9 Reasons to Not Buy an Annuity

not buy an annuity
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Annuities are a booming industry. 

According to the Secure Retirement Institute® (SRI®) U.S. Individual Annuity Sales SurveyU.S. annuity sales totalled $62.3 billion in the third quarter of 2021, up 12% from third quarter 2020. 

In Q1 to Q3 2021, annuity sales increased 19% to $191.4 billion. 

Annuities can be excellent investment vehicles for certain investors. 

However, there are several reasons to not buy an annuity that you need to be aware of before you sign on the dotted line.  

#1 You Don’t Know Your Why

Do not buy an annuity – or any financial product for that matter – unless you know WHY you are purchasing it. 

It’s your unique WHY that dictates what type of financial product is best for your future goals. 

Before you sign an annuity contract, ask yourself: What is the purpose of this money I’m investing? 

Is it for lifetime income or a protection of your principal investment? 

Are you looking for guaranteed growth, or do you want an annuity for estate planning purposes to avoid probate? 

For some, it may be that they want to use the annuity as a long-term care (LTC) rider because it’s less expensive than a traditional LTC policy.

Whatever your reason, you need to define your purpose clearly BEFORE you purchase an annuity. Because your reason for investing will dictate the type of annuity and contract terms you should shop around for. 

[Related Read: Types of Annuities Explained]

#2 You Don’t Understand Everything about the Product

Don’t buy an annuity if you don’t understand EVERYTHING about the product you are purchasing. 

Think about the examples above of why people buy annuities

Does the annuity you are looking to purchase meet one of your goals? If not, dig deeper into the contract and see what makes it so special. 

How long is the contract? Does the length of the annuity equal your time frame for investing your money? 

What are the surrender charges if you need your money sooner than the contract terms?

Remember, an annuity is a contract between you and an insurance company. They are contract based, and contracts can widely vary. In addition, the fees, riders, taxes, and surrender penalties also vary.

In order to fully understand what’s in an annuity, you have to read the details of the contract. If you don’t understand something fully, don’t buy it. 

Likewise, if it sounds too good to be true, don’t buy it.

[Related Read: Bonus Annuities Explained – Are They a Trap?

#3 You Are Too Young

Don’t buy an annuity if you aren’t close to retirement age. 

If you are too young, they aren’t the best way to grow your money. You have plenty of time on your side to invest in higher-growth financial products

Also, if you change your mind early in the annuity contract and want to cash out or roll it over, you will be hit with surrender charges, which could be substantial, as well as 10% IRS penalties if you cash out before age 59½.

It may be in your best interest to take classes in investing and DIY. You can also set up an IRA or contribute to a 401(k) at work. 

#4 You Expect Stock Market-Like Returns

Don’t buy an annuity expecting stock market returns. You WON’T get them!

Rates are near all-time lows. And most annuity rates are based on the rates at the beginning of the contract, not the end.

Let’s look at market returns for 2021 and compare to current rates with annuities:

  • S&P 500: 26.9%
  • Nasdaq: 21.4%,
  • Dow: 18.65% (S&P500 and Dow returns do not include dividends)


Current rates with many annuities are:

  • Fixed annuities: 2 – 3.5% depending on the contract.
  • Indexed annuities: Caps of 3-5% and participation rates of 25-35% of the SP500 index.

There are some offering 100% participation rates or higher, but they are tracking some unheard of or newer indexes.

These rates may seem low, but many people buy annuities to protect their principal investment.

Make sure to ask what interest you can expect to get with the annuity you are looking at before you make a decision.

#5 You Haven’t Shopped Around

Don’t buy an annuity without comparing other companies and contracts. 

As mentioned above, each company and contract varies – and it’s up to you to read the fine print and fully understand what you’re investing in. 

Annuities are long-term contracts. If you were purchasing a car for the next 10 years, would you only test-drive just one?

No, you wouldn’t.

Shop and compare different companies for the best rates and features that meet your goals.

Also, shop with different advisors. 

Many advisors are captive agents, meaning they can only sell products from that one company. Get quotes and product comparisons from several advisors before you buy.

See Why Working with a Fiduciary Advisor Is Critical to Your Financial Future.

#6 You Can Manage the Money Yourself

Don’t buy an annuity if you can manage the money yourself. 

You may consider yourself savvy when it comes to investing and could possibly beat the current rates offered with annuities.

If this makes you feel comfortable, do it.

You may already have a professional advisor who manages your money. If so, ask their opinion on annuities and whether or not they might be right for your financial goals. 

A word of caution: Many wealth managers may be firm against annuities, even if they fit your goals. Also, if your advisor works for a firm, he or she may not be permitted to sell you an annuity, even if you want it.

#7 You Don’t Have an Emergency Fund 

Don’t buy an annuity if you don’t have an emergency fund.  

Again, annuities are long-term contracts, and many are illiquid in the early years due to the high surrender charges. 

Insurance companies set these up this way, and they know their profit margin. If you leave the contract early because you need those funds, they impose hefty surrender charges to ensure they don’t lose money. 

On a compliance side, most annuity companies will not accept your contract if you don’t have substantial liquid assets – some of them you need up to 50% of what the annuity principal is. 

Let’s say you’re getting ready to invest $50,000 into an annuity. The company may look at your assets, and want to see $25,000, $50,000, or more in liquid assets before you purchase that annuity. 

#8 You Attend a Dinner Seminar

Don’t buy an annuity DURING a presentation at a dinner seminar.

You can build a relationship with the host advisor and have an appointment with them afterwards, but do not purchase an annuity on a whim during the presentation. Don’t impulse buy.

Early in my career, I was invited to a dinner seminar to see how a major insurance company was selling annuities.

During the presentation, after explaining the product, they passed out applications for an annuity contract.

The advisor pulled up the application on the screen and walked everyone through how to fill it out.

He requested people leave off their Social Security numbers until they came and spoke with him.

There were over 50 people in attendance, and they were all offered the same product.

The advisor NEVER asked each attendee about his or her specific financial goals or what they wanted their money to do for them. (Go back to #1 in our list above.)

Those who signed up that day were SOLD an annuity. And I hate to think about how many of them regretted it later on.

#9 You Get the Heebie-Jeebies

Don’t buy an annuity if it’s being sold to you like a used car.

The annuity will still be available tomorrow, and there is not a limited supply of them. You don’t have to sign on the dotted line today.

Note: There are times where rates will expire. Ask to see the rate sheet from the insurance company or just call them to see when the rate expires.

Don’t be pressured into the sale. Don’t be a transaction.

Remember, it’s your financial future.

It’s your money.

And you should be in the driver’s seat so you stop being a transaction and start being an informed consumer.

Learn More about Annuities and Other Financial Products So You’re NEVER Sold to Again. Subscribe to Our YouTube Channel.

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