TLDR
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Some annuity criticism is completely valid — variable complete guide to annuities in Kentucky are often overpriced, oversold, and placed with the wrong people.
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The most common complaints (high fees, liquidity lockup, complexity) apply primarily to variable annuities and poorly structured contracts.
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Fixed annuities and FIAs rarely attract the same criticism — they’re simpler, lower-cost, and do exactly what they advertise.
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Advisor conflicts of interest play a role — fee-only advisors often criticize annuities they don’t profit from; commission advisors sometimes oversell ones they do.
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For the right Kentucky retiree, a well-structured fixed annuity is a legitimate, defensible retirement tool — not a product to fear.
Here’s the truth about the annuity debate: both sides are partially right, and both sides conveniently leave out the part that weakens their argument.
The financial advisor who tells you annuities are always bad is usually describing a specific, often problematic type. The insurance salesperson who tells you an annuity is always great is usually not telling you about the total fee load.
The real answer is more useful than either extreme.
Where the Criticism Comes From — and Why Some of It Is Earned
The most vocal critics of annuities tend to be fee-only financial planners — advisors who charge clients directly (flat fees or AUM percentages) rather than earning commissions on products they sell.
Their criticism of annuities usually goes like this: annuities are complex insurance products with high fees, long surrender periods, and limited liquidity — and in most cases, a simple portfolio of low-cost index funds would outperform them over a long enough time horizon.
On the specific subject of variable annuities sold to younger investors with long time horizons, that criticism is mostly accurate. A variable annuity with a 1.25% M&E fee, 1.00% rider fee, and 0.75% average fund expense ratio carries a 3% annual drag. A comparable index fund portfolio carries 0.03%–0.15%. Over 30 years, 3% compounding against you is a massive cost.
But that critique — accurate for variable annuities in the wrong hands — gets applied reflexively to all annuities, including simple fixed products where none of those criticisms hold.
The Conflict of Interest Problem — On Both Sides
This is where the debate gets murky, and both camps have something to answer for.
On the commission side: Some insurance agents and broker-dealers have historically placed clients in high-commission annuity products — particularly variable annuities and equity-indexed products with complex surrender schedules — that were technically suitable but not necessarily in the client’s best interest. The annuity industry has faced real enforcement actions over unsuitable placements, particularly targeting elderly investors.
On the fee-only side: A fee-only advisor who manages a client’s whether annuities make sense as an investment portfolio on an AUM basis earns nothing if that client moves $200,000 into an annuity. The advisor’s income goes down. That creates a financial incentive to discourage annuity purchases — not necessarily based on the product’s merits, but based on the business model. A blanket “annuities are bad” recommendation from a fee-only advisor deserves the same skepticism as a blanket “this annuity is perfect for you” from a commission salesperson.
Neither position is inherently corrupt — but both involve financial incentives that don’t always align perfectly with the client.
The cleanest approach: understand the argument on its merits, not based on who’s making it.
The Legitimate Criticisms of Variable Annuities
Variable annuities are the primary target of anti-annuity arguments, and for several reasons that are difficult to dispute.
High total fees. Variable annuities routinely carry total annual costs of 2%–3.5% when M&E fees, rider charges, and fund expenses are combined. At that cost level, the guaranteed income riders they’re typically sold on become much harder to justify compared to cheaper alternatives.
Complexity used to obscure costs. Variable annuity illustrations can project returns under optimistic market scenarios that never materialize, while burying total fee structures in dense contract language. Some buyers don’t realize what they’re paying until they’ve been in the contract for years.
Long surrender periods. Many variable annuities carry 7–10 year surrender periods with declining surrender charges. For an investor who might need liquidity, this creates real risk.
Tax treatment advantage is overstated. Variable annuities grow tax-deferred — which sounds appealing. But inside an IRA, money already grows tax-deferred without the additional layer of insurance fees. A variable annuity inside an IRA doubles up the tax deferral benefit while adding the insurance cost. The IRS deferral advantage is often meaningless in that structure.
These are legitimate criticisms. They apply specifically to variable annuities, and they’re well-documented in the financial planning literature.
What Critics Get Wrong About Fixed Annuities
The same blanket criticism applied to fixed and fixed indexed annuities doesn’t hold up as cleanly.
Fee criticism: Most fixed annuities have no annual management fees. The carrier’s cost is built into the interest rate spread — they offer you a rate slightly below what they earn on the underlying investments. There is no 1.25% M&E fee. No rider charge on a basic fixed contract. The cost structure is fundamentally different.
Complexity criticism: A fixed annuity is straightforward: you deposit a premium, it earns a guaranteed rate for a set term, and at the end of the term you choose what to do next. That’s simpler than most investment products.
Opportunity cost criticism: This one has more merit. A fixed annuity earning 5% guaranteed beats a savings account but may underperform an equity portfolio over 20 years. For a 40-year-old with a long runway, that opportunity cost is real. For a 68-year-old who needs guaranteed income to cover fixed expenses, the opportunity cost argument loses relevance quickly — they’re not trying to maximize returns, they’re trying to eliminate income risk.
The Jason Scenario: When an Annuity Actually Saved a Retirement in Lexington
Jason is 71 and a retired teacher from the Lexington area. He has a pension, Social Security, and a $350,000 investment portfolio. In 2022, his advisor told him not to bother with annuities — “fees too high, you don’t need the complexity.”
Jason kept everything in a diversified portfolio of index funds and ETFs. In 2022, that portfolio dropped 18% — from $350,000 to $287,000. Because Jason was drawing $18,000/year from the portfolio for supplemental income during the drop, he experienced a sequence-of-returns problem: selling shares at depressed prices to fund withdrawals, permanently reducing the portfolio’s recovery capacity.
A portion of his portfolio placed in a fixed indexed annuity three years earlier would have returned 0% in 2022 — not 0% growth, 0% loss. The sequence-of-returns problem doesn’t exist inside an FIA because there’s no principal loss to sell into.
The annuity isn’t better than the index fund. It’s a different tool that solves a different problem. Jason’s advisor conflated “investment performance” with “retirement income structure” — and it cost him.
When Advisors Are Right: Cases Where Annuities Are a Bad Fit
The criticism isn’t always wrong. Here are the specific situations where an annuity is genuinely the wrong tool.
You’re decades from retirement. For a 35-year-old with a 30-year runway, equity market growth significantly outperforms fixed annuity rates over time. The opportunity cost is real and large.
You have no income gap to cover. If Social Security, a pension, and other guaranteed income fully cover your fixed expenses, a guaranteed income annuity isn’t solving a problem. You’re paying for a solution you don’t need.
You need liquidity within the surrender period. If you might need access to the funds within 5–10 years, a surrender-period annuity is the wrong vehicle. Keep that money liquid.
You’re buying a variable annuity inside an IRA. As noted above, the tax deferral advantage — the primary argument for variable annuities — is redundant inside an already tax-deferred account. The fees just add cost.
The carrier is poorly rated. An annuity from a carrier rated below A- by A.M. Best carries credit risk that may not be worth the rate. See our companion article: Are Annuities Safe? What Kentucky Investors Need to Know.
The Right Question to Ask Before Taking Advice
When someone tells you annuities are bad, ask one question: which type of annuity, in which situation, for which person?
If the answer is “all annuities, always” — that’s an ideological position, not a financial analysis. If the answer is “variable annuities with high fees, placed with younger investors who don’t need income guarantees” — that’s a defensible specific critique worth listening to.
Similarly, when someone tells you an annuity is the right product for you, ask them to model the total annual cost of the contract, the surrender charge schedule, and what alternatives would look like at the same guaranteed income level. A good recommendation holds up under scrutiny.
An independent agent who represents multiple carriers — and compares annuity products against non-annuity alternatives honestly — is better positioned to give unbiased guidance than either a fee-only advisor with a financial incentive against annuities or a captive agent with a financial incentive for one company’s products.
Learn more about when annuities make sense for Central Kentucky families in Are Annuities a Good Investment for Kentucky Families? and read the full picture in our pillar guide on annuities in Kentucky.
Final Takeaways
✅ Annuity criticism is often valid — for variable annuities with high fees placed with the wrong people. That’s a real problem in the industry.
✅ The same criticism doesn’t apply cleanly to fixed annuities — which have no M&E fees, no subaccount risk, and straightforward terms.
✅ Conflicts of interest exist on both sides — fee-only advisors may have a financial incentive against annuities; commission agents may have one for them. Evaluate arguments on their merits.
✅ The most legitimate criticisms are high total fees, surrender period illiquidity, and opportunity cost for younger investors — all valid in the right context.
✅ Fixed annuities solve a specific problem — income risk in retirement — and they solve it well when matched to the right client.
✅ “Are annuities bad?” is the wrong question. The right question: does a guaranteed income structure solve a real problem in my specific retirement plan?
✅ An independent agent compares products — and should be willing to tell you when an annuity isn’t the right answer.
Frequently Asked Questions
Why do financial advisors say annuities are bad?
Many fee-only financial advisors criticize annuities primarily because variable annuities carry high fees, long surrender periods, and complexity that disadvantages clients who don’t need the guaranteed income component. These criticisms are valid for variable annuities in many situations. They’re less applicable to fixed annuities, which have simpler structures and no annual management fees.
Are all annuities bad investments?
No. The blanket statement “all annuities are bad” doesn’t hold up when applied to fixed or fixed indexed annuities used appropriately. Variable annuities with high fees placed with younger investors are a legitimate target of criticism. Simple fixed annuities providing guaranteed income to retirees with an income gap are a different product entirely and solve a genuine need.
Do financial advisors get paid to say annuities are bad?
Fee-only advisors don’t earn commissions on products, which makes their advice more independent in one sense — but it also means they don’t earn anything when clients move assets into annuities. Some advisors on an assets-under-management fee structure see annuity placements as a direct reduction in their revenue. That’s a conflict of interest worth acknowledging, just as commission conflicts should be acknowledged.
When is an annuity a genuinely bad idea in Kentucky?
An annuity is a poor fit if you’re young with decades until retirement, if you have no income gap to fill in retirement, if you need liquidity within the surrender period, if you’re buying a variable annuity inside an IRA (redundant tax deferral), or if the carrier’s financial strength rating is below A- from A.M. Best.
What is the biggest problem with variable annuities?
The biggest problem with variable annuities is total fee load. M&E fees (1–1.5%), income rider fees (0.75–1.5%), and underlying fund expenses (0.5–1%) can combine to 2.5–3%+ annually. That fee drag, compounding over years, significantly reduces the net return — often making cheaper alternatives more attractive for the same long-term goals.
Are fixed annuities subject to the same criticism as variable annuities?
No. Fixed annuities don’t carry M&E fees, have no subaccount market risk, and have much simpler terms. The common criticisms of annuities — high fees, complexity, market risk — apply primarily to variable products. Fixed annuities’ main limitation is opportunity cost for younger investors and liquidity during the surrender period.
How do I know if my advisor’s annuity recommendation is in my best interest?
Ask for a full disclosure of: total annual fees on the contract, the surrender charge schedule, the advisor’s compensation structure, and a comparison to at least two alternative approaches. A recommendation that holds up under that scrutiny is defensible. One that can’t be explained clearly in those terms deserves more questions.
👉 Want an honest comparison of annuity options — including when they might not make sense for you? Call 📞 859-687-2004 or visit Nova Insurance Group.
📞 859-687-2004 — Prepared. Not panicked.
Steve Straub | Nova Insurance Group | 99 Wind Haven Dr., Suite 1, Nicholasville, KY 40356 Serving Lexington, Nicholasville, Wilmore, Georgetown, Richmond, and Danville.
About the Author
Steve Straub is the principal agent of Nova Insurance Group, an independent insurance agency serving Lexington, Nicholasville, and Central Kentucky. With 13 years in the insurance industry — including roles as an underwriter, risk manager, loss control specialist, and sales manager at a Fortune 400 insurance carrier — Steve brings carrier-level insight into how policies are written, priced, and paid out. He holds licenses in Property, Casualty, Life, and Health insurance. As an independent agent, Steve represents multiple carriers to find the right fit for each client — not the best fit for a company quota.
