Make Sure the Annuity You May Buy isn’t Oversold

The other day, I was browsing MarketWatch, a prominent financial news and information website, and noticed an advertisement by an annuity service company proclaiming a 14% guaranteed first-year annuity payout. 14%! Think about this for a moment.  If it is guaranteed, it is a fixed annuity, and no other insurance company comes anywhere close to this.

The highest annual payout for a plain-vanilla fixed annuity in the first half of September elsewhere is about 6.25% for a five-year contract. How does 14% come to the forefront? Simple. It’s an illusion.

It’s the same with other annuity providers that regularly guarantee an 8% annual rate. Sidestep the gimmicks, and, again, you’ll see this is not really the case.

What is happening in these situations is that the annuity purveyors guarantee an annual growth rate on the so-called “income base,” not the cash value of your annuity.  This is a phantom number that exists only on paper and is separate from the actual cash value or your annuity.

While your cash value is the real money you can withdraw in a lump sum, the sole mission of the income base is to determine how much money the insurance company will pay you in regular installments. If it’s a guaranteed lifetime income annuity and your invested dollars ultimately fall to zero, the guarantee provides the same payout rate.

Here is another way to absorb this. Whether it’s a 14% sales pitch or an 8% sales pitch, the term “payout rate” rarely surfaces in the sales pitch.  Instead, the salesperson will focus on the “guaranteed growth rate,” “guaranteed interest rate,” or the “guaranteed income base.” This is a deliberate choice of words to make the product sound more lucrative than it is in practice.

Prospective annuity buyers should also be mindful of so-called “bonus” offers.  While this sounds appealing, it often comes with a catch, such as a longer surrender period.  Moreover, the bonus is typically added to your income base, not your cash value.

These complex games are exacerbated by the fact that many prospective annuity buyers are actually unfamiliar with annuities. 

Studies consistently show that most consumers lack a thorough understanding of annuities. Only 9% of consumers say they feel very knowledgeable about them, and one survey gave older Americans a score of just 12 out of 100 on a basic quiz. Another study ranked annuities dead last in consumer understanding, behind Medicare, life insurance, and long-term care.

This knowledge gap is a significant factor in what financial experts call the “annuity puzzle” – the fact that annuities are theoretically beneficial tools for retirees, yet many people who could benefit from them don’t buy them or fail to choose the most suitable product. On the latter front, many seniors are also often unaware of surrender charges – severe penalties that apply if a buyer prematurely exits an annuity contract.

Little can be done about it, but it doesn’t help that annuity contracts tend to be notoriously complex and dozens of pages long.  They contain jargon and numerous other technical terms. Among common misunderstandings, as previously noted, is the difference “income base” and “cash value.”

Another concern is that some annuity sellers work on commission and may push products that offer them the highest payout, even if those products aren’t the best fit for the customer. While not always the case, this potential conflict of interest is one reason many buyers choose fee-based or fee-only advisors, whose compensation is tied to the client’s long-term financial health rather than the sale of a product.

Those who are weary about this can sidestep the issue by buying an annuity from a broker offering a fee-based or fee-only model. This structure is seen as aligning the advisor’s interest more closely with the client’s, as their income is tied to the client’s overall financial well-being, not to the sale of a specific product. 

Overall, this is not a significant issue because many firms, including Somerset Wealth Strategies and others, predominantly sell annuities created by prominent and financially healthy insurance companies, such as New York Life, MassMutual, Nationwide, Athene, Fidelity & Guaranty Life, Lincoln Financial Group, and Prudential. These companies want to keep customers happy. In addition, most firms will purchase an annuity that appeals to a prospective buyer even if it’s not in the bailiwick of the insurance company. 

The bottom line: before buying, ask whether guarantees apply to your cash value or only the income base, understand any surrender charges, and confirm how your advisor is compensated. A few pointed questions can prevent costly surprises.

Date of publication: September 17, 2025

Disclaimer: Rates are accurate at the time of publishing, but are subject to change. Please contact us directly for current rates.

About Steve Kaufman

Steve Kaufman is a long-time writer and business reporter and has been an annuity
researcher and wordsmith for a decade on behalf of Somerset Wealth Strategies, a
Portland, Oregon-based investment advisory firm.  He has been a business news
reporter for multiple newspapers for a quarter century.  He is a graduate of the
Columbia University Graduate School of Journalism.