Insurance companies offer annuities to individuals looking to augment their income during their golden years. Those who enter into an annuity contract🦂 pay a certain amount of cash either in a lump sum or in installments, then later receivཧe payments (either in a lump sum or regular payouts). 

Of course, this isꩵn’t money for nothing. Annuities often come with a range of fees, commissions, and hidden charges. It’s wise to consider these costs before engaging in any annuity contract.

What Are Annuity Fees and Commissions?

Two types of costs come with annuities: fees and commissions. Fees are charged by the insurance company to cover certain costs, such as insurance risk, administering the account, for the expenses of the investments. Fees also cover additional features, such as a guaranteed minimum income benefit or 澳洲幸运5官方开奖结果体彩网:long-term care insurance.

Along with these fees, there are also commissions associated with an annuity contract. These are payments that go to the agent who helped set up your plan. But while you, as the annuitant, have to pay fees, the commission is usually covered by the insurer and built into the contract.

There’s another charge that you should be aware of as well when it comes to an annuity: early withdrawals from annuities are subject to a 10% IRS penalty plus income tax (unless an exception applies).

Types of Annuity Fees

Administrative Fees

Similar to other financial products, such as a 401(k) or IRA, the issuer may charge you for the recordkeeping and other administrative expenses of your annuity contract. This may be a flat annual fee, or a percentage of your account value, typically about 0.3%. Comparatively, 澳洲幸运5官方开奖结果体彩网:401(k) fees can range between 0.5% and 1% or even higher, depending on plan size and investment options.

Mortality and Expense Risk Charges

As an insurance product, annuities come with risk. Typically found in 澳洲幸运5官方开奖结果体彩网:variable annuities, the insurer will charge you about 1.25% of the account value annually for the risk it assumes under the contract. According to the SEC, the profit from this charge is sometimes used to pay a commission to the person who sold you the annuity.

Surrender Charges

Say you bought into a variable annuity but need money sooner than you anticipated. During the 澳洲幸运5官方开奖结果体彩网:surrender period, which is usually six to eight years after buying the annuity, you decide to sell or withdraw funds from the contract. You’ll now be subject to a surrender charge by the insurer.

These vary from contract to contract but are typically steep, starting as high as 7% in the first year, then dropping 1 percentage point each year before disappearing entirely. The value and potential returns of your annuity will be reduced if you opt to withdraw early.

Investment Expense Ratios and Rate Spreads

These costs are only applicable to certain kinds of annuities, particularly variable and fixed index annuities. The 澳洲幸运5官方开奖结果体彩网:investment expense ratio is a fee for managing the annuity’s investments, and could range from 0.6% to 3% each year.

Rate spreads are applied to fixed index annuities, which typically offer a guaranteed minimum rate of return. The spread covers the risk insurers take on by providing that benefit. The insurance company will set a percentage for the interest rate spread each new contract🔯 year. 

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Understanding Annuity Commissions

For annuities, you are usually not directly responsible for paying the commission, which is the payment due to the individual who set up your contract. The commission is typically built into the price of the contract, and could rang🔯e based on the total value and complexity of the annuity — the higher the complexity, the higher the commission. Again, beware of agents that steer you toward more complex annuity products if they’re beyond your needs.

For example, the commission for a single premium immediate annuity or multi-year guaranteed annuity may be 1% to 3%, a 澳洲幸运5官方开奖结果体彩网:deferred income annuity may be 2% to 4%, while a 澳洲幸运5官方开奖结果体彩网:fixed index annuity may fetch a commission between 6% to 8%.

Factors Influencing Annuity Costs

Annuity Type

All annuities are subject to administrative fees and a commission, the latter of which you are usually not directly responsible for. As an annuity product becomes more complex, you’ll have to pay more fees to the insurer.

On the simpler side, for example, an immediate annuity is purchased with a lump sum payment and is not subject to any additional fees unless you add a rider. A fixed annuity generally exposes buyers to the least risk while providing the most predictability by having a guaranteed, set interest rate that is locked in when you sign your contract. Along with administrative fees, these plans include surrender charges that you only pay if you withdraw early.

On the other hand, variable annuities and fixed index annuities are subject to market factors and hence carry more fees, including 澳洲幸运5官方开奖结果体彩网:mortality and expense risk charges, investment expense ratios, and rate spreads.

Customization and Riders

If you’d like to add additional features to your annuity contra🍒ct, this is possible through riders. For example, minimum withdrawal benefits allow a certain percentage of the principal to be withdrawn annually for the rest of your life, no matter ho🌳w markets perform. 

There are also 澳洲幸运5官方开奖结果体彩网:death benefits that, say, allow a new annuitant to be named in case of your premature death. Yet another rider increases the amount of payments to adjust for inflation. Each of these additional features adds costs to your contract, therefore lowering your payments.

Evaluating Annuity Costs: Is It Worth It?

As each annuity contract comes with its own fees, you’ll have to determine whether the costs are worth the benefits. A 澳洲幸运5官方开奖结果体彩网:financial planner can help you make that determination. 

Investors and retirees like annuities because they provide another source of retirement income and are fairly predictable when they’reꦬ not tied to markets. But as these products become more complex and provide the potential for higher returns, the fees will become higher.

Consider your financial goals and a🥃ppetite for risk when deciding between 🌺different annuities and their subsequent costs.

The Bottom Line

Annuities can provide an additional source of retirement income, but the fees insurance companies charge vary based on the complexity of the product and the total value of the contract. The agent who sold you the annuity will earn a commission, so be on the lookout if they’re directing you to a more 🌠complex product than you need. Commissions are typically built into the contract, and you do not pay for them directly𝔉. 

Before purchasing an annuity, evaluate the fees so you know how much you’ll be expected to pay. Consult a financial advisor if you need assistance.