Are Income Annuities Fair?
An off-kilter idea of fairness may be getting in the way of some people's long-term plans for guaranteed income.

If you get a chance, you might read this article, “Why Retirees May be Wary of Annuities.” Written by two knowledgeable academics and based on a study of consumers, the authors conclude that investors’ aversion to income annuities may be related more to a question of fairness than the value of the investment itself.
At the crux of the issue is the question of whether it’s fair that an insurance company can hold on to part of the money a person pays into an annuity if they die before getting their premium back in annuity payments.
Basically, there is a group of people who simply feel that deal is not right. They can’t get behind the shared risk model at the heart of annuities, which is that early deaths help subsidize the payments for those who live beyond their life expectancies.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.

Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
At the end of the article, the authors suggest that what’s needed for annuity acceptance is a “highly personalized approach, in which the [planning] solutions are tailored to reflect the goals, circumstances of the individual.”
As an actuary by training and a designer of novel forms of income annuities, I may be the wrong person to ask whether they are fair. Like Social Security and pension plans, they enable group risk sharing and higher payments. When I look at fairness, I look at the pricing of the annuity payments — and I happen to be comfortable with the competitive marketplace for income annuities.
Here’s a point-by-point response to the study participants who expressed the fairness issue:
1. ALL insurance is based on the pooling and sharing of risk.
Who has paid for fire insurance and not had a fire, or paid life insurance premiums to cover a mortgage and lived until it was paid off — and didn’t get their premiums back? The peace of mind and protection from knowing you were covered is only possible if your reserve pays for the claims of other people who are insured. In the same way, while income annuities are paid for with an upfront premium, the pooling still exists.
2. What if you’re not convinced by the risk-sharing argument?
If you still believe it’s unfair, then buy some protection for your beneficiary — either through the income annuity itself or through a separate life insurance policy. If you do it through the income annuity, it will lower your income, but if it makes you feel better then go ahead. In that case the insurance company is holding on to a smaller part of your reserve and paying it to your beneficiaries.
3. You are getting paid for this loss of reserve in higher annuity payments.
When you are buying an annuity, what you are doing is generating more income without taking investment risk. In effect, you are “selling” this part of your legacy to the insurance company, which pays you back in guaranteed income. Often these are called longevity or mortality credits.
But enough of these technical arguments in favor of the income annuity as a singular product. The bigger issue in evaluating income annuities is that they are posed as an either/or product purchase decision rather than as a how/how much retirement planning decision. For example, very few investors would buy junk bonds or emerging market equities unless they were part of a diversified investment portfolio.
Similarly, you should look at your entire retirement income plan with and without income annuities and decide which is better, looking at all of the aspects of the plan. From legacy early in retirement to liquidity in mid-retirement to income late-in-retirement.
The problem for the consumer is that most sellers of income annuities don’t present them in the context of the personalized (planning) solution the study’s authors suggest. The people selling annuities are often life insurance agents and not investment advisers. So, in our view, consumers considering income annuities should consider them as simply part of a retirement portfolio, just like bonds, and find advisers who share the same perspective.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Jerry Golden is the founder and CEO of Golden Retirement Advisors Inc. He specializes in helping consumers create retirement plans that provide income that cannot be outlived. Find out more at Go2income.com, where consumers can explore all types of income annuity options, anonymously and at no cost.
-
The Most Tax-Friendly States for Investing in 2025 (Hint: There Are Two)
State Taxes Living in one of these places could lower your 2025 investment taxes — especially if you invest in real estate.
-
Want To Retire at 55? See If You Can Answer These Five Questions
Who said you can’t retire at 55? If you say yes to these questions, you may be on your way to an early retirement.
-
Potential Trouble for Retirees: A Wealth Adviser's Guide to the OBBB's Impact on Retirement
While some provisions might help, others could push you into a higher tax bracket and raise your costs. Be strategic about Roth conversions, charitable donations, estate tax plans and health care expenditures.
-
One Small Step for Your Money, One Giant Leap for Retirement
Saving enough for retirement can sound as daunting as walking on the moon. But what would your future look like if you took one small step toward it this year?
-
This Is What You Really Need to Know About Medicare, From a Financial Expert
Health care costs are a significant retirement expense, and Medicare offers essential but complex coverage that requires careful planning. Here's how to navigate Medicare's various parts, enrollment periods and income-based costs.
-
I'm a Financial Planner: Could Partial Retirement Be the Right Move for You?
Many Americans close to retirement are questioning whether they should take the full leap into retirement or continue to work part-time.
-
From Mortgages to Taxes to Estates: How to Prepare for Falling Interest Rates
As speculation grows that the Federal Reserve will soon start lowering interest rates, now is a good time to review your financial plans for housing, estate, taxes, investing and retirement to make the most of potential changes.
-
This Is How Lottery Winners Build Lasting Legacies, From a Financial Professional
Winning a massive lottery jackpot, like the recent $1.4 billion Powerball, requires seeking immediate legal and financial counsel, protecting your identity and winnings and planning your legacy.
-
I'm an Investment Strategist: This Is How the Fed's Next Rate Move Could Impact Your Wallet
Interest rate cuts might be coming, which could affect everything from your credit card debt to your mortgage. It's smart to prepare now — here's how.
-
I'm a Retirement Planner: These Are Three Common Tax Mistakes You Could Be Making With Your Investments
Don't pay more tax on your investments than you need to. You can keep more money in your pocket (or for retirement) by avoiding these three common mistakes.