Hopefully, you are now a little more knowledgeable when it comes to the different types of annuity. Next up is learning about the fees associated with annuities.
Regardless if you buy a variable annuity or fixed annuity, there are different fees charged on these different types of annuities. How are they determined? Well, it comes down to the purpose of the contract terms that you agree to.
“Generally, variable annuities include an underlying investment (e.g., mutual fund) and charge explicit fees,” clarifies the folks over at Fidelity. “Fixed annuities offer either a fixed rate of return or a guaranteed income stream, which reflects the company’s expenses and profit margins, rather than having explicit charges that you typically find in variable annuities.”
When it comes to indexed annuities, things go in a different direction. In particular, “limiting returns through factors such as participation rates, spreads, and caps.”
While it’s not feasible for you to become an expert, you should familiarize yourself with the most common fees that will be applied to your annuity contract.
Annuity Fees You Need to Know About
These are also commonly known as mortality and expense (M&E) fees and administrative fees. Their purpose is to “pay for insurance guarantees that are automatically included in the annuity, and the selling and administrative expenses of the contract.”
Investment management fees.
“These are assessed on the investment options within variable annuities, and are similar to management fees on mutual funds,” notes Fidelity. You’ll want to double-check “the annuity prospectus for any underlying funds to learn how much you might pay for investment management fees.”
It’s not uncommon for insurance companies to limit the amount of penalty-free withdrawals you can take out during the initial years of a contract. As such, expect a “surrender charge on any withdrawals above that preset limit.” Fidelity warns though that, these charges can be hefty and imposed for an extended time period. It’s definitely worth it to “ask for details on any surrender charges to help ensure that you have enough flexibility”.
These are optional guarantees that are available in certain annuities. One example of this would be a death benefit rider. For an additional cost, this ensures that your heirs will at least receive the principal that you invested upon your death (minus any withdrawals). However, “some riders are not optional and maybe a standard cost associated with the annuity contract.”
Typically, variable annuities come with insurance charges, underlying investment fees, surrender charges, flat contract fees, and riders if applicable. These fees are deducted from your annuity contract balance. With fixed annuities, you may only have to be concerned with surrender charges since fees are embedded in the stated rate or guaranteed income amount.