There are some costs involved with owning annuities.
In addition to the premiums you pay to buy an annuity, you pay commissions and fees to cover the services and benefits your contract provides and possibly surrender charges, which you may owe if you end your contract or withdraw within the first seven to ten years.
The amount you pay in fees and expenses varies, based on the type of annuity you buy, the company that issues it, and the specific terms that are part of your contract. For example, the way you allocate your variable annuity premium among the available investment options affects the amount you pay in fund expenses. Details of the charges that apply, how they’re calculated, and when they’re subtracted from your account value are included in the prospectus that you should read before purchasing an annuity.
There are fees that apply to variable annuities that do not apply to fixed annuities. These fees are used to provide the guaranteed death benefit, which is subject to the claims-paying ability of the issuer, the management and other fees relating to the investment funds, and the various payout options available when you begin to take income.
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:
- The guaranteed death benefit
- The option of a lifetime payout
- The assurance of fixed insurance costs, including the M&E fee itself, which are frozen for the life of the contract
- 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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