Financial advisors frequently recommend annuities as part of a long-term retirement strategy, often highlighting guaranteed income, tax advantages, and market protection. But are annuities truly beneficial for most investors, or are they simply high-commission products that benefit advisors more than clients?
If you’re wondering whether an annuity is the right financial move for you, this guide will break down:
- Why financial advisors recommend annuities
- The real benefits and drawbacks
- How annuity commissions impact recommendations
- When an annuity actually makes sense
Let’s dive in.
What Is an Annuity?(And Why Do Advisors Push Them?)
An annuity is a contract with an insurance company where you invest money in exchange for a guaranteed future income stream. These are commonly used as retirement income tools to prevent outliving savings.
There are three main types of annuities:
- Fixed Annuities– Provide a stable, predictable payout.(Most common for conservative investors.)
- Variable Annuities– Payments fluctuate based on investment performance.(Higher risk, higher reward.)
- Indexed Annuities– Returns are tied to a market index but offer some protection against losses.
But here’s the real question: Are advisors recommending annuities because they’re good for you—or because they’re profitable for them?
The #1 Reason Financial Advisors Recommend Annuities
High commissions.
Unlike stocks, ETFs, or index funds, annuities pay advisors large upfront commissions.
- Fixed annuitiespay advisors 1-3% of the contract value.
- Variable and indexed annuitiescan pay5-7% or more on the initial investment.
- Somecommission-based advisorsmay push annuities because they generate significantly more income than other investments.
Example:If you invest $500,000 in an annuity, your advisor might instantly earn $25,000-$35,000 in commissions.
That’s 25-50x more than they’d earn managing your money in a low-cost portfolio.
Does this mean all annuities are bad? No. But it does mean you should be skeptical of aggressive annuity recommendations.
When Annuities Actually Make Sense
Despite the commission incentives, annuities can be a good financial tool—if used correctly.
- You Want Guaranteed Income for Life– If you’re worried about outliving your savings, an annuity provides predictable income like a pension.
- You’ve Maxed Out Other Retirement Accounts– If you’ve already contributed to401(k)s, IRAs, and HSAs, an annuity’stax-deferred growthcan be useful.
- You Have a Low Risk Tolerance– If market fluctuations make youanxious, an annuity can offer peace of mind withstable, contractually guaranteed payments.
- Estate Planning& Legacy Goals– Some annuities offerdeath benefitsthat protect assets for beneficiaries.
But before buying an annuity, ask: “Is this the best option—or just the most profitable for my advisor?”
When to AVOID Annuities
❌If You Need Liquidity– Many annuities have surrender charges that lock your money up for 7-10 years.
❌If You Want Low Fees– Some annuities have fees exceeding 3-4% per year, significantly reducing long-term growth.
❌If You Haven’t Maxed Out Tax-Advantaged Accounts–401(k)s, Roth IRAs, and HSAs should be fully funded first.
❌If You Can Get the Same Results with a Simpler Investment Strategy– A well-diversified portfolio may achieve the same goals without high fees and restrictions.
Financial Advisors & Annuities: Fiduciary vs. Commission-Based
Not all advisors are created equal. Understanding how an advisor is paid can help you spot biased recommendations.
Fiduciary Advisors (Fee-Only) →No commissions, legally required to put your interests first.
Commission-Based Advisors →Earn high commissions on annuity sales. May prioritize products that pay them more.
If afee-only advisorrecommends an annuity, it’slikely in your best interest.
If acommission-based advisorpushes an annuity aggressively, proceed with caution.
💡Looking for an experienced professional?→Browse experienced financial advisors on Sam’s List.
Questions to Ask Before Buying an Annuity
Before signing anything, ask your advisor:
- What’s your commission on this annuity? (A transparent advisor will disclose this.)
- Are there surrender charges if I need my money early?
- What are the annual fees? (Anything over 1.5% is high.)
- What’s my breakeven point? (When will I actually benefit?)
- Can I get similar benefits elsewhere for lower cost?
If the advisor hesitates or can’t answer clearly, that’s a red flag.
Final Verdict: Should You Buy an Annuity?
Annuities can be useful, but they aren’t for everyone.
✅Good for:Lifetime income, risk management, tax deferral
❌Bad for:High fees, limited liquidity, unnecessary complexity
Before committing, explore all your options. If your advisor is pushing an annuity too hard, consider a second opinion.
🔍Looking for a fiancial advisor?→Find a financial planner here.
Frequently Asked Questions (FAQ) About Annuities
Why do financial advisors push annuities?
Because they pay higher commissions than other investment options.
Are annuities better than mutual funds?
Not always—mutual funds generally have lower fees and higher long-term growth potential.
What’s the biggest downside to annuities?
High fees, lack of liquidity, and potential surrender charges.
What’s a good alternative to annuities?
Low-cost index funds, bonds, and dividend stocks can provide income without high fees.
Should I buy an annuity from my financial advisor?
Only if they’re a fiduciary. Otherwise, seek a second opinion.
Author: Kimi, Co-founder of Sam’s List
Kimi writes about what she's learning while building Sam’s List and shares honest takeaways from her conversations with accountants and financial advisors across the country. None of this is financial advice—just the stuff most people wish someone told them sooner.
