Annuity Fees: What to expect
The Annuity Man
In the race to find the dumbest statements commonly used when referring to annuities, there are two primary reflex comments that I hear way too often. The first is the obligatory broad brush of “I Hate Annuities.” That’s so ridiculous on its face that every time I see or hear those ads, I’m hoping and praying that the public isn’t that dumb or gullible. It’s like saying that you “hate all restaurants.” It’s incredible that people actually believe that all annuities are bad while they happily collect their annuitized Social Security payments.
The other primary piece of annuity misinformation is the absolutely stupid comment that “all annuities are expensive.” Every time I hear this, I make the correlation that it would be like me giving advice on ballet. I could bloviate and try, but it wouldn’t be based on any foundational ballet information.
The bottom line is that when it comes to annuity fees, most annuity types have none. Yes, I said none. There are only a couple of those annuity insurance products that can have annual fees, but the majority have none at all.
When I factually shoot holes in the “all annuities have high fees” nonsense, some people fire back with “opportunity costs.” Apples and oranges my friends. The other reflex is to talk about agent commissions. All annuity commissions paid to the agent are “built in” to the policy. In other words, you do not see them. If you put $100,000 into an annuity of any type, you are going $100,000 on your statement. And by the way, there are some annuities that are “no-load” and pay no hidden commission to the selling agent or financial advisor.
Annuity Types & Fees
So let’s go through the primary types of annuities that are available to the consumer and lay out the specific annual fees and charges, if any, with each annuity contract. For the record, all annuity types are issued by life insurance companies.
Single Premium Immediate Annuities (SPIAs): No annual fees.
Deferred Income Annuities (DIAs): No annual fees.
Qualified Longevity Annuity Contracts (QLACs): No annual fees.
Multi-Year Guarantee Annuities (MYGAs): No annual fees.
Fixed Index Annuities (FIAs): No annual fees unless an Income Rider is attached at the time of application. Income Riders, if attached, have an annual fee for the life of the policy that is typically around 1%.
Variable Annuities (VAs): There are very good No-Load VAs available that have 100% liquidity day one. However, Load VAs can have high annual costs that cover items like mortality expenses and administrative fees. Those annual fees can range from 1% to over 3%, depending on the policy that you choose...and is for the life of the policy.
With SPIAs, DIAs, and QLACs...these are “annuitized” income products with no moving parts and no surrender charges because the payment stream is irrevocable. Built in agent commissions are very low because of the simplicity of the strategies.
FIAs, MYGAs, and VAs typically have a surrender charge period for a specific duration. That surrender fee is usually on a declining scale over that sales charge time period.
Recently, there has been a growth in VAs and FIAs that are designed to be managed for a fee. Most have short surrender charge periods or none at all, and those annual management fees are typically negotiated with your advisor.
When it comes to retirement planning and putting together a retirement income strategy or overall financial plan, annuities can have a place but are not one size fits all. Annuities are contracts, and in my opinion, should only be purchased for their contractual guarantees.
As for the fees with annuities, as I laid out above, it depends on the annuity type. Not all annuities have fees, but some types do. Your agent or advisor should transparently tell you about any and all fees, but you can always check out a specimen policy or call the carrier directly to verify and clarify any needed questions.
So when it comes to annuity fees, here’s what to expect. 1) Commissions are built-in to the product, and hidden from the consumer. Just remember that the simpler the strategy, the lower the commission. There’s a reason (not a good one) that too many agents lead with complex product types. 2) Most annuity types have no annual fees. Only Variable Annuities (VAs) and Fixed Index Annuities (FIAs) can have annual fees. FIAs have no fees unless an Income Rider is attached at the time of application, and VAs can be purchased in a no-load version.
Annuity rumors, one liners, and non-educated annuity advice should be taken with a grain of salt. Do your own research. Ask for a specimen policy to read. Take your time. Fake annuity news is alive and well, so don’t be influenced by hidden agenda’s or group think.
Annuities are transfer of risk strategies, pure and simple. You either need to transfer that risk, or you don’t. Your decision to buy one (or not) should be that simple.