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The "Risk-Free" Trap
- Jose Alvarez, CFP®, MBA
- Jun 3
- 5 min read
Updated: Jul 23
I talk a lot of shit about annuities. But honestly, it’s not because annuities are inherently bad. I've used them - I don't anymore but they have a purpose.
While you read this, try to remember:
The problem is how and why they’re sold, not the product itself.
Farm and rural families, in particular, seem to fall into this “risk-free” trap more often than most. They want gains but no risk. They want growth but no losses. I think it comes from the same mindset that says, "land is the only real investment."
There’s a deep-rooted conservatism in rural life - work hard, avoid debt, trust what you can see and touch. That kind of thinking can make folks skeptical of the markets and eager for things that feel safe, secure, and guaranteed.
But sometimes “guaranteed” ends up meaning “tied up,” and “safe” becomes a slow financial bleed.
Let Me Share a Couple of Real-World Stories.
Case #1: Nothing Left to Inherit
I met with a man who was trying to settle his brother’s trust. He had a few old statements and what looked like check stubs but couldn’t figure out where the rest of the money had gone and the advisor on the statements wasn't returning the family's calls.
After a closer look, we discovered his brother’s advisor had placed the majority of his assets into immediate annuities. These annuities take your money and convert it into income which means you lose the cash value but receive a steady payment.
Unfortunately, when his brother passed, there was hardly anything left to distribute but a checking account.
Case #2: Over $1 Million, Completely Tied Up
Another couple came in, excited to start gifting and preparing to transition the farm to their kids. We sat down, looked at their statements, and realized they had over a million dollars locked up in annuities. Most were long-term contracts still in their early years. Some as long as 10-year terms. These annuities made up nearly 100% of their investable assets.
What made it worse?
The advisor who sold the contracts used the value of the farm - assets that weren’t even part of the family's personal liquid net worth - to justify the sale. On paper, it looked fine.
In reality, it was a disaster.
When I explained what had happened, they shut down completely and I became the bad guy. They didn't become clients and in the years that have followed, they've never returned my call... come to think about it, I probably could have handled that better.
What is an Annuity and What Does it Do?
Annuities are insurance contracts designed to protect assets and provide income. That’s the pitch. You give a lump sum to an insurance company, and in return, they give you a combination of:
A guaranteed rate for a period (often sold as a "CD replacement" by financial advisors in banks)
A capped return with downside protection (you can’t lose money, but you also can’t earn more than a certain percentage)
A participation rate (you get some percentage of the market upside with no maximum)
Income guarantees like “period certain,” “life income,” or “joint with survivor”
At first glance, that probably doesn’t sound too bad. And that’s exactly what the people selling them are counting on.
Here’s Why You Should Think Twice
Your money gets locked up.
Most annuities limit you to withdrawing 10% of your account value per year. If you invest $100,000, that means you can only access $10,000 without triggering penalties. Go over that limit, and you could be looking at a surrender charge as high as 9%. Some contracts lock you in for up to 10 years.
They're not tax friendly.
Many of my farm clients hold most of their liquid wealth outside of retirement accounts. That means investment income is taxed annually. If you have to pay tax, capital gains tax is the one you want. But annuities? They typically only build up ordinary income tax exposure. And if you pass away holding them, your heirs get stuck with the full tax liability. No step-up in basis, no tax break. Just a tax bomb for your beneficiaries.
Returns often fall short.
The investments inside many annuities are tied to proprietary indices that don’t track real market benchmarks. I’ve reviewed dozens of these, and most aren't worth the paper they're printed on.
Commission run high and fees are buried deep.
At Harvest Horizon Wealth, we don’t charge commissions, take referral fees, or receive product bonuses. What we charge is on our website, in our agreement, and reviewed with every client. Our client is the only one that pays us. But in the annuity world, you often have no idea how your advisor is getting paid or why.
I’ve seen commissions on annuities as high as 6%, plus layered fees like rider costs, “mortality and expense,” account maintenance, and subaccount fees. I’ve reviewed annuities with total annual fees over 4%.
For reference, our highest fee is 1.10%.
The Worst Part? It’s Not Just the Math
What pisses me off most isn’t just the fine print. It’s how easily these products end up in portfolios, especially for families in the rural areas like where I grew up.
It starts with a seminar invitation, or a visit to the local bank advisor. It’s packaged with a friendly face and the promise of peace of mind.
But what it turns into is a binding, long-term commitment that often wasn’t fully explained and without much help or support from the advisor who put the family into it in first place.
Telling the Truth Isn’t Always a Win
These are hard conversations. But I didn’t get into this business to make people feel good with half-truths. I became a planner because people deserve to understand what they’re getting into.
Sometimes, telling the truth means I don’t win the client. That’s okay. It’s still my job to tell them what they need to hear, whether they’re ready or not.
So, What Should You Watch For?
When you hire an advisor, you’re not hiring them for access to products. You’re hiring them for experience, knowledge, and commitment to you. If someone leads with a product - especially something you don’t fully understand, it's okay to pause.
Ask how this is in your best interest.
Ask how they’re compensated.
Ask what it costs you.
Ask what happens if you want out.
Ask what their continued financial planning process is.
Ask if this is a fiduciary recommendation.
Your future is too important to get trapped in something you didn’t fully understand.
If you’ve been sold something that doesn’t feel quite right, or just want a second opinion, I’m happy to take a look.
Jose Alvarez
Founding Advisor
Harvest Horizon Wealth Strategies Me
The information presented in this blog is the opinion of the author and does not reflect the views of any other person or entity unless specified. The author may hold positions in any securities discussed in this blog. The information provided is believed to be reliable and obtained from reliable sources, but no liability is accepted for inaccuracies. Images included in this blog are created by artificial intelligence. Any resemblance to any existing persons, past or present, is purely coincidental. The information provided is for informational, entertainment, and educational purposes and should not be construed as advice. Advisory services are offered through Harvest Horizon Wealth Strategies LLC, an investment adviser registered with the state of Wisconsin.
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