, insures the one risk a portfolio handles worst: a retirement that lasts 35 years instead of 25. Retirement income research, including work from the Wharton School and the Center for Retirement Research at Boston College, has long found that partial annuitization can improve sustainable spending for retirees without strong bequest priorities.
• You spend nervously without a floor. Some retirees with entirely sufficient portfolios underspend out of fear. A contractual monthly deposit changes behavior in a way spreadsheets do not. That is a behavioral benefit, and behavioral benefits are real benefits.
• You hold conservative money for five-plus years and value deferral. A short-list MYGA from a strong insurer can compete well with bonds and CDs for that sleeve, particularly for investors in high tax brackets who do not need the interest currently.

Notice what every defensible case has in common: a simple contract, a specific job, and a price you can see.

When is an annuity usually the wrong tool?

• Inside an IRA, sold for tax deferral. An IRA is already tax-deferred. Paying annuity costs to add deferral an account already has is paying twice for one feature. An annuity inside an IRA can only be justified by its insurance features, never by its tax treatment.
• As a growth investment. After 2 to 3 percent in annual costs, equity subaccounts trail comparable funds, and indexed crediting formulas cap the upside that makes equities worth owning. If growth is the goal, lower-cost ownership of the assets themselves is hard to beat.
• When liquidity matters. Surrender charges of 7 percent or more in early years, declining over seven to ten years, are standard on commission-sold contracts. Money that may be needed for a home, a business, or a health event does not belong behind a surrender schedule.
• When the pitch arrives at a free dinner seminar. The product may even be acceptable; the selection process is not. A contract chosen because it pays the presenter the most is unlikely to be the contract chosen because it fits you best.

What should you do with an annuity you already own?

Owning an annuity you regret is not the same as needing to exit it today. The analysis runs in a specific order.

First, map the surrender schedule. If the contract is past its surrender period, you have full flexibility. If 18 months of a 7-year schedule remain, the cost of waiting may be far smaller than the penalty for leaving.

Second, value the riders carefully. Some older contracts carry income or death benefit riders written in higher-rate or more generous eras that are worth more than the contract's cash value. Surrendering an in-the-money benefit to escape fees can destroy real value. This requires reading the contract, not the statement.

Third, consider a 1035 exchange. Section 1035 of the tax code allows a tax-free exchange of one annuity for another, which can move a high-cost contract into a low-cost, no-commission contract while preserving deferral and basis. For contracts with large embedded gains, this often beats surrendering and paying ordinary income tax at once.

Fourth, plan the exit taxes if you do cash out. Annuity gains are taxed as ordinary income, not capital gains, and withdrawals before 59 1/2 generally add a 10 percent federal penalty on earnings. Spreading withdrawals across tax years, or annuitizing to spread the gain over a payout period, can substantially change the after-tax result.

We perform this analysis for clients regularly, and the recommendation is frequently "keep it" or "exchange it," not "surrender it." The right answer depends on the contract in hand, not on anyone's opinion of annuities in general.

Key numbers

Frequently asked questions

Are annuities ever a good idea for wealthy families?Sometimes, in narrow roles: an income floor for a spouse who wants contractual income, or a MYGA sleeve for conservative capital. Above roughly $10 million, longevity risk is rarely a portfolio-threatening problem, so the insurance case weakens and the cost case dominates.

Is an annuity safer than the stock market?It is different, not categorically safer. Fixed annuity promises depend on the insurer's claims-paying ability, backed secondarily by state guaranty associations with per-person limits. Variable annuity subaccounts carry market risk directly.

Why do annuities have a bad reputation?Mostly because of how they are sold. High commissions reward complexity and volume, and the worst abuses, such as selling deferred annuities for tax benefits inside IRAs, involve products misfit to purpose rather than products that are inherently fraudulent.

What is the cheapest way to buy lifetime income?Generally a plain SPIA or DIA purchased competitively across several highly rated insurers, since payouts for the same premium can vary noticeably from carrier to carrier. Adding riders and account features raises costs quickly.

Can I get out of an annuity without paying taxes?You can exchange it tax-free for another annuity under Section 1035, which preserves deferral. An outright surrender triggers ordinary income tax on the gains, plus a 10 percent federal penalty on earnings if you are under 59 1/2.

Does Atlatl Advisers earn anything if I buy or sell an annuity?No. We sell no insurance products, hold no product sales licenses, and receive no commissions or referral fees. Our only compensation is the transparent advisory fee our clients pay us directly.