If this isn’t the worst investment out there, then it certainly is one of the worst. That isn’t just my opinion, but others as well. Helaine Olen, a financial expert and author of the book Pound Foolish: Exposing the Dark Side of the Personal Finance Industry, relates, “In [Suze Orman’s] view and the view of more than a few experts [these investments] are sold for one reason and one reason alone. They ‘make money for the financial advisers who sell them’.”1 This investment is not usually in the best interest of the client; they are in the best interest of the financial adviser selling them.

Baby boomers are now their primary target market. In the 2nd quarter of 2021 alone, sales increased a whopping 39%.2 The sales process is the same. It is similar to the one described in Olen’s book. The investment is not named until the end:

“We’re facing a new retirement challenge,” [the adviser] tells the now fully engaged men and women in the room, as [they] lead them through a twenty-seven-slide presentation consisting of scary facts about their future. According to the broker’s and Prudential’s slide presentation, Social Security’s future is “uncertain” and “shaky,” and the only way to salvage it is to tax our future benefits “at up to 85 percent.” Health care costs are rising significantly faster than our incomes. And then we come to the scariest slide of all: “47 percent of Americans today ages 55–62 would run out of funds necessary to pay for basic retirement expenditures if they retire at age 65. Are you prepared to create income that will last a lifetime?” “Are you part of the 47 percent that would run out of money?”

After presenting all the doom and gloom, the broker presents the solution:

“It’s nothing to be fearful of. We can plan for it. That’s why you are here. Prudential has a strategy to deal with these risks,” the broker says before they begin to tell us all about a product that will allow us to reap stock market gains with no risk: variable annuities.”3

It is a hard sell, but annuities are a very lucrative product for the financial adviser. Commissions run from 5 to 14 percent. Rates of 8 to 10 percent are more typical. For the firms selling annuities so far in 2021, fixed and variable annuities have generated $139 billion in revenue for the insurance, banking, and brokerage companies.

The primary selling point that agents and brokers rely on is that annuities are “guaranteed”. But is it really true? The National Organization of Life and Health Insurance Guaranty Associations (NOLHGA) was formed to be similar to FDIC. For each insurance product, including annuities, the originators pay a small percentage into NOLHGA. That organization will then meet the obligations of any failed insurance company. Or that is how it is supposed to work.

In some sales pitches, buyers of annuities are told that insurance companies never go bankrupt. That is not true, nor is it true that NOLHGA will pay out on the same terms as the failed insurance company promised. Executive Life was the largest insurance company in California when it filed for bankruptcy in 1991. Penn Treaty Network completed bankruptcy in 2017, American Medical and Life Insurance in 2016, CoOportunity Health in 2015, and on and on goes the list of failed insurance companies.

Even the biggest insurance companies can fail. Mutual Benefit Life, founded in 1845, was considered top of the companies with a conservative approach and A+ rating. NOLHGA took three years to move the annuities to another insurance company. Baldwin United, another of the largest insurance companies, failed. NOLHGA froze all payments for nearly four years and then payments were made at the lowest interest rate possible.

For me, those are hollow guarantees. They are probably more to be feared than all of the doom and gloom that is pitched at those sales seminars.

Beyond the “guarantee”, there are other reasons to question the value of a variable annuity. There is no question that if you are someone who cannot control your spending, then an annuity may be a good solution. A solution to lock up the principle and limit your spending. But the large majority of people are not in that situation.

The variable annuity is a chocolate covered hand grenade. Not only is the guarantee feature untruthful, but the returns on your money are subpar, in my opinion. First, most annuities have multiple layers of fees. The fees can total as much as 3.8% per year.4

Those are the fees for the annuity itself. In addition, there are the hidden fees associated with the mutual funds inside the annuity. Mutual funds publish and tout their expense ratio. What they do not publish are the actual fees, most of which are hidden and can be up to 60% of the total return. Here is a short list of fees, which is not all-inclusive:

  • Expense fees (the expense ratio)
  • Cash carry cost
  • Asset management fees
  • Marketing fees
  • Trading costs
  • Brokerage commissions
  • Spread costs
  • Market impact costs
  • Soft-dollar costs
  • Redemption fees
  • Account fees,
  • Purchase fees5

Second, some annuities have an annual return cap. If the annual returns are above a certain percentage, like 9%, the annuities do not increase more than the 9%, even if the stock market increases 25%.

If you are invited to one of those lunch seminars, don’t go. If you have gone and are considering buying an annuity, banish the thought. If you own an annuity, call us at AFC. For all but a few people, the best response for an annuity is terminate it and take the money out now. Even if there is a surrender charge. You will probably pay as much in annuity fees over the next year or two as you would pay in surrender charges. You can put your money to work for you in what we feel is a much better way.


[1] 1. Olen, Helaine, Pound Foolish: Exposing the Dark Side of the Personal Finance Industry, Portfolio; Reprint edition (December 31, 2013).

[2] 2. “Annuity Sales Surge 39% in Second Quarter”, Investment News, July 27, 2021.

[3] 3. Olen.

[4] 4. “Annuities in Retirement: Understanding the Trade-offs”, Fisher Investments, https://www.fisherinvestments.com/en-us/annuities/guides/annuities-in-retirement. Print.

[5] 5. Robbins, Tony, MONEY Master the Game: 7 Simple Steps to Financial Freedom, Simon & Schuster; Updated edition (March 29, 2016).