What Do Fixed Annuities Cost?
A fixed annuity typically does not impose direct expense charges on the contract owner, other than surrender charges (charges for cancellation of the contract during its early years) for deferred fixed annuities. The spread, or difference between what the issuing company expects to earn and what it commits to pay out is intended to cover the insurer’s expenses.
What Do Variable Annuities Cost?
A variable annuity, on the other hand, involves direct expenses in the form of insurance charges and indirect expenses in the form of management and other fees and expenses associated with the underlying subaccount investment choices.
Insurance, Administrative, and Distribution Charges
The fees and charges commonly associated with variable annuities also include mortality and expense risk charges (M&E fees), administrative charges, and distribution charges.
In most contracts, the M&E fee pays for three important insurance guarantees:
- The ability to choose a payout option that provides an income that cannot be outlive
at rates set forth in the contract at the time of purchase
- When available, a death benefit to protect beneficiaries
- The promise that the annual insurance charges will not increase
The administrative and distribution charges pay for all of the services involved in the maintenance of variable annuity contracts, such as the preparation of contract statements and mailings and other customer services. Some variable annuities also impose an annual contract fee that is similar to the annual account maintenance fee imposed by many IRAs. This fee generally ranges between $30 and $40 per year. Most insurers waive this fee for contracts with an accumulation or contract value of at least a certain amount, e.g. $25,000.
Investment Fees and Expenses
Variable annuities contain investment management fees and operating expenses of the sub-accounts, and in many cases, distribution charges known as “12b-1 fees,” which are named after the SEC rule that governs them. Investment management fees for the subaccount investment options in variable annuities are, generally, lower than those charged for their publicly offered mutual fund counterparts. These lower fees have the effect of offsetting, to some extent, the insurance charges.
If a contract owner decides to cancel a deferred annuity during the early years of the contract, surrender charges may apply. These charges, if applicable, generally begin in a range from 5 percent to 7 percent of the amount invested and decline to zero over a period of time, such as five to seven years. Surrender charges are structured differently for different annuity products.
Some variable annuity contracts permit purchasers to select from a menu of optional product features, each of which usually has an associated charge. This unbundling approach gives customers the ability to select and pay for only those features they want.
Optional features, referred to as riders, include, for example, enhanced guaranteed death benefits and guaranteed minimum living benefits. These riders typically have a separate, additional fee.
If you are considering an annuity purchase, be sure to fill out our quote form to research suitable options available.