There are five typical fees or charges that investors usually incur when purchasing annuities, particularly variable annuities. Understanding them (and their differences) will help make the best possible decision. These include:
- Investment management fees – These fees are typically anywhere from a 0.25 to 1 percent, but sometimes higher for specialized funds such as foreign stock funds, sector funds, REIT-type funds, and others.
- Administration expense and mortality risk charge – This charge ranges from a low of about 0.5 percent to a high of about 1.3 percent. Additional riders and features can increase this cost to as high as nearly 2.0 percent. However, in recent years a market has grown for low load annuity products sold primarily by fee-only financial planners, with mortality risk charges and loads totaling less than 0.5 percent to as low as 0.2 percent or even lower.
- Annual maintenance charge – This charge typically ranges from $25 to $100. However, often it is waived once total investments exceed a specified amount, such as $25,000.
- Charge per fund exchange – This charge can be up to $10, but most funds will permit a limited number of charge-free exchanges per year. In addition, automatic rebalancing programs usually do not count towards this limit.
- Maximum surrender charge – Surrender charges vary by company and policy and generally phase-out over a number of years. If the charge is lower, the phase-out range tends to be longer. For example, typical charges and phase-out periods are 5 percent of premium decreasing to 0 percent over ten years or 8 percent of premium decreasing to 0 percent over seven years.
The prospectus for a variable annuity must specify items (1) through (4) above. In a fixed annuity, these costs generally are incorporated into the management of the insurance company’s general account and are simply netted out of the return credited to annuity holders. Thus, when comparing fixed annuities, cost comparisons (although other noncost aspects are also analyzed) generally are restricted to an evaluation of the comparable crediting rates of the general account and the surrender charges.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM