Due to economic concerns, sales of annuities have seen significant growth. According to data from the Life Insurance Marketing and Research Association (LIMRA), annuity sales surpassed $105 billion in the first quarter of 2025.
However, not all annuity products are created equal. Brokers or agents may not always provide accurate information about annuities, as their motives may not solely be in your best interest. Here are some warning signs to watch out for to avoid purchasing unsuitable annuity products.
In the annuity industry, there are terms like “churning” or “twisting,” which refer to agents trying to convince you to switch to a different annuity product after you’ve purchased the original one.
This practice may not align with your best interests and could come at a cost. Agents engage in this behavior to earn higher commissions, which is not only unethical but also illegal in some states, according to annuity.org.
A clear red flag is when an agent sells you an annuity and then, after a couple of years, pushes you to switch to another annuity product. The new annuity product may not necessarily be better than the original one.
However, be cautious – if you decide to switch annuities, you may incur surrender charges from the original annuity. Surrender charges are penalties imposed by the insurance company when you withdraw money from the contract before it matures. The amount of these charges depends on the annuity’s term and the amount being withdrawn.
These surrender charges could lead to actual financial losses for you.
It’s important to note that not all agents engage in such practices, and some genuinely offer better products. However, it’s advisable to remain vigilant against such tactics.
Annuities are insurance products sold by agents who earn commissions. Some dishonest agents may resort to high-pressure sales tactics to rush you into making decisions. The products they offer may not necessarily be the best fit for you; they just want to close the deal.
When an agent emphasizes “limited-time offers” or urges you to “act now,” it’s a warning sign. They are playing on your fear of missing out (FOMO) to pressure you.
Remember, annuities are long-term investment vehicles, and you should not make purchase decisions under pressure. If you encounter such situations, consider seeking advice from a different agent.
Annuity products incur annual management fees. Variable annuities and indexed annuities typically have the highest fees, and agents earn higher commissions from them.
According to annuity.org, the average annual management fee for annuities is around 0.3% of the annuity amount. For example, if your annuity account is $100,000, you would need to pay approximately $300 in fees annually.
This figure is just an average; some annuities may have higher fees. If a product’s fees far exceed the average, it should raise a red flag as it may not be suitable for you.
Annuities are complex products that may be challenging to understand. If an agent only highlights the benefits without discussing any risks, it’s a dangerous signal.
One of the questions you should ask upfront is, “What are the downsides of this annuity?” If the agent hesitates or is unable to provide a clear answer, it’s best to seek advice from someone else.
Annuity bonuses refer to additional amounts added to your annuity account, which can be a certain percentage of the initial premium or a rate of return bonus for the first year.
However, these bonuses often come with longer surrender periods or higher surrender charges. Other issues may include additional hidden fees, lower long-term rates, or bonuses that end up unfulfilled.
A blatant warning sign is when you see advertisements or receive mail promoting an annuity with high bonuses without disclosing the accompanying conditions. These “gift packages” often appear too good to be true.
Annuities are insurance products, and the contract you sign and the funds you invest establish a relationship between you and the insurance company. Agents act as intermediaries representing the company, which pays them commissions, and you do not need to directly pay commissions.
If an agent asks you to transfer money directly to them, it’s a severe warning sign. Your funds should go directly to the insurance company.
The returns of variable and indexed annuities are linked to market performance, meaning your account value may fluctuate with market trends.
You should review the historical performance of the annuity product. This information can be found in the annuity prospectus or quarterly reports provided by the company.
If you cannot locate this information, it’s a bad sign. Reputable companies proactively provide such information and make it easily accessible.
Start by researching the background of the agent or broker to ensure they are licensed and represent reputable companies with sound track records.
If you have a financial advisor, it’s advisable to seek their analysis. Annuity products are highly intricate, and you must fully understand the product you are about to purchase.
Remember, if you are unsure or encounter warning signs, you have the option to walk away from the transaction.