No, but the misinformation about annuities abounds. For example, the public often reads negative articles about variable annuities and lumps all annuities types together. Variable annuities do have high fees, typically 2-3 percent per year, plus the management fees of the mutual funds that comprise the internal investment of a variable annuity. These variable investments are subject to the risks of the stock market. In fact, there are almost no limits regarding how much money you can lose in variable annuities. However, many brokerage firms recommend variable annuities despite the high risks and high fees generated by the mutual funds inside these annuities.
There is a huge confusion between risky and expensive variable annuities versus low-cost and risk-free fixed indexed annuities.
Variable annuities are frequently sold by stock brokers through the big Wall Street firms that benefit financially from the mutual fund fees inside these variable annuities. With variable annuities your principle is invested in the stock market. If you are looking for safety of principle, lack of volatility, liquidity and low cost, variable annuities should be avoided like the plague.
Today’s Indexed Annuities to the Rescue!
Fixed indexed annuities are quite different. Most have zero annual fees. Your money is never invested in the stock market. Regardless of declining stock markets, your indexed annuity will not lose value. Plus, you may profit from an increasing stock market. That’s right, you only participate in the upward direction of the stock market. Understand that this market participation is limited and you may not get all the gains in an increasing stock market. This is the tradeoff you make in order to avoid all stock market declines. As of 2024, historical average annual interest credits are now competitive with long-term stock market gains. This is significant since there is no stock market risk with indexed annuities.
Conservative tax wise investors have always been attracted to the absolute safety and tax deferred nature of indexed annuities. In 2021 average annual gains of 3 to 6 percent were common with these investments, which was reasonably appealing when compared to the then low money market, CD or bond interest rates.
But today, in 2025, the interest rate environment has dramatically changed. Average annual gains of 6 to 9 percent and even higher returns are now possible with growth-focused indexed annuities. Annual crediting rate caps and participation rates have increased dramatically on some annuities, allowing much higher annual gains. And some crediting methods have no caps or limits. Now these indexed annuities look attractive even compared to the long-term average of the stock market. You should not expect your index annuity to keep up with a rapidly increasing stock market but then again there is zero participation in a declining stock market. Thus, you never are waiting to gain back from previous declines.
Today’s Indexed Annuities Improved Liquidity!
Indexed annuities have a great advantage over the stock market: the fact that they can never go down in value. Indexed annuities do not decrease in value when the stock market declines. Your money is always safe and accessible. You will never need to wait-and-wait for the stock market to recover to get your cash and earnings out of your annuity. Thus, in some circumstances, like during declining stock markets, indexed annuities can be more liquid than even a stock market investment!
Another liquidity concern is the annuity surrender charges. An annuity company will charge a surrender fee if you liquidate the policy within an initial period, typically 3 to 10 years. These fees are typically 6 to 10 percent in the first year and quickly decline each year you own the annuity. Of course, these fees are completely avoidable by only investing money in an annuity which you plan to not spend for a few years. Realize that any contracted annuity income is exempt from these fees. Also, most annuities allow 10% annual withdrawals free of surrender fees.
Surrender fees should be considered in the broader picture. Let’s compare with investing in the stock market or in a mutual fund. With these investments you can easily be down 10, 20 even 30 percent in the first few months. And if you soon needed your money for an emergency, you could be forced to take a large loss. But with an annuity this loss is limited to the remaining (decreasing) surrender charge. But remember you get to keep the gain you already earned on the annuity. In 2023 with the higher earning potential and higher annuity crediting methods, the surrender charge can be overcome within a year or two by policy earnings.
Locking In Lifetime Income at Today’s High Rates!
Before 2021, I was not impressed by the guaranteed income provisions of most annuities. But now, in 2025, locking in today’s lifetime income provisions has become an incredible opportunity. Previously, a 65-year-old could lock-in a 4 to 6 percent income for life. But now, in 2025, the same person can lock-in a 9 percent annual payout rate. This is a guaranteed lifetime contract rate that will not go down if interest rates decline. Lock-it in while you still can! If the same person is willing the wait several years before starting lifetime income, annual income could double. Of course, policy provisions vary significantly between various annuity companies. Working with a knowledgeable independent insurance agent who can help you shop and find the best policy for you is important.
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