Sales of annuities hit an estimated $385 billion in 2023, a record according to LIMRA, and insurers are pitching them harder than ever to Americans worried about outliving their savings.
What the brochures tend to gloss over is the fee stack buried inside many of these contracts.
Those charges can quietly shave 1% to 3% off your balance every year, and over a 20-year retirement, that adds up to real money.
Annuities come in two basic flavors, and the fee math differs sharply.
Fixed annuities, including multi-year guaranteed rate products, typically carry no explicit annual fee — the insurer simply credits you a set rate and keeps the spread.
Variable annuities are where costs pile up: mortality and expense charges, fund management fees, administrative fees, and often a rider fee if you add a guaranteed income or death benefit.
Add those layers together and a variable annuity can run 2% to 3.5% a year, according to fee analyses from Morningstar and industry filings.
That means a $250,000 contract could bleed $5,000 to $8,750 annually before you see a dime of growth.
To break even, the underlying investments have to clear that hurdle just to get back to zero.
Most contracts impose a 7-year schedule that starts around 7% and steps down each year, so exiting early means paying a penalty on top of what you already lost to fees.
That lock-in is exactly why so many buyers feel stuck when they realize the product doesn't fit.
Indexed annuities, which tie returns to a market index with caps and participation rates, sit somewhere in the middle.
They usually skip explicit annual fees, but the insurer limits your upside through the cap, and that foregone growth is an invisible cost that never shows up on a statement.
If you already own one, the practical move is to request the full fee disclosure in writing — not the summary, the actual prospectus-level breakdown — and total every charge as a percentage of your balance.
Then compare that number to what a low-cost index fund plus a simple Treasury ladder would cost.
Sometimes the guaranteed income is worth the price; often it isn't.
For anyone being pitched a new contract, ask three questions: What is the total annual cost including all riders?
And what happens if I want out in year three?
A salesperson who can't answer those plainly in writing is a reason to walk away.
The Department of Labor's fiduciary rule fights have also reshaped how these products get sold, so it's worth checking whether your advisor is held to a best-interest standard.
The bottom line: annuities aren't automatically bad, but their fees are frequently buried and rarely volunteered.
A few percentage points a year sounds trivial until you compound it across a 25-year retirement — that's the difference between a comfortable cushion and a tight one.
Final Thoughts
Read the fine print before you sign, because the insurer certainly wrote it with their margin in mind.