Annuities, a type of insurance product, can offer guaranteed income over time, especially for retirement, and can be customized with riders to better reflect your goals. Depending on your financial situation though, the high costs and fees of an annuity might outweigh the benefits.
Let’s take a look at annuity fees and how they work.
How much does an annuity cost?
For all the pros that come with purchasing an annuity — a steady income stream, tax-deferred growth and potential survivor benefits — there are also drawbacks. One of the biggest is that annuities tend to have a swarm of fees that may be charged annually based on the value of your annuity.
These potential annuity fees include:
- Commissions (1 percent to 8 percent)
- Administrative fees (0.3 percent)
- Surrender charges (0 percent to 10 percent)
- Mortality expenses (0.5 percent to 1.5 percent)
- Expense ratios (0.06 percent to 3 percent)
- Riders (0.25 percent to 1 percent)
- Rate spreads (2 percent)
The total cost of an annuity depends on what kind of annuity you get and the specific details of your contract. Typically, variable annuities and fixed indexed annuities have the highest fees and commissions while fixed annuities and immediate annuities have the lowest.
Commissions (1 to 8 percent)
Because annuities are sold by insurance companies, they come with commissions charged by the broker when they sell you the contract. Annuity commissions range from 1 percent to 8 percent of the total value, though you pay as high as 10 percent or as low as 0 percent if you buy a commission-free annuity.
For example, if you pay $200,000 for an annuity, you could pay between $2,000 to $16,000 in commission, which is built into the annuity contract.
The more intricate, detailed or robust the annuity contract, the more likely it is you’ll pay a higher commission too.
Administrative fees (0.3 percent)
Administrative fees cover the cost of managing your annuity. Things like record keeping, processing transactions and customer service all fall under administrative fees.
Annuity administrative fees are usually 0.3 percent of the annuity’s total value or a flat fee and deducted on a yearly basis.
Surrender charges (0 to 10 percent)
A surrender charge occurs when you withdraw funds early from an annuity, typically within the first six to eight years. If you’re younger than 59½, you may be subject to a 10 percent early withdrawal penalty to the IRS.
Surrender charges usually decrease over time, starting around 10 percent or higher and dropping to 0 percent. A crisis waiver for specific situations, such as a terminal illness or long-term care, might save you from surrender charges if you need the money sooner.
Surrender charges are common across variable, fixed and indexed annuities.
Mortality expenses (0.5 to 1.5 percent)
Some annuities, typically variable and fixed index, may have what’s called a mortality expense. This fee compensates the insurer for providing a guaranteed death benefit sooner than expected.
Mortality fees are an annual fee based on a percentage — 0.5 percent to 1.5 percent, though 1.25 percent is common — of the annuity’s total value. Mortality expenses are usually combined with other administrative fees.
Expense ratios (0.06 to 3 percent)
Like mutual funds or exchange-traded funds, expense ratios are fees charged to manage the underlying investments for variable and fixed index annuities.
Expense ratios are charged annually as a percentage — around 0.06 percent to 3 percent — of the underlying investment.
Investors can allocate their annuity funds among various sub accounts based on their investment objectives and risk tolerance, so expense ratios will vary based on the specific expense ratios of the underlying investments.
Riders (0.25 to 1 percent)
You can add riders to your annuity to better suit your needs. Riders provide additional benefits and protections, such as guaranteed lifetime income, death benefits, higher payouts for long-term care and waiving surrender charges for terminal illness.
You’ll pay extra for those bonuses though. Riders are typically charged as a percentage — 0.25 percent to 1 percent — of the annuity’s overall value.
Rate spreads (2 percent)
You may also experience rate spreads with variable and fixed index annuities. A rate spread is how much the insurance company takes off the top of any gains before applying interest to your annuity. Rate spreads usually average 2 percent. If your gain is 5 percent, you will net 3 percent, for example.
Rate spreads can limit the amount of interest or growth on the account over time.
Bottom line
Annuities offer a secure income stream over a long period of time but come with high commissions and fees. There’s no one set price for any annuity, and each contract is different depending on your financial needs. Common fees to expect include commissions, administrative fees, surrender charges, mortality expenses and expense ratios.
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