Why Do Financial Planners Push Annuities? The Truth Behind the Sales Pitch

Ever wondered why your financial planner seems obsessed with getting you to buy an annuity? You’re not alone. I’ve seen this pattern repeat itself countless times, and there’s more to it than meets the eye

Financial salespeople (who often call themselves “advisors”) are pushing annuities harder than ever these days. With investors feeling nervous about their financial futures, these products are being pitched as the perfect solution But before you sign on the dotted line, let’s dig into what’s really happening

The Real Reason Annuities Are Pushed So Hard

Let’s cut to the chase – money talks The primary reason many financial planners aggressively push annuities is simple

They make a killing on commissions.

According to industry data, annuities provide the biggest payday to brokerages, banks, and their sales forces. The average commission for selling an annuity? A whopping 6-7% goes straight to the salesperson’s pocket.

Think about that for a moment. If you invest $100,000 in an annuity, your “advisor” could instantly make $6,000-$7,000 on that single transaction. That’s a powerful incentive to push these products, regardless of whether they’re the best fit for you.

The Cost Problem Most Salespeople Won’t Mention

Annuities aren’t just profitable for the people selling them – they’re also incredibly expensive for you as the investor.

Why are they so costly? Simple – annuities are insurance-based products that need to make up the cost of whatever they’re guaranteeing. Many annuities promise you’ll never lose principal while still allowing you to make money through investment accounts similar to mutual funds.

But there’s a catch in that guarantee. When they say you’ll “never lose principal,” what they often mean is that your beneficiaries are guaranteed your principal upon your death – not necessarily you during your lifetime. This guarantee provided little comfort to many investors approaching retirement during the financial crisis.

The fee structure of annuities is where things get really painful:

According to Morningstar, the average expense of a variable annuity is 2.2%. That might not sound like much, but let’s look at what it does to your money over time:

• If you invest $10,000 into an annuity with a 2.2% fee and the market returns 8%, in 20 years you’d have $30,882.
• If you instead put that same $10,000 into an index portfolio with just 0.03% in fees, you’d end up with $46,351.

That’s a difference of $15,469 – over 50% more money in your pocket just by avoiding those high annuity fees!

The Tax Deferral Myth

“But what about the tax benefits?” I hear this question all the time.

For younger investors especially, annuities are frequently marketed as tax-deferral investment programs. And yes, a variable annuity will give you tax deferral – but at what cost?

For investors who have already maxed out their 401(k)s and IRAs and are looking for additional tax-sheltered retirement savings, there are better options. A taxable, tax-efficient portfolio is often the smarter choice.

With the popularity of Exchange-Traded Funds (ETFs) and direct indexing (for larger investors), you can build a very tax-friendly portfolio at an investment cost of less than 0.15% – a fraction of what you’d pay for an annuity.

How They Hook You: The Psychology Behind Annuity Sales

So why do so many intelligent people still fall for the annuity pitch? It comes down to the persuasive tactics of skilled salespeople combined with the financial industry’s expertise at playing on your fears.

Many consumers, especially those who primarily use banks for their financial services, might never invest in the market on their own, seeing it as too risky. The annuity seems to offer the safety they crave.

The sales pitch typically follows a predictable pattern:

1. Highlight market volatility and economic uncertainty
2. Create fear about outliving your money in retirement
3. Present the annuity as a “guaranteed” solution that eliminates risk
4. Downplay or completely ignore the high fees and commissions
5. Use confusing jargon and complicated contract terms to obscure the downsides

Remember the old saying: if it sounds too good to be true, it probably is. There’s no such thing as a free lunch in investing, and those “guarantees” come at a steep price.

Types of Annuities You Might Be Pitched

Not all annuities are created equal, and knowing the differences can help you spot a bad deal. Here are the main types you’re likely to encounter:

Variable Annuities

These are the most commonly pushed products. They allow you to invest in market-based “subaccounts” (similar to mutual funds) while providing some form of downside protection. They typically have the highest fees and most complex structures.

Fixed Annuities

These pay a guaranteed interest rate for a specific period. The rates are often initially attractive but may drop significantly after the introductory period.

Fixed Indexed Annuities

These tie your returns to a market index like the S&P 500, but with caps on how much you can earn when the market performs well. You’re protected from losses, but your upside potential is severely limited.

Immediate Annuities

You give the insurance company a lump sum, and they begin paying you an income stream right away. These can sometimes make sense for retirees seeking guaranteed income.

Deferred Income Annuities

Similar to immediate annuities, but payments start at a future date. They’re sometimes marketed as “longevity insurance.”

Who Might Actually Benefit from Annuities?

I’m not saying annuities are always bad for everyone. There are specific situations where certain types of annuities might make sense:

• Retirees who want guaranteed income they can’t outlive
• Very conservative investors who prioritize safety over returns
• Those who have maxed out all other tax-advantaged accounts and want additional tax deferral (though better options may exist)
• People who struggle with investment discipline and might otherwise panic-sell during market downturns

Even in these cases, however, it’s crucial to shop carefully, understand all fees, and consider alternatives.

Better Alternatives to Consider

So if annuities aren’t the answer for most investors, what should you consider instead?

For Retirement Income:

• A well-diversified portfolio of low-cost index funds or ETFs
• A systematic withdrawal strategy designed by a fiduciary advisor
• Treasury bonds, TIPS, and high-quality corporate bonds
• Social Security optimization strategies

For Tax Efficiency:

• Tax-managed index funds
• ETFs (which are generally more tax-efficient than mutual funds)
• Direct indexing for larger portfolios
• Municipal bonds for taxable accounts (if appropriate for your situation)

For Downside Protection:

• Proper asset allocation based on your risk tolerance
• Diversification across multiple asset classes
• Treasury bonds and other high-quality fixed income
• Put options or other hedging strategies (for sophisticated investors)

How to Protect Yourself From Annuity Sales Pressure

The next time a financial professional starts pushing annuities, here’s what you should do:

1. Ask about commissions and fees: Request a full breakdown of all costs, including surrender charges, mortality and expense charges, administrative fees, and investment management fees.

2. Request alternatives: Ask what other strategies might achieve your goals with lower costs.

3. Get a second opinion: Consult a fee-only fiduciary advisor who doesn’t sell commission-based products.

4. Take your time: Never sign anything in the first meeting. Take materials home to review carefully.

5. Read the fine print: Annuity contracts are notoriously complex. If you don’t understand something, don’t sign.

6. Consider the source: Is the person selling you the annuity truly acting in your best interest, or are they motivated by commissions?

The Fiduciary Difference

This is probably the most important point in this whole article. There’s a fundamental difference between two types of financial professionals:

• Commission-based brokers/agents: Can recommend products that are merely “suitable” for you, even if they’re not the best option. They’re paid through commissions.

• Fiduciary fee-only advisors: Legally obligated to put your interests first and recommend what’s truly best for you. They’re typically paid through transparent fees rather than commissions.

If you want objective advice about whether an annuity makes sense for your situation, consult a fiduciary fee-only advisor. They can help you explore alternatives that will likely cost one-tenth of what you’d pay for the average annuity.

The Bottom Line

Financial salespeople push annuities because they’re incredibly profitable – for them. The high commissions create a powerful incentive to recommend these products regardless of whether they’re the best choice for you.

While annuities might make sense in specific situations, most investors can achieve their financial goals more efficiently with lower-cost alternatives. The key is working with a financial professional who puts your interests first.

Remember, when it comes to your financial future, the person giving you advice should be working for you – not for the insurance company paying their commission.

Have you been pitched an annuity recently? I’d love to hear about your experience in the comments below. And if you found this article helpful, please share it with someone who might be facing similar sales pressure.