After two years of elevated interest rates, sales of these insurance-backed retirement products hit record levels in 2023 and stayed strong through 2024, according to industry tracker LIMRA.
But the same contract that promises steady income often carries a stack of fees that can quietly shave thousands off a nest egg over time.
The first layer is the commission, and it's the one most buyers never see on a statement.
A sales agent can earn anywhere from 1% to 7% of your premium upfront on many products, and that cost is baked into the contract rather than billed separately.
On a $100,000 annuity, that could mean several thousand dollars gone before your money ever starts growing.
Next comes the mortality and expense charge, usually 0.5% to 1.5% a year on variable annuities.
That fee pays the insurer for managing the account and guaranteeing certain protections.
Add in administrative charges of roughly 0.1% to 0.3%, and a typical fee-based variable annuity can run 1.5% to 2.5% annually once you include the fund expenses inside it.
What makes those numbers sting is the long-run math.
A 2% annual drag on a $100,000 account can cost you well over $100,000 in foregone growth across three decades, depending on market returns.
Advisors often cite this compounding gap as the single biggest argument for scrutinizing the fine print before signing.
Most contracts lock you in for five to seven years, charging a percentage of your account value if you withdraw too much too soon.
That penalty starts around 7% in year one and steps down annually, but it can trap savers who need cash after a job loss or medical bill.
Promises like guaranteed lifetime withdrawal benefits, enhanced death benefits, or long-term care coverage sound comforting, but each can add 0.25% to 1% or more per year.
Stack three riders and you may be paying 3% annually before the annuity ever earns a dime.
The good news is that not every annuity is fee-heavy.
Fixed immediate annuities, where you hand over a lump sum for a set monthly check, are often simpler and cheaper because there's no investment menu to manage.
Some low-cost variable annuities now advertise expense ratios under 0.5%, though they're the exception rather than the rule.
If you already own an annuity, pull the prospectus or contract and look for the fee table near the front.
That single page usually lists mortality charges, admin fees, rider costs, and surrender terms in one place.
Comparing that total against what a low-cost index fund plus a simple bond ladder would cost is a reasonable gut check.
For anyone shopping now, ask the agent for the fee breakdown in writing before the paperwork gets signed, and ask whether a fee-based or commission-free version exists.
The answer often reveals how much of the pitch is about your retirement versus their payout. **Our take:** Annuities can serve a real purpose for people who want guaranteed income and won't flinch at the cost, but the fee stack is where most buyers get blindsided.
Final Thoughts
Read the fee table before the brochure, and treat every rider as a separate purchase you have to justify.