Six Annuity Risks and How to Avoid Them

Written by Ariel Stern Updated June 12, 2026

When you shop for an immediate annuity, it’s just as important to understand the benefits of an annuity as the risks. While we have an article dedicated to the pros and cons of immediate annuities, this article will focus on six specific immediate annuity risks and how to avoid them.

We’re going to focus on the following:

• Liquidity Issues: money for emergencies
• Dying Early: leaving behind no inheritance
• Stability: your insurer going bankrupt
• Inflation: losing purchasing power
• Opportunity Cost: are other investments better
• Fee misconceptions: Are immediate annuities expensive?

Liquidity issues: What if you need money from your immediate annuity?

Limited liquidity is one of the major risks of buying an immediate annuity. When you buy one, you are locked into the contract after your free look period expires. This means that you cannot easily change your mind after the fact.

This can be problematic if unexpected expenses arise that you haven’t planned for. While some immediate annuities offer limited liquidity, such as an advance of future payments or a lump sum in exchange for a reduction in your income stream, not all have these liquidity features. On top of this, these liquidity features are generally not a great deal for you.

For this reason, you need to make sure that you have adequate money set aside that you can access if a big emergency expense occurs. In fact, many insurers will limit the amount of your liquid assets you can even use to purchase an immediate annuity. Just be honest with yourself about how much income and liquidity you will need in the future.

Dying early: Leaving behind no inheritance

Another immediate annuity risk is that you die earlier than expected. If you purchase a Life Only option, you will likely get the highest monthly income, but when you die there is no death benefit for your beneficiaries.

The good news is that there are a variety of payout options you can choose from. We strongly encourage you to run quotes for many types of payout options with our blue quote calculator on this page. This will help you balance getting enough monthly income with providing for loved ones in the event you die early.

Insurer stability: What if the insurer goes bankrupt?

The insurance company you choose can actually be another annuity risk. Annuities are a contract between you and the insurer. Annuities are not FDIC insured, and while some coverage is offered by state guaranty associations, an insurer going through rehabilitation can cause disruptions in their services.

The last thing you want is your guaranteed income stream to not seem so guaranteed anymore. For that reason, you should choose a company with a strong financial rating. Check out our insurance company ratings page, which lists the A.M. Best, Standard and Poor’s, and Moody’s ratings for the insurers we work with.

While an insurer failing might sound scary, it’s important to remember that most insurers have been historically stable, even during times of economic downturns, and many of our insurers have been in business for decades or even over a century.

Inflation: Will it eat away at your purchasing power?

Inflation is an external but very real immediate annuity risk. While annuities can be great for guaranteeing regular, steady income, many policies pay a flat income rate. This means that inflation eats away at your purchasing power over time, which is something you should consider if you are planning for several decades of retirement.

The good news is that there are a number of strategies to protect your immediate annuity income from inflation. Some people buy an annuity with a Cost of Living Adjustment (COLA) or employ an annuity ladder to incrementally increase your income over time.

For other people, the security offered by an immediate annuity allows them to be more aggressive with how they invest their remaining money. This can help with not only combatting inflation, but also leaving behind a larger legacy for loved ones.

Opportunity cost: Could you do better using other investment vehicles?

For some people, the long-term contractual guarantees of an immediate annuity are the risk. You are locked into the policy. You can’t move the immediate annuity funds to another vehicle later if something better comes up, and other investment vehicles may produce better returns over the long haul. This concept is often referred to as opportunity cost.

When you consider the opportunity cost of an immediate annuity, it’s important to remember that the long-term contractual guarantees are actually the annuity’s security.

While other investment vehicles like mutual funds, ETFs, or even bonds may produce better yields over the long term, all of these investments carry the risk of investment loss. Your account values can decrease with market downturns. While this happens, your annuity income remains steady.

That’s why many experts suggest annuities as a part of a balanced, diversified portfolio. Immediate annuities provide steady, predictable income when your other investments are in decline. And if you don’t like the long-term contractual terms of an immediate annuity, it’s worth considering multi-year guarantee annuities which have shorter terms and guaranteed returns.

When you think about the opportunity cost of an immediate annuity, ask yourself a few questions:

• Will you invest the money elsewhere?
• If you lose money in the markets, do you have the stomach to stick it out?

Answering these questions honestly can help you determine if the opportunity cost of an immediate annuity is worth it to you.

Fee misconceptions: Are immediate annuities expensive?

The misconception that all annuities are expensive comes from confusing variable annuity fees with immediate annuity fees. While variable annuities do tend to have expensive, ongoing fees, the fee structure of immediate annuities is completely different and much more favorable.

Immediate annuities have no fees to you directly. There are no maintenance costs or deductions outside of tax withholding (if you elect to have taxes withheld).

It is true, however, that the insurance agent who sells you the immediate annuity makes a one-time fee at the point of sale. This commission is typically between 2% and 4%. The insurer pays the agent; you do not. These commissions are simply baked into your immediate annuity rate.

If you think that this commission is too high, remember that it is a one-time commission. If you pay an investment advisor 1% annually, your investment advisor quickly becomes more expensive. For more information, check out our article on annuity commissions.

In the end, remember that the immediate annuity rate you are quoted is what you will get; we don’t charge any additional fees. This helps you to evaluate adding the security of an immediate annuity to your retirement plan without having to consider high ongoing costs.