Annuities aren't for everyone—and sometimes, aggressive advisors push them when they shouldn't. This is your guide to knowing when to walk away.
We're going to be brutally honest. If any of these situations apply to you, an annuity is probably the wrong choice. No exceptions, no caveats—just straight talk.
Absolute Deal-Breakers
These are non-negotiable. If you're in any of these situations, do not buy an annuity.
1. You're Under 45 (With Very Few Exceptions)
If you're in your 20s, 30s, or early 40s, annuities are almost always a mistake. Here's why:
- Too early to lock up money – You have 20-40 years until retirement. Locking money into a 10-year surrender period makes no sense.
- Better options for growth – At this age, you should be in stocks. Historically, stocks return ~10% annually over long periods. Annuities cap your upside at around 5-11% depending on type.
- Surrender charges trap you – Life is unpredictable in your 30s and 40s. You might need money for a house, business, or career change. Annuities penalize early withdrawal.
The rare exceptions: Large inheritance you want to convert to income, or specific estate planning situations. But even then, get a second opinion from a fee-only financial planner.
2. You Need Liquidity
Annuities are illiquid by design. If any of these apply, stop here:
- You might need this money for a house down payment in the next 5 years
- You're starting a business and may need capital
- Your emergency fund is shaky (less than 6 months expenses)
- You have aging parents who might need financial support
Surrender charges during the first 5-10 years can be brutal—often 7-10% of your account value. Even the "free withdrawal" provision (typically 10% per year) isn't enough if you truly need the money.
Better alternatives: High-yield savings accounts (currently 4-5%), money market funds, or short-term CDs. You sacrifice some return for complete liquidity.
3. You Don't Have an Emergency Fund
This is non-negotiable. Before you lock money into an annuity, you must have 6-12 months of living expenses in a liquid, accessible account.
Why? Because life happens. Car repairs, medical bills, job loss—these aren't hypothetical. If your only assets are in an annuity and you need $10,000 urgently, you're stuck paying surrender charges plus taxes and penalties.
The rule: Emergency fund first, then annuities. No exceptions.
4. You're Carrying High-Interest Debt
If you have credit card balances at 18-25% APR, personal loans at 12%, or any high-interest debt, paying that off comes first.
The math is simple:
- Annuity might earn: 5-7% annually
- Credit card costs: 18-25% annually
You're losing 11-18% per year by holding debt while buying an annuity. This is financial malpractice.
Exception: Low-interest debt like a mortgage at 3-4% is fine. We're talking about consumer debt here.
5. You Haven't Maxed Tax-Advantaged Accounts
Before considering an annuity, you should have maxed out:
- 401(k) with employer match – This is free money. If your employer matches 5% and you're not contributing 5%, you're leaving money on the table.
- Roth IRA – $7,000/year ($8,000 if 50+). Tax-free growth forever beats tax-deferred annuity growth.
- Full 401(k) contribution – $23,000/year ($30,500 if 50+). If you're not maxing this, you have no business in an annuity.
- HSA – $4,150 individual / $8,300 family. Triple tax advantage beats annuities.
Only after exhausting these should you consider an annuity for additional tax-deferred growth.
Situational Red Flags
These aren't automatic disqualifiers, but they should make you very cautious.
6. Advisor Pushes Variable Annuity with High Fees
Variable annuities are the most expensive annuity type. Here's what to watch for:
- Total fees over 2% annually – This includes M&E charges (mortality and expense), admin fees, subaccount fees, and rider fees. If the total exceeds 2%, walk away.
- Living benefit riders costing 1-1.5% extra – These guarantee lifetime income but cost a fortune. Often, you're better off with a simpler immediate annuity.
- Commission-motivated sales – Variable annuities pay advisors 5-7% upfront. If your advisor pushes hard, ask if they're fee-only (they don't earn commissions).
Warning: If an advisor says "this variable annuity will give you market upside with no downside," they're lying. Variable annuities CAN lose money. The protection costs extra via expensive riders.
Better alternative: Low-cost index funds. A portfolio of Vanguard or Fidelity index funds costs 0.03-0.1% annually—that's 20x cheaper than most variable annuities.
7. You Need Maximum Growth
If you're in these situations, annuities will limit your returns:
- Young investor (20s-40s) with long time horizon
- You can handle volatility without panic selling
- Your goal is wealth accumulation, not income or protection
Historical stock market returns: ~10% annually over 30+ years. Fixed index annuities cap at ~11%, and fees eat into that. Variable annuities have fees of 2-3%, reducing net returns to 7-8% even in good markets.
Better alternative: Low-cost stock index funds (S&P 500 or total market). Over long periods, these beat annuities handily.
8. You Want to Leave a Large Inheritance
Annuities are not optimized for legacy planning. Here's why:
- "Life only" annuities pay nothing to heirs – If you die at 70, the insurance company keeps the remaining balance. That's the trade-off for maximum income.
- Death benefits cost more – You can add beneficiary protections, but they reduce monthly income by 10-20%.
- Tax treatment is poor for heirs – Beneficiaries pay ordinary income tax on gains, not the favorable capital gains rate.
Better alternatives for legacy:
- Life insurance – Tax-free death benefit, efficient wealth transfer
- Investment portfolio – Step-up in basis means heirs avoid capital gains tax
- Roth IRA – Tax-free inheritance for beneficiaries
9. Your State Has a Weak Guaranty Fund
State guaranty associations protect annuity holders if an insurance company fails, but coverage limits vary by state:
- Most states: $250,000 in present value coverage
- Some states: $100,000-$300,000
- A few states: $500,000
If you're buying a large annuity (over $500,000), check your state's coverage. You may need to split the premium across multiple carriers to ensure full protection.
Alternative: FDIC-insured CDs at a bank. Coverage is $250,000 per person per bank, but you can ladder across multiple banks for more coverage.
10. The Product Is Too Complex to Explain
If your advisor can't explain the annuity in simple terms, it's probably overengineered. Red flags:
- "Structured products" – These involve derivatives and complex payoff structures
- "Hedge funds in annuities" – Usually just expensive with poor performance
- Multiple riders stacked together – Each rider adds cost and complexity
The rule: If you can't explain the product to a friend in 2 minutes, don't buy it. Complexity is not a feature—it's a bug.
Better Alternatives
For Safety and Guaranteed Returns
- CDs (Certificates of Deposit) – FDIC insured up to $250,000, simpler than annuities, fully liquid at maturity
- Treasury bonds – Backed by U.S. government, no state/local tax on interest, can be sold anytime
- High-yield savings accounts – Currently 4-5%, fully liquid, FDIC insured
For Tax-Deferred Growth
- Max out 401(k) – $23,000/year ($30,500 if 50+), often with employer match
- Max out Roth IRA – $7,000/year ($8,000 if 50+), tax-free growth and withdrawals
- Max out HSA – $4,150 individual / $8,300 family, triple tax advantage
For Retirement Income
- Delay Social Security – Every year you delay from 62 to 70, you get an 8% increase. This is often better than buying an annuity.
- Dividend-paying stock portfolio – 4-5% yield, income grows over time, principal can grow, liquid
- Bond ladder – Buy bonds maturing in different years, predictable income, more flexible than annuities
- Rental property – If you're comfortable being a landlord, can provide inflation-adjusted income
The Honest Truth About Commissions
Annuities pay advisors 3-7% commission. This creates an incentive to sell them even when they're not the best fit.
Commission breakdown by annuity type:
- Fixed/Index annuities: 5-7%
- Variable annuities: 5-7%
- Immediate annuities: 2-3%
This doesn't mean all advisors are bad—many earn their commission by providing valuable service. But it does mean you should be aware of the incentive structure.
How to protect yourself:
- Get a second opinion from a fee-only advisor (they charge by the hour or a flat fee, not commission)
- Ask: "How much commission do you earn on this product?"
- Ask: "What are three alternatives you considered and why did you rule them out?"
Warning Signs: If an advisor says "everyone should have an annuity" or pushes hard without discussing your full financial picture—walk away. Good advisors lead with questions, not products.
Bad Scenario: Jenny's Mistake
Jenny is 35 years old with the following:
- $50,000 in savings (no emergency fund)
- $10,000 in credit card debt at 22% APR
- Contributing only 3% to her 401(k) (employer matches 6%)
An advisor sells her a variable annuity with 2.5% annual fees. She puts her entire $50,000 into it, locking it up for 7 years.
Why this is disastrous:
- She has no emergency fund—if her car breaks down, she's stuck
- She's paying 22% on credit card debt while earning maybe 5% in the annuity (net loss of 17%)
- She's leaving 3% free money on the table by not capturing full 401(k) match
- At age 35, she has 30+ years until retirement—she should be in low-cost stock index funds, not an expensive annuity
What she should have done:
- Pay off credit card debt immediately ($10,000)
- Build emergency fund ($15,000 for 6 months expenses)
- Increase 401(k) to 6% to capture full employer match
- Invest remaining $25,000 in a Roth IRA ($7,000) and low-cost stock index funds ($18,000)
This is unfortunately common. Advisors see a lump sum and push annuities without assessing if the client is ready.
How to Say No
If an advisor is pushing an annuity and you're not comfortable, here's what to say:
"I appreciate the recommendation, but I'm going to get a second opinion from a fee-only advisor before making this decision. Can you provide me with the product prospectus and a detailed fee breakdown?"
If they hesitate or get defensive, that's a red flag. A good advisor will support you getting a second opinion.
The Bottom Line
Annuities are a tool—not a universal solution. They work for specific situations (covered in When to Consider Buying an Annuity), but they're wrong for many others.
The key questions:
- Do you have your financial foundation in place? Emergency fund, debt paid off, maxed employer match?
- Can you afford to lock up this money for 5-10 years?
- Is the product simple enough to explain?
- Are the fees reasonable? Under 1.5% total annually for most annuity types.
If the answer to any of these is "no," walk away. There are better alternatives.
Remember: the best financial decision is often the one you don't make. Saying no to a bad annuity is just as valuable as saying yes to a good one.