A lot of people we talk to aren’t aware of all the standard fees that they are paying inside their variable annuity, and we’ve found them to be one of the most expensive kinds of investments that you can own.
Truth is, some fees can’t be avoided while others can and should be avoided if at all possible. Fees reduce the earning power of your investment, which means you might be taking on much more risk than you have to just to keep your head above water.
We’re going to take you on a Fee Tour inside your typical variable annuity to help uncover the facts behind the five most common fees.
Exhibit One: Surrender Charges
It’s common to see a surrender charge on most annuities, including variable annuities. These charges are assessed by the insurance company because an annuity is a long-term investment. They are trying to invest your money in a way that delivers a predictable stream of income, and so they don’t want you to take this money out.
There are variable annuities with “no surrender charges,” but LOOK OUT! The fees are often much higher in other areas to make up for this.
If you decide you want to get out of your annuity, surrender charges on most variable annuities range from 5% to 9% for the first six to eight years of the contract and sometimes go for as long as 10 years or as short as four years.
Bottom Line: If you need structured income, surrender charges are par for the course. Most kinds of annuities give you free withdrawal access of (on average) 10% of your account value. To avoid surrender charges, plan for your emergency cash needs.
Exhibit Two: The M&E Risk Charge
This charge is assessed by the insurance company that issues your annuity and it is specific to VARIABLE annuities. Fixed annuities and indexed annuities typically do NOT assess an M&E risk charge. Here’s why:
A variable annuity is invested in mutual funds AND it is trying to guarantee income. These two goals basically work against each other, and so the insurance company has to protect itself. They do this by assessing a risk charge. The SEC says this charge for variable annuities is in the range of 1.25% annually, but we’ve seen it as high as 1.65%.
Bottom Line for You: Even if you need guaranteed income, this fee can be avoided.
Exhibit Two: The Administration Fees
This is another fee deducted by the insurance company to cover “record-keeping and other admin expenses,” but in our opinion, this fee might be compared to a bunch of baloney. It takes another .15% to 1.50% right out of your account every year, and there’s nothing you can do about it.
Bottom Line: This fee is typical for variable annuities because they are more complicated than other kinds of annuities that don’t usually charge an administration fee.
Exhibit Three: Front-Load Fee, Sales Charge or Premium Based Charge
This is another fee seen inside variable annuities that can be hard to uncover. The SEC doesn’t mention this fee on their website, but we’ve combed through the prospectus of several variable annuities and seen this fee listed under various names and ranging anywhere from 1.00% to 5.50%. This fee could be a one-time payment or for as long as seven years after the initial premium payment. What does this look like?
If you have a $40,000 to put in a variable annuity, right out of the gate the insurance company is going to keep as much as 5.50%, so your balance drops on day one down to $37,800 because of this fee.
Bottom Line: Shop around to avoid this fee. It weakens the compounding muscle of your investment.
Exhibit Four: Underlying Fund Expenses
This is the fly in the ointment, so to speak, and the one fee that financial salespeople often fail to mention. Why? This fee is NOT assessed by the insurance company and so they are not required to report it.
You might see something about this fee if you’re looking for it, usually something along the lines of, “Please see the prospectus for details.” There might also be mention a “fund facilitation fee” assessed daily as a percentage of the value of certain sub accounts. This may be in addition to the underlying fund expenses, which can really add up. Generally speaking, they range from .46% to 2.20% per fund.
Bottom Line: If you are in the income phase of your life, trying to structure your money for regular payments, you can and should avoid this fee. If you are trying to aggressively grow your money, then a .60% to .70% is par for the course on mutual funds, but keep in mind that inside a variable annuity, the insurance company is also going to assess you fees.
Exhibit Five: Charges for Benefits and Features
All annuities including variable annuities assess you a charge for special features such as stepped-up death benefits, enhanced growth rates, guaranteed minimum income benefits (or riders) and long-term care benefits. These fees usually average around 1.25% and can go higher depending on whether you are guaranteeing benefits for an individual or for a married couple.
Bottom Line: If you want to guarantee lifetime income and an enhanced growth rate on an annuity, this fee is par for the course.
Before purchasing any annuity, it really pays to shop around and compare what you are paying versus what you are getting. Some annuities have higher income payout percentages than other annuities that earn higher returns, so it can be tricky to compare these products on your own. Want to see how an annuity matches up against the competition? Fill out our contact form for a free analysis and one of our qualified financial advisors will be happy to help you get the most bang for your buck.