This is a question that sometimes comes up. Do annuities have fees? Some do have fees associated with them, no matter what. Others only come with fees when you select certain additional benefits, or if you take out money too soon. Importantly, whether you pay fees or not, and how much you pay, depends on two factors: The type of annuity you buy, and the details of that annuity contract. In this post, we’ll go over different types of annuities and fees, to help you determine if an annuity could be right for you.
Factors That Determine Fees
You may pay fees, depending on the factors of an annuity contract. There are other fees, in addition to the most common ones listed here. For example, annuities may have underwriting fees, which go to the issuing insurance company. There may also be a commission for the annuity to pay the licensed insurance agent. The annuity owner doesn’t usually pay these costs upfront, though. Instead, the insurance company determines what their rate of return may be after taking these fees into account. In other words, the insurance company pays these fees and then adjusts your rate in accordance.
Common Types of Fees
The most common fees that are associated with certain annuities fall into two groups. Firstly, there are fees that are administrative in nature. For example, an insurance fee or management fee. The insurance company sets these fees in the contract for certain annuities. They aren’t optional: If you want that annuity, you pay that fee. Secondly, there are optional fees. For example, a surrender charge. You don’t pay this fee automatically. Instead, you pay it only if you take out more money than agreed upon. Or, if you take out your money earlier than the time established in the contract. A rider fee is another optional fee, but it isn’t paid due to a break in contract terms. Instead, a rider fee is something you agree to pay to gain an additional benefit. For example, a death benefit. In both cases, the fees are due to the actions or choices of the annuity owner, rather than the insurance company.
Fees Differ for Different Annuities
Three main types of annuities exist: Variable annuities, fixed annuities, and fixed indexed annuities. Each type has its own structure, and therefore has a different setup for its fees. Here are the three types of annuities, and the fees you might typically pay with each.
Variable annuities tend to have the most line-item fees of the three. The most common of these include insurance charges, investment management fees, and flat contract fees. Because the rate of return of variable annuities fluctuates, it also tends to have higher risks associated with it as opposed to the other types.
A fixed annuity offers a set rate of return. This rate already takes into account the aforementioned fees, and as a result, you won’t typically see them in your agreement. However, surrender fees are still a possibility with this type of annuity.
Fixed Indexed Annuities
With a fixed indexed annuity (FIA), the owner gets a reasonable rate of return** based on the performance of an index. However, the FIA ensures that you do not lose your principal, in contrast to a variable annuity. Your account can’t drop below your initial amount, regardless of market conditions. FIAs are more like fixed annuities in terms of fees. Usually, the only fees are surrender charges and rider fees. Anything else counts as an expense to the insurance company, who then factors it into their rate of return calculation.
Could An Annuity be Right For You?
Looking for more information about annuities, and the instances where annuities have fees? We’re here to help. Reach out to us.