Watch Out for These Red Flags When Buying an Annuity

Annuities are complicated, so you must ensure you thoroughly understand what you're entering into.

Published: 7/1/2025, 10:15:28 AM EDT

Watch Out for These Red Flags When Buying an Annuity — There are red flags to watch for so you don't purchase a bad annuity. (Photon photo/Shutterstock)

Concerns about the economy have driven sales for annuities. According life insurance marketing and trade association LIMRA, annuity sales topped $105 billion in the first quarter of 2025.

But not every annuity is good. The agent or broker may not always represent the annuity properly. They could have another agenda other than your best interest. Here are some red flags to watch for so you don’t purchase a bad annuity.

Agent Tries to Switch Your Annuity

In the annuity business, there are the terms “churning” or “twisting.” This is when an agent or broker tries to convince you to switch your annuity for another after you purchase the original one.

Many times, it’s not in your best interest, and it can be expensive. The agent does this to earn a bigger commission. It’s an unethical practice and, according to annuity.org, illegal in some states.

The red flag is when an agent sells you an annuity and then, in two or three years, approaches you to switch to another one. The new annuity may or may not be better than the original.

But beware: If you decide to change, you must pay a surrender charge on the original annuity. A surrender charge is the penalty an insurance company charges when you transfer money before the contract ends. It varies based on the age of the annuity and the amount transferred.

But this surrender charge could result in you losing money.

It must be noted that not all agents practice this, and they may legitimately have a better product. But it would be wise for you to be aware of this practice.

Pressure to Make a Decision

An annuity is an insurance product sold by agents, and they work on commission. Unscrupulous agents may resort to high-pressure tactics to convince you to buy an annuity. They may or may not offer you the best product, but they want that sale.

The red flag should be agents who say “limited time offer” or “act now.” This is their way of pressuring you by using fear of missing out (FOMO) tactics.

But remember, this is locking your money in for the long term, and you shouldn’t feel pressured to buy. If this happens to you, you might want to find another agent.

Insurance Company Charges High Fees for Annuity

Annuities have several fees that are charged annually for administration. Variable annuities and indexed annuities typically have the highest fees. They also have the highest commissions for the agent.

According to annuity.org, typically, a fee averages 0.3 percent of the annuity value. For example, if you had a $100,000 annuity, your annual fee would be $300 per year.

This is an average, so some fees may be higher. But the red flag is that if it’s too far above average, it may not be the right one for you.

Oversimplifying the Explanation of Annuity

Annuities are complicated; they are not easy to explain. If an agent is telling you all the benefits without explaining the downsides, that’s a red flag.

One of the first questions you should ask is, “What are the downsides?” If the agent fumbles or can’t answer with details, you might want to move on to another.

Misleading Annuity Bonuses

Annuity bonuses offer more to the annuity balance. They can be either a percentage of the initial premium payments or a first-year interest rate.

And although it’s not a scam, it’s designed to lure you into buying.

The bonus often comes with longer surrender periods or higher surrender charges. Other problems may be more fees, lower interest rates over the life of the annuity, and a non-tangible bonus.

The red flag is that you see an advertisement or email for a large bonus with an annuity, but it doesn’t tell you the strings attached. The large bonus is probably too good to be true.

Agent Wants You to Send Them the Money

An annuity is an insurance product. Therefore, the contract you sign and invest in is between you and the insurance company.

The agent is the middleman, and he or she represents the company. The company pays the agent a commission for selling you the annuity. You don’t pay the commission directly. There’s no reason the agent should have possession of your money.

It’s a red flag if the agent asks you to send them the money. The money must go directly to the insurance company.

Annuity Has Poor Returns

Variable and indexed annuities have investments that are tied to market performance. That means your annuity can rise or fall according to investments.

Ensure you research how the annuity has performed over time. You can find performance information in the annuity’s prospectus or quarterly statement provided by the company.

If you can’t find this information, it’s a bad sign. Legitimate companies make this easy to find and will usually provide it to you.

Research Any Annuity You’re Considering

Start by researching the agent or broker and ensure they are appropriately licensed and representing a company with a solid track record.

If you have a financial adviser, ask them for advice. Annuities are complicated, so you must ensure you thoroughly understand what you’re entering into.

Remember, you can walk away from the deal if you’re unsure or see a red flag.

The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. NTD does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. NTD holds no liability for the accuracy or timeliness of the information provided.

From The Epoch Times