Just about any type of financial product can “cost” you in one way or another. For instance, even with a “free” savings or checking account, you may be required to maintain a minimum balance in order to avoid a fee. Insurance products like annuities could also cost you money – but, if you know what to look for prior to purchasing an annuity, you could end up paying no fees at all, along with reaping the benefits of tax-deferred growth and a lifetime income you can count on for as long as you need it.
Which Annuities Can End Up Costing You?
Although there are many different annuities available in the marketplace today, you can narrow them down to three primary types. These include:
- Variable Annuities
- Fixed Annuities
- Fixed Indexed Annuities
Variable Annuity “Gotchas”
Variable annuities are annuities that base their return on the performance of an underlying portfolio of equities, such as mutual funds. While these annuities provide the opportunity to earn a nice return, they can also pose risk to your principal if the market goes down. Variable annuities can also reduce your overall return due to their fees.
In fact, when people refer to annuities having a lot of fees, they are typically referring to the variable annuity. Just some of the most common fees that you can run into with variable annuities include:
- Policy/Account Fee – Variable annuities will usually charge a policy or account fee. These will typically run somewhere between $30 and $150 per year, and they are usually deducted directly from your account.
- Mortality & Expense (M&E) Fee – Because annuities are insurance products that can guarantee a future income stream – with many also offering a death benefit on the product – the insurance carrier will generally charge a mortality and expense fee. This fee could run between 0.4 to 1.75% annually.
- Investment Fees – Because variable annuity funds are invested via the insurance carrier’s sub-accounts, you can also incur charges in each of the individual investments that you choose. Depending on the individual investment, these fees could be as much as 3% per year.
- Rider Fees – If you opt to add an additional income rider to a variable annuity, you usually must pay for this separately. Fees for income riders could be in the neighborhood of 1.5%. Other riders that could also cost you added fees include a long-term care rider, death benefit rider, joint life/spousal income rider, and/or a minimum accumulation benefit.
- Surrender Charge – If you cancel the annuity or you withdraw a certain amount of money from the account value during the first several years after purchasing it, you will also likely incur a surrender penalty. The surrender charge period on an annuity can last from just a few years to ten or more years. Because of that, annuities should always be considered long-term financial commitments.
So, suffice it to say that variable annuities charge a long list of fees, as well as subjecting your money to market-related risk.
The Freedom of Fixed and Fixed Indexed Annuities
Fixed and fixed indexed annuities may not offer you the opportunity to earn stellar returns (although they will keep your principal safe during any type of market condition), but they are also not riddled with fees like variable annuities.
Typically, there is no up-front agent or broker commission charges – so 100% of your principal can go to work right away. Also, if you have money invested in a fixed account, you’re guaranteed not to lose your contribution.
A fixed indexed annuity will provide you with the opportunity to earn a higher return by linking it to the performance of an underlying market index such as the S&P 500. In times where the index performs well, your account will be credited – usually up to a certain “cap,” or maximum.
However, if the underlying index performs poorly – and even if it incurs a significant loss – your principal will be safe, and the account is simply credited with a 0% for that period. Therefore, the risk of market-related losses with both fixed and fixed indexed annuities is little to none.
It is important to be aware that most fixed and fixed indexed annuities will have surrender charges associated with them. Given that, you should consider them a long-term endeavor, and do not contribute funds that you may need in the near future for a financial emergency or other obligation.
Which Type of Annuity is Right for You?
Deciding which annuity is best for you can be a bit like herding cats – and unless you are familiar with its temperament, an annuity could be a great addition to your life, or alternatively, it could come back to bite you when you least expect it.
One of the best ways to obtain an in-depth understanding of how an annuity works is to talk with a specialist. That way, you can literally walk through particular annuities, and even conduct an easy comparison between several annuity alternatives to determine which one may best fit with your objectives.
That’s where you can turn to Annuity Gator.
At Annuity Gator, our primary mission is to educate consumers (as well as financial professionals) regarding how annuities work, and why a particular annuity may or may not be the best choice, based on an investor’s or a retiree’s goals.
We’ve been doing this for quite some time now, and in turn, we have become a highly trusted source of annuity information online. We even have an annuity review database located on our website so that you can read in-depth details about hundreds of annuity options.
In addition, we have a team of annuity experts on board who can answer any of the annuity-related questions or concerns that you may have. So, feel free to reach out to us directly by phone at (888) 440-2468. Or, you can send us a message through our secure online contact form and set up a time to chat.