Are fixed annuities expensive? No.
Are index annuities expensive? Sometimes.
Are variable annuities expensive? Yes, but they generally include a death benefit.
Lets start with a plain vanilla, fixed annuity. In terms of fees, you can think of a fixed annuity like purchasing a Certificate of Deposit. In most cases with this type of annuity, there are no fees. All the “costs” are included in the rate of return. Critiques of annuities will emphasize the fact that the early withdrawal penalties for an annuity are far worse than the early withdrawal penalties for a CD. You can learn more about early withdrawal penalties here.
In some cases, index annuities have no fees like a fixed annuity. Critics of annuities will suggest that the limits on your returns (which can come in the form of maximum annual returns or participation rates) are a huge fee in disguise. They believe that the value of principal protection is much smaller than the returns you are likely to “give up” because of the limits on your returns.
Some indexed annuities have a spread or administrative fee. Usually, indexed annuities with this fee have much higher annual return caps and participation rates than annuities without these fees. The fee is annually charged as percentage of funds, and can be as high as 2%.
With a variable annuity, the largest fee is the mortality and expense fee. According to the National Association of Variable Annuities, on average the mortality and expense fee is 1.15% annually. However, you are in fact buying “something” or getting a benefit for paying this fee, which is the death benefit. In the case that you die, your heirs will receive the greater of the following: 1) The value of your account. or 2) Some guarantee, such as your principal payments minus withdrawals. If the market goes down dramatically in value after the purchase of the variable annuity, this benefit could be meaningful.
The second largest fee associated with variable annuities is the investment expense-fee. These fees can run from 0.25% to 2.00%, depending on your annuity issuer and the types of investments you select to have inside your annuity. Passive investments like index funds will be cheaper, and actively traded stock funds will be more expensive. The fees should be similar to the fees charged by a no-load mutual fund in the same investment category. If the fees seem higher than a mutual fund, you might want to look for a different annuity.
Administrative fees. Yes, you can be charged a fee for just having an annuity. For the privilege of sending you a statement some variable annuities will charge you an annual fee between 0.10% and 0.30%.
With the death benefit, you are a looking at 2.00% to 3.00% annual fees for a variable annuity. They certainly are not cheap.
This lesson is part of our Free Guide to Investing in Annuities. Continue to the next lesson here.
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