Annuity Commissions and Fees

Fee categories

All annuity issuers charge you fees that cover overhead, sales and marketing, and the general cost of doing business.

You also pay for the risks the issuer assumes, including the possibility that business costs might increase, that annuitants might outlive their life expectancies, or that investments the company makes to help meet their obligations might provide disappointing returns.

You may also pay an annual administrative fee. Some contract providers waive the fee once the amount of premium you’ve paid reaches the required minimum, such as $50,000.

Asset-based fees are a percentage of the total value of your variable annuity, except amounts in a fixed account, deducted daily. All owners of the same contract pay the same percentage of their assets in these fees, but different dollar amounts. In some contracts, the rate drops as your account value increases.

You may also owe a transaction fee, sometimes called a transfer processing fee, if you make more transfers among your funds than the contract sets as the norm.

Mortality and expense fee

The asset-based mortality and expense risk (M&E) fee that is charged on all variable annuity contracts pays for four things:

1. The guaranteed death benefit
2. The option of a lifetime payout
3. The assurance of fixed insurance costs, including the M&E fee itself, which are frozen for the life of the contract
4. The guarantee of minimum annuity purchase rates when you annuitize

The cost of these insurance features is a percentage of the total value of your variable annuity each year. In most cases, the fee is subtracted proportionally from each of the investment funds into which you’ve put money.

When comparing a number of contracts, you’ll find that sometimes the M&E fee is higher than average, while administrative and management fees are lower, or vice versa. So you may want to look at the entire fee package, rather than any single component, in evaluating a contract.

More benefits /more cost 

A number of variable annuity contracts offer features often described as enhanced benefits or riders. One example is a more generous death benefit guarantee, which locks in any portfolio gains for payment to your beneficiary should you die during the accumulation phase. Another benefit is additional protection for your income payments during retirement. These guaranteed minimum income benefits ensure a minimum lifetime income stream when you convert the savings in your annuity into income payments. Still other new features, such as long-term care protection, are also offered.

In general, you pay for these enhancements in additional fees. The fees generally reflect the nature and extent of the risks and expenses the company is assuming in providing these extra services.

Stepped up death benefits

Initially, the death benefit guarantee provided that your beneficiary would receive the greater of your contract value or the amount of your premium minus any fees and withdrawals if you died during the accumulation phase of your variable annuity. Today, some insurers have added new features to make their annuities more competitive. This means the cost of the death benefit feature may be higher. You have to decide whether the additional protection is worth the additional fee.

Remember too that collecting this benefit depends on the claims-paying ability of the company issuing the contract. Part of choosing an annuity provider should always include investigating the company’s reputation and financial status.

Annuity Commissions and Fees by Inna Rosputnia

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