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.

Sign up for Kiplinger’s Free E-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.
Get Kiplinger Today newsletter — free
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.
-
Stock Market Today: Stocks Soar on China Trade Talk Hopes
Treasury Secretary Bessent said current U.S.-China trade relations are unsustainable and signaled hopes for negotiations.
By Karee Venema
-
2026 Disney Dining Plan Returns: Free Dining for Kids & Resort Benefits
Plan your 2026 Walt Disney World vacation now. Learn about the returning Disney Dining Plan, how kids aged three to nine eat free, and the exclusive benefits of staying at a Disney Resort hotel.
By Carla Ayers
-
SRI Redefined: Going Beyond Socially Responsible Investing
Now that climate change has progressed to a changed climate, sustainable investing needs to evolve to address new demands of resilience and innovation.
By Peter Krull, CSRIC®
-
Here's When a Lack of Credit Card Debt Can Cause You Problems
Usually, getting a new credit card can be difficult if you have too much card debt, but this bank customer ran into an issue because he had no debt at all.
By H. Dennis Beaver, Esq.
-
Going to College? How to Navigate the Financial Planning
College decisions this year seem even more complex than usual, including determining whether a school is a 'financial fit.' Here's how to find your way.
By Chris Ebeling
-
Financial Steps After a Loved One's Alzheimer's Diagnosis
It's important to move fast on legal safeguards, estate planning and more while your loved one still has the capacity to make decisions.
By Thomas C. West, CLU®, ChFC®, AIF®
-
How Soon Can You Walk Away After Selling Your Business?
You may earn more money from the sale of your business if you stay to help with the transition to new management. The question is, do you need to?
By Evan T. Beach, CFP®, AWMA®
-
Two Don'ts and Four Dos During Trump's Trade War
The financial rules have changed now that tariffs have disrupted the markets and created economic uncertainty. What can you do? (And what shouldn't you do?)
By Maggie Kulyk, CRPC®, CSRIC™
-
I'm Single, With No Kids: Why Do I Need an Estate Plan?
Unless you have a plan in place, guess who might be making all the decisions about your prized possessions, or even your health care: a court.
By Cynthia Pruemm, Investment Adviser Representative
-
Most Investors Aren't as Diversified as They Think: Are You?
You could be facing a surprisingly dangerous amount of concentration risk without realizing it. Fixing that problem starts with knowing exactly what you own.
By Scott Noble, CPA/PFS