Banks need to make money on their products. Instead of offering annuities they could just put that money into the stock market* . So they need to make as much as they would in an index matching fund plus operating expenses plus a profit.

So their actuary says, "this guy will (statistically speaking) live another 23.2 years. If we pay him x dollars a month, we'll break even on his premiums". And the actuary's boss says, ok, pay him x-.12x.

Banks could compete on that -12%, but only so far. The cost of administering the program, plus profit is the friction, the waste that you're losing out on, and it's usually far more than the risk you're mediating by not putting it all in an index fund.

Basically, the bank is an unnecessary middleman. But a) they've got good salespeople and b) most people don't control their money optimally, so the waste of annuity may be less than the waste an undisciplined investor may make.

*This is an oversimplification, there are issues of risk diversification, and probably some laws about where banks invest their money.