The Annuity Scam: Why Insurance Companies Profit While Retirees Suffer – Don’t Sign Until You Read This!

September 12, 2025

1 View

SaveSavedRemoved 0

Picture this: You worked 40 years and saved $200,000 for retirement. An insurance agent promises you a steady income for life. Sounds great, right?

Here’s what they don’t tell you. That agent just earned $16,000 from your money. The insurance company will charge you annual fees. And if you need your money back? You’ll pay penalties that can cost you $20,000 or more.

A retired farmer in Minnesota learned this the hard way. He was charged $6,800 in surrender penalties when he needed access to his $24,000, almost 30% of his life savings. All because he bought an annuity.

This isn’t rare. It happens every day across America.

In this article, you’ll learn exactly how insurance companies make billions while retirees lose access to their own money. You’ll see the hidden fees they don’t want you to know about. And you’ll discover better ways to protect your retirement without making insurance companies rich.

Your retirement is too important to gamble on products designed to benefit someone else.

How Insurance Companies Turn Your Retirement Into Their Payday

Insurance companies have built a money machine. And it runs on retirees’ savings.

Here’s how it works. When you buy an annuity, the agent gets paid first. Annuity commissions range from 1 percent to 8 percent of the total value, though you pay as high as 10 percent. On a $200,000 annuity, that’s up to $20,000 going straight to the salesperson.

But that’s just the beginning.

The insurance company charges you fees every single year. Administrative fees. Management fees. Something called “mortality and expense” fees. Mortality expenses can range from 0.5% to 1.5% of the policy value each year.

Let’s say you put $100,000 into an annuity. Here’s what you might pay:

Administrative fee: $300 per year
Mortality expenses: $1,000 per year
Management fees: $500 per year

That’s $1,800 every year. After 10 years, you’ve paid $18,000 in fees alone.

And here’s the worst part. Variable annuities may charge 1.4 percent or more per year in administrative fees, mortality expenses, and investment fund expenses. Some charge even more.

The insurance company also keeps a “rate spread.” This means when your investments make money, they take their cut before you see any gains. It’s like a casino that always wins.

Why do they charge so much? Because they can. Most people don’t understand these fees until it’s too late.

Meanwhile, you could put that same money in low-cost index funds and pay less than 0.1% per year. Over 20 years, that difference could cost you $50,000 or more.

The Surrender Charge Trap That Holds Your Money Hostage

Now comes the really ugly part. Surrender charges.

These are penalties you pay if you want your own money back too soon. And “too soon” can mean anywhere from 6 to 16 years.

Surrender charges can be as much as 7% of your annuity’s value. Some start even higher. Most annuity contracts impose a surrender charge that begins at around 7% to 10% in the first year.

Here’s a real example. Another Minnesota woman was sold an annuity with surrender charges lasting for 16 years, or until she was 95 years old, with the surrender penalty being 17 percent of her investment.

Think about that. A 79-year-old woman couldn’t touch her money without losing 17% until she turned 95. What if she got sick? Need nursing home care? Too bad.

Let’s say you put $100,000 into an annuity and need $30,000 two years later for medical bills. With an 8% surrender charge, you’d pay $2,400 just to access your own money. Plus income taxes. Plus a 10% IRS penalty if you’re under 59½.

That $30,000 withdrawal could cost you over $5,000 in penalties and taxes.

Why do insurance companies do this? Simple. When an annuity owner withdraws funds or terminates the contract prematurely, the insurance company loses its potential profit. Surrender charges deter the annuity owner from withdrawing funds early by penalizing them for doing so.

They’re protecting their profits. Not your financial security.

The Pennsylvania Insurance Department had to step in recently. PID was able to get over $130,000 returned to an older Pennsylvanian who was sold an annuity that clearly wasn’t in the consumer’s best interest. But most people aren’t that lucky.

The High-Pressure Sales Machine That Targets Your Fears

Insurance companies don’t sell annuities through honest conversations about pros and cons. They use fear.

Here’s how the sales process really works.

First, they offer you a free meal. Steak dinner. Nice restaurant. What could go wrong? Everything. These “educational seminars” are sales pitches designed to scare you into buying.

The agent tells you the stock market will crash. Social Security will fail. Inflation will destroy your savings. But don’t worry – they have the perfect solution. An annuity that “guarantees” your money is safe.

Some unscrupulous sellers use high-pressure sales pitches, seminars, and telemarketing. Beware of agents who “cold call” you, contact you repeatedly, offer “limited time offers,” show up without an appointment, or won’t meet with you if your family is present.

They create fake urgency. “This deal expires tomorrow.” “Interest rates are going up next week.” “I can only offer this bonus today.”

All lies.

Many agents use fake credentials, too. They call themselves “Certified Senior Advisors” or “Retirement Income Specialists.” These labels may sound official, but they’re often handed out by pay-to-play organizations with little or no training requirements.

The worst part? With billions of dollars in sales to be made, insurance companies may offer commissions as high as 10 percent to agents to sell products like long-term deferred annuities to senior citizens.

This creates a huge incentive to sell you the highest-fee products. Not what’s best for you. What’s most profitable for them?

Some agents specifically target vulnerable seniors. Some agents target older adults who are terminally ill, convincing them to purchase annuities that lock away money for more than a decade. They know these seniors won’t live long enough to benefit.

That’s not financial planning. That’s predatory.

Why Most Retirees Don’t Actually Need Annuities

Let’s be honest about what annuities actually do.

They promise a steady income in retirement. But so do other investments – without the high fees and surrender charges.

Most annuities create more problems than they solve.

Problem #1: You lose control of your money. Fixed annuity products may also carry risks, such as long-term deferral periods, barring investors from accessing all of their money. What if you need money for medical care? Home repairs? Helping family? You’re stuck.
Problem #2: Tax disadvantages. If you’re putting IRA or 401(k) money into an annuity, you get no additional tax benefits. According to the SEC, investors purchasing an annuity connected with a 401(k) plan or IRA receive no tax advantage. You’re paying fees for nothing.
Problem #3: Complexity hides costs. Annuities are complicated investments. Some bear complex qualities of both insurance and securities products. The more complex the product, the easier it is to hide expensive fees.
Problem #4: Inflation risk. Many annuities don’t protect against inflation. A “guaranteed” $2,000 monthly payment sounds good today. In 20 years, it might buy half as much.
Problem #5: Company risk. Your payments depend on the insurance company staying in business. If they fail, you could lose everything. Banks have FDIC insurance. Annuities don’t.

What works better for most retirees?

A diversified portfolio of low-cost index funds and bonds. You keep control. Pay minimal fees. Can access your money anytime. And historically earn better returns.

For guaranteed income, consider Treasury I Bonds or TIPS (Treasury Inflation-Protected Securities). They’re backed by the U.S. government. Not some insurance company.

The $400+ Billion Industry Built on Confusion

The numbers tell the real story.

U.S. annuity sales reached a record high of $432.4 billion in 2024. That’s nearly half a trillion dollars flowing into insurance company pockets.

Sales have surpassed $105 billion in the first quarter of 2025 alone. The industry is booming.

Meanwhile, fraud against seniors is exploding. The FBI reported $3.4 billion was stolen via financial fraud from Americans over the age of 60 in 2023.

Why are annuities so popular if they’re bad for retirees?

Marketing. Fear tactics. And commissions that motivate salespeople to push these products.

The senior citizen population is large, growing, and by some estimates, holds two-thirds of the individual wealth in the United States. That makes seniors prime targets.

The industry knows exactly what it’s doing. High bonus rates or eye-catching illustrations can distract from long lockup periods, punishing surrender charges, or unrealistic market assumptions.

They dazzle you with big “bonus” percentages. Promise market gains without market risk. Show illustrations that assume unrealistic returns.

Then they lock up your money for years while collecting fees.

In 2023, nearly 400,000 complaints were filed with the FTC from those over age 60, comprising $1.9 billion in losses. Many involved annuities and other “retirement” products.

The system is designed to confuse you. Complex products. Buried fees. High-pressure sales tactics. All to separate you from your money.

Red Flags That Should Make You Run Away

Before you even consider an annuity, watch for these warning signs:

Unsolicited contact. If an agent is pushing a “limited time” annuity offer that makes you uncomfortable, trust your instincts. If a deal feels too good to be true, it’s likely a scam.
Free meal seminars. Nobody gives away free steaks just to educate you. These events exist to sell products. Period.
Pressure tactics. Legitimate financial advice doesn’t come with countdown timers. Real opportunities don’t disappear overnight.
Complex explanations. If you can’t understand the product after asking questions, don’t buy it. Complexity usually hides expensive fees.
Fake credentials. Look up any “certifications” the agent claims. Many are worthless.
Won’t meet with family. Honest advisors welcome family members to meetings. Scammers prefer isolated targets.
Check payable to the agent. If a salesperson asks you to send money to a P.O. box or to an individual or an agency, rather than the insurance company you are purchasing the annuity from, you should be suspicious and investigate.
Verbal promises. Everything important should be in writing. Don’t trust verbal assurances about fees or benefits.
High-pressure closing. “Sign today or lose this opportunity” is always a red flag.

If you see any of these warning signs, walk away. There are better options for your retirement money.

What to Do Instead of Buying an Annuity

You have better choices. Here’s what actually works for retirement income:

Low-cost index funds. Put your money in diversified stock and bond funds with expense ratios under 0.1%. Vanguard, Fidelity, and Charles Schwab all offer excellent options.
Bond ladder. Buy Treasury bonds or CDs that mature at different times. This creates a steady income without fees or surrender charges.
Dividend-paying stocks. Quality companies that pay dividends can provide growing income over time. Much better than fixed annuity payments.
TIPS bonds. Treasury Inflation-Protected Securities adjust for inflation. Your purchasing power stays constant.
Real estate investment trusts (REITs). These provide income from real estate without the hassle of being a landlord.

The key is keeping costs low and maintaining control of your money.

Before making any major financial decisions, talk to a fee-only financial advisor. These advisors don’t earn commissions from selling products. They work for you, not insurance companies.

You can find fee-only advisors through:

National Association of Personal Financial Advisors (NAPFA)
XY Planning Network
Garrett Planning Network

Don’t Let Insurance Companies Win

Your retirement money should work for you. Not for insurance companies and their sales agents.

The annuity industry has built a $400+ billion business by making simple investing seem scary and complex. They sell fear, then offer expensive solutions to problems they created.

Here’s the truth: Most retirees don’t need annuities. You can create retirement income with low-cost investments that don’t lock up your money or charge excessive fees.

Remember that Minnesota farmer who lost $6,800 trying to access his own $24,000? That’s nearly 30% of his money gone to penalties. All because he trusted an insurance salesperson more than his own judgment.

Don’t make the same mistake.

Before you sign anything: