For as long as I’ve been in the financial world, one thing has remained constant: big banks, insurance companies, and many financial firms promote annuities and whole life insurance as essential financial planning tools. But are they truly in your best interest? Or are they high-commission products that primarily benefit the companies and salespeople who sell them?
I’ve invested my own money since 1995, and I’ve advised clients as a fiduciary since 2014. And even with all my experience, I struggle to find scenarios where locking up money in these products, paying high fees, and handing over a significant commission to a salesperson is the best option for an investor, especially for high-income earners, where the fees can be astonishing.
Are They Financial Advisors or Salespeople?
When you work with a fiduciary financial advisor, they are legally obligated to put your best interests first. That means their recommendations must be tailored to your specific financial situation, goals, and long-term strategy. A fiduciary advisor is not just selling products. They are sitting on the same side of the table as you, guiding you with a deep understanding of your entire financial life and working to ensure your wealth is structured in the most efficient way possible.
However, many individuals selling annuities and whole life insurance are not fiduciaries. Depending on the product, the license and the state, they may be held to a suitability standard or a best interest standard, and neither is the fiduciary duty an investment adviser owes you. This difference is critical because commissions on these products can create an inherent conflict of interest.
Commissions and Incentives: The Hidden Cost
Let’s break down how money is made behind the scenes:
Annuities and whole life policies can pay the person who sells them a large commission. Ask how much before you sign.
Because of these high commissions, financial professionals who sell these products often have a strong incentive to recommend them, regardless of whether they are the best option for you.
Do These Products Actually Deliver?
Annuities and whole life insurance are often marketed as "safe" investments that provide guarantees. While these products do have their uses in specific scenarios, such as income security for retirees or estate planning, they are often misunderstood.
- Annuities can offer guaranteed income, but they typically come with high fees, surrender charges, and limited liquidity. Many may also underperform compared to a well-diversified investment portfolio.
- Whole Life Insurance provides a cash value component, but the growth rate is usually much lower than other investment vehicles, and the policyholder may not receive both the cash value and the death benefit upon passing.
Many investors find themselves frustrated when they realize how much their annuity costs each year or that their whole life policy isn’t growing at the pace they expected.
A Real Story: The Bank Teller Selling Annuities
A few years ago, I opened a business bank account. The representative assisting me, unaware of my background, began pitching me an annuity within minutes. Curious, I asked her whether she personally owned the annuity she was selling. She admitted she didn’t. Neither did her husband.
When I asked why she didn't invest in it herself, she hesitated before saying, “I actually don’t believe in it. I’m just doing my job. We’re required to offer these products to everyone who comes in.”
This moment reinforced what I already knew. Many of the people selling annuities and whole life insurance don’t necessarily believe in them. They are simply doing their job, often motivated by sales quotas and commissions.
Where Smart, Savvy Investors Go
Many of the most financially successful individuals (entrepreneurs, executives, and high-income professionals) aren’t locking up their wealth in annuities or whole life policies. Instead, many are turning to fiduciary financial advisors who provide customized, one-on-one planning tailored to their needs.
Working with a fiduciary means:
- Comprehensive and personalized advice that factors in your investments, taxes, estate planning, and long-term financial security.
- A relationship built on trust, where your advisor knows every detail of your financial situation and helps you make informed decisions.
- Advice that isn’t tied to selling you an investment product, from an advisor who takes no commissions on investment products.
Are There Better Ways to Build Wealth?
Rather than locking money into high-commission products, consider these alternatives:
- Investing in a diversified portfolio of stocks, bonds, and real estate tailored to your risk tolerance and long-term goals.
- Maximizing tax-efficient accounts such as Roth IRAs, Mega Backdoor Roth 401(k)s, and HSAs.
- Leveraging employer equity compensation, RSUs, stock options, or ESPPs.
- Building a real estate portfolio that can provide cash flow and long-term appreciation.
These strategies can offer a combination of flexibility, liquidity, and growth potential, without the high fees that often come with annuities and whole life insurance.
Should High-Income Earners Be Skeptical?
If you’re a high-income earner, skepticism is healthy when evaluating annuities, whole life insurance, or any investment opportunity or relationship. Here’s why:
- If someone’s primary business is selling these products, question their incentives.
- If they aren’t a fiduciary, understand that they may not have the same legal duty to put your interests first.
- If they make a large commission from your purchase, recognize the potential conflict of interest.
Final Thoughts...
I could have built my business around selling annuities and whole life insurance. It would have made me a lot of money. But I never did, because I rarely see them fit a high earner.
Many of the smartest, wealthiest investors seek out fiduciary advisors who work as true partners in their financial success. They understand that a financial plan isn’t just about products. It’s about strategy, relationships, and making informed decisions that serve them best.
Mateo