Annuities are pitched as a simple way to turn savings into lifetime income.
What the brochures rarely put in bold is how many layers of fees can sit between your money and your payout.
Before you sign, it helps to know exactly who gets paid and when.
Insurance agents and brokers typically earn a percentage of what you put in, often 1% to 8% depending on the product.
That cost is baked into the contract, not billed separately, so it can be easy to miss.
You may also face surrender charges, which are penalties for pulling money out early, sometimes 7% in year one and declining over a set period.
Variable annuities can carry mortality and expense fees, administrative fees, and fund management fees, which together may run 1% to 3% or more of your account value every year.
Add living-benefit or income riders and you can pile on another 0.5% to 1.5%.
Fixed indexed annuities often skip visible fees but cap your gains instead, which is a cost paid in lost upside rather than a line item.
Why this matters now: with the Fed holding rates elevated and inflation still squeezing household budgets, every basis point counts.
A 2% annual drag on a $200,000 account is roughly $4,000 a year, money that would otherwise compound for retirement.
Over 20 years, that gap can run into six figures.
Immediate annuities are usually simpler, with costs reflected in the payout rate itself.
Variable and indexed annuities are where the layers stack up, and where a hard-to-read prospectus can hide the math.
Ask for the total expense ratio in writing, plus any rider charges, and compare that number against a low-cost alternative like index funds or a simple Treasury ladder.
Small print also governs when you can actually access your cash.
Many contracts let you withdraw 10% a year without penalty, but anything beyond that triggers surrender fees.
Some let insurers raise certain charges later, within limits spelled out in the contract.
If an agent waves off those details, that is your cue to slow down.
A few practical moves before you commit: request a full illustration showing fees and projected values, check the insurer's financial strength rating, and confirm whether the income rider's payout is guaranteed or tied to market performance.
If the numbers only work under rosy assumptions, they probably do not work.
Annuities can be useful for people who want guaranteed income and will hold the contract long enough to outlast the fees.
For everyone else, the question is whether the peace of mind is worth the price.
Final Thoughts
Run the math on total costs first, because the house always knows its cut.