Sales of fixed indexed annuities hit a record $113.5 billion in 2024, according to Limra, and the pitch usually sounds simple: lock in a guaranteed income stream for retirement.
What the glossy brochures tend to leave out is how many layers of fees sit between your money and that check.
Annuities are insurance products, not bank accounts, so the insurer charges for the guarantees it makes.
Those charges show up as mortality and expense fees, administrative fees, and often a rider fee for optional benefits like a guaranteed lifetime withdrawal.
Industry data from Morningstar put the average variable annuity expense ratio around 1.3%, but once you stack on insurance charges and fund fees, the all-in cost can climb past 2% or even 3% a year.
A 2% annual drag on a $200,000 account quietly removes roughly $4,000 in year one, and because that money never compounds, the gap widens every year you hold the contract.
Over 20 years, the difference between a 2% and 0.5% cost structure can run well into six figures, which is money that would otherwise land in your pocket.
Annuities also use surrender charges, a penalty for pulling your money out early.
A typical schedule starts at 7% in year one and steps down by a point annually until it hits zero, often after seven years.
That means if your plans change, a job loss or a medical bill, your own cash can be locked behind a wall that costs thousands to climb.
Fixed indexed annuities add another wrinkle: caps and participation rates.
The insurer credits only part of the index's gain, say a 6% cap even if the market returns 20%.
There's no fee line item for this, but it's a cost in disguise, and it's the reason two contracts with identical fee schedules can deliver wildly different results.
The good news is that not every annuity is expensive.
Low-cost immediate annuities sold through competitive bidding platforms, and no-load variable annuities, can charge well under 1%.
The catch is that these rarely pay the commission that makes a salesperson eager to call you.
Before signing anything, ask for the total annual cost in dollars, not percentages, and request it in writing.
Then compare that number against what the same money would earn in a low-cost index fund or a Treasury ladder.
If the agent dodges the question or talks only about upside, that's your answer. **Our take:** annuities can make sense for people who genuinely want to hand off longevity risk, but the fee stack is where most of the value quietly disappears.
Final Thoughts
Treat any pitch without a clear dollar-cost breakdown as a reason to walk, not a reason to sign.