Annuities Pros and Cons [Top 10 Advantages & Disadvantages]

Category: Annuities
January 15, 2019
Written by: Steven Gibbs | Last Updated on: June 17, 2024
Fact Checked by Jason Herring and Barry Brooksby (licensed insurance experts)

Insurance and Estates, a strategic life insurance provider composed of life insurance professionals, is committed to integrity in our editorial standards and transparency in how we receive compensation from our insurance partners.

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Annuities are a solid financial solution for many people. However, they’re not for everyone. If you’re considering an annuity, you should understand first what is an annuity and then weigh the pros and cons carefully. To follow are our Annuities top 10 pros and cons, offered here for the sole purpose of assisting you in your decision making process.

When making any investment decision, you should carefully consider other lost opportunities such as funding dividend paying whole life insurance, real estate investing or traditional market based investments such as stocks and bonds.

Some may also suggest that you should be “maxing out” contributions to other retirement accounts.

Finally, you should consider your full estate planning and business planningoutlook AND and decide whether opportunities such as infinite banking may be more or less advantageous.

Defining an Annuity

In its purest form, an annuity refers to the conversion of a lump sum of money into a monthly stream of income. So to “annuitize” any account means to convert it into regular monthly payments.

This means, for example, that you can  annuitize an IRA account, which simply refers to electing to receive regular consistent IRA payment distributions (as opposed to rolling it into a formal annuity contract).

An annuity, by definition, also refers to a contract, or more specifically a contractual life insurance asset that is created between an individual or business entity AND a life insurance company. An annuity is a unilateral contract because the life insurance company is the only party that is legally bound to perform. The other individual or entity that purchases the annuity may surrender it at any time (subject to penalties).

The sole purpose of an annuity is to convert a lump sum payment (or series of payments) into a stream of income that is guaranteed for set period of time (usually the life of the contract owner or another chosen person referred to as the annuitant).

In general, ALL annuities have 2 phases which are:  1) accumulation/savings;  and 2) payout.

Annuities are referred to as either immediate annuities OR deferred annuities depending upon how quickly they convert to regular monthly payments.

Annuity payments are referred to as “premiums” and may be made either as a lump sum or a series of payments.

Immediate annuities are always paid with a lump sum, whereas a deferred annuity may be funded with a series of payments.

All annuities (whether immediate or deferred) have an Annuity Start Date (ASD) which is the date that the regular monthly payments initiates. Once the annuity owner decides to initiate the ASD and begins receiving payments, the decision to annuitize is NOT revocable.

Annuities may be categorized as a qualified or non-qualified annuity, with the former reserved for those which are used to fund a qualified retirement account such as a 401(k) or an IRA and the latter being reserved for ALL other annuities.

Qualified annuities are the only ones that allow an employer or individual to deduct the premiums which means to that they are paid with pretax income.

However, all annuities as well as cash value life insurance policies offer certain tax advantages  AS WELL AS certain asset protection advantages to be discussed in this article to follow.

Annuities ALSO are subject to various restrictions from a taxation and contractual standpoint and we will carefully consider these restrictions as well.

Pros and Cons of Annuities 

The benefit of weighing the following PROs and CONs for annuites and any financial decision is that some of the following or possibly all will relate more directly to your financial circumstances and needs than others. For some, the PROs will weigh more heavily than the CONs and vice versa. With that in mind, let’s get started.

The following TOP 5 Pros of Annuities are similar than those that apply to permanent life insurance and specifically using cash value life insurance for wealth building. Where there are important distinctions; however, I will point them out because it is common for a life insurance strategy to offer a more appropriate solution and vice versa.

Top 5 Pros of Annuities

  1. Income Stream Guaranteed for Life
  2. Tax Deferred Growth
  3. Asset Protection
  4. Contractual Cash Value Growth
  5. Death Benefit for Heirs or Beneficiaries
Income for Life

The point of an annuity is to convert a lump sum payment (or series of payments) into a regular income payment. Annuities in general agree to provide this income payment for life and are well situated to absorb the risk of whether the annuity owner lives for a very long or very short time. This shift of risk is the central benefit to an annuity and is a major PRO for many people.

Seniors who are seeking an immediate payment that will be guaranteed for life may benefit from an immediate annuity for this purpose. Similarly, younger people who are looking to supplement their retirement plan and have a significant amount of time for account growth may find that a deferred annuity is suitable for this purpose.

Tax Deferred Growth

ALL annuities offer tax deferred growth, as do permanent life insurance policies. It is important to differentiate TAX DEFERRED vs. TAX FREE growth.

Tax deferred simply refers to the ability NOT to pay taxes on the growth now. The logic is that tax NOT paid now can be used to fund up the premiums, thereby fostering more growth of the account. The point being, taxes on the growth will eventually have to be paid.  For those in a higher tax bracket who believe they may be in a lower one during retirement, this can be an important consideration.

Asset Protection

Most state laws allow some asset protection from creditors for the account proceeds in an annuity account. States like Texas and Florida tend to offer the highest levels of protection, whereas states like California tend to offer a lesser degree.

A more comprehensive look at asset protection is featured in our free e-book, the Estate Planner’s Tactical Guide, which is available on this website for free.

Cash Value Growth

The cash value of an annuity account is set by the contract, similar to the cash value accumulation and life insurance, and varies between a fixed index annuity on one end of the spectrum AND a variable annuity on the other end.

A fixed interest rate annuity may be considered a very conservative safe bucket investment as defined by Robert Kiyosaki.

A variable annuity, on the other hand, is subject to more risk, akin to other market based investments like stocks, bonds and mutual funds OR real estate investing.

The difference between these 2 types of annuities is in the creation of a separate account for variable annuities and the risk of market losses for these accounts.

A middle ground may be a fixed index annuity which can operate similar to an indexed universal life insurance policy by fixing gains to a market index such as the S & P 500 and allowing for stop loss protection.

Death Benefit

Some types of annuities and most, if not all, variable annuities offer a death benefit to protect the account value in the event the annuity owner passes away early.  Often, the death benefit is based upon the account value OR it may be based upon formula to calculate amounts paid in verses paid out.  The PRO may be most beneficial pertaining to variable annuities where the risk of loss is a more relevant factor.

Top 5 Cons of Annuities

  1. Loss of Liquidity
  2. Surrender Charges
  3. Tax Restrictions
  4. Estate Planning Downside
  5. Inflexibility
Loss of Liquidity

The most obvious, and probably most significant, CON of annuities is the loss of liquidity. The reason being, annuities by definition convert a totally liquid sum of cash into a contractually agreed series of monthly payments.

This fact should be carefully considered because the benefit of a guaranteed payment for life is ALSO experienced as the loss of liquidity to pursue other investment opportunities (opportunity cost). This issue will be discussed further concerning surrender charges and tax penalties for early withdrawal.

Surrender Charges

A withdrawal or surrender of an annuity account during the accumulation phase, which is usually around 7 years, will generally result in a surrender charge penalty from the insurance company. This surrender charge is the insurance company’s way of covering the cost of administering the account during the early years of the contract AND is in addition to the tax penalties for early withdrawal or surrender of the contract.

Tax Restrictions

The tax deferred growth that is available to annuities has a backlash in terms of tax restrictions because withdrawals are NOT allowed until age 59 1/2 and this makes these accounts similar to other retirement accounts. Withdrawals prior to age 59 1/2 result in a 10% penalty, similar to other retirement accounts.

Early withdrawal are calculated in another very non-advantageous way using the “last in first out” (LIFO) method which means that income taxes are realized on any early withdrawals until all earnings have been covered (for tax purposes) and the balance is a non-taxable return of premiums paid.

Estate Planning Downside

Unlike life insurance contracts that provide a death benefit which is non-taxable to beneficiaries, annuities paid to an estate incur what is called “income in respect to a decedent“. For estate tax planning  and business continuity succession planning purposes, taxation is a negative result to be avoided.


All of the above are factors that relate to the inflexible nature of annuities. By their nature, annuities are NOT flexible because the are a contractually guaranteed return on investment that offers tax advantages. Even taking a loan from an annuity, unlike a loan from a cash value life insurance policy, is a taxable event because it considered either an early withdrawal of cash OR an additional withdrawal over the regular monthly payment.

The above Annuity Pros and Cons should be carefully considered, along with other options, before making a final decision concerning retirement planning OR any investment planning.

We’re here to help so please connect with us today if you have further questions.


Annuities are not for everyone and there is no one size fits all product. If you are interested in an annuity, please give us a call today to speak to a seasoned life and annuity professional. We can help you on your journey and offer solid advice so you can choose the right product based on your unique needs, goals and objectives.


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  • gary lucas
    gary lucas

    I am age 75 with low risk tolerance. Have “over” $200,000 in savings that is drawing “minimal” interest and we live on ss income plus some savings that will play out in 3 to 4 years. At the end of this time, we need to be able to start taking the income generated from the “over” $200,000 account to replace the savings account we will have depleted. Here is what we are looking for:

    Deferred monthly income that continues to either/both of us till both deceased
    Security of principal
    Money left to leave to our child when we are both gone
    Some ability for some/or all liquidity in emergencies

    Are these items obtainable in some form?

    • Insurance&Estates

      Hello Gary, thank you for your interest and comments. Your questions are in depth and should be addressed in a confidential discussion with an expert in order to completely explore your goals and concerns. Jason Herring will reach out to you to continue the conversation if you’re interested.



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