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Annuities, which are insurance products, are a critical component of many Americans’ retirement planning because they provide guaranteed payments. Insurance firms provide annuity contracts that allow you to pay a premium in exchange for regular payments and, in certain cases, investment opportunities. Depending on your stage of life, payments can begin immediately or at a later period.

Regardless of the sort of annuity you choose, there are certain charges associated with having it. If you have any questions concerning annuities or their charge schedules, consult with a financial counselor.

The first thing to know about owning an annuity is that fee schedules vary from company to company. The costs you may encounter to own one such policy may be completely different from what may accompany the same type of annuity at a different provider.

As a general rule of thumb, the more complex an annuity is, the more you can expect to pay to own it. The most valuable way to keep these charges in perspective is to consider them as a whole, representing a percentage of the annuity’s overall value. That’s similar to evaluating the costs of a mutual fund or exchange-traded fund (ETF) through an expense ratio.

With all of this in mind, there are a few common annuity fees and charges you can expect to pay in most situations:

1. Administrative Annual Fees

The most conventional fee you could pay for an annuity is the administrative fee. This is essentially a baseline charge that allows you to maintain ownership of your contract. These fees might cover things like record-keeping, account services and basic management of the annuity.

These fees are often charged either as a percentage of your annuity’s total value or on a flat-rate basis. If the former, rates typically won’t exceed 0.30% of your contract’s value. If your provider uses a flat fee, though, rates range from $50 to $100. Many times, an annuity company will waive your administrative fee if your contract is larger than a predetermined amount.

2. Investment Expense Ratios

When you buy into a variable annuity, your money is tied to an underlying investment. For example, your assets may track the performance of mutual funds, ETFs or index funds. Each of these types of funds carries an expense ratio, which reflects the annual cost of owning the fund. The expense ratio is deducted from the assets you have invested in the fund, making this an indirect cost of owning an annuity. These rates vary wildly, but most won’t exceed 2.5%.

3. Surrender Charges

At any point, you may want to sell some or all of your ownership in an annuity for cash. While this is possible, you’ll likely need to pay a surrender fee to do so. These fees specifically apply to any withdrawals that come before your regular payments are scheduled to begin.

Whether you pay a surrender fee and how much the fee amounts to depends on the terms of your annuity contract. For instance, an insurance company could charge a higher surrender fee if you withdraw money during any of the first 10 years of your contract. Typically speaking, though, insurance companies utilize a declining fee schedule for withdrawal charges. That means that this cost will shrink annually and eventually disappear.

4. Mortality and Expense Risk Charges (M&E)

An annuity is an insurance product, not a security such as a stock or a bond. That means insurers have to hedge the amount of risk they’re inheriting. One way they do that is by charging mortality and expense risk fees. These are designed to guarantee that the cost of providing the annuity to you won’t change even if your mortality risk or life expectancy changes. For the most part, these fees range from 0.50% to 2% of your contract value.

5. Commissions

Commissions are paid to the insurance agent who sells you your annuity contract. This is similar to any other sales commission, like the ones that some fee-based financial advisors can earn for selling a particular investment product. Your insurance company may roll the commission into the contract rather than spell it out in a specific fee schedule.

The more robust your contract’s features are, the higher the commission you’re likely to pay. In turn, fixed annuities usually come with cheaper commissions than, say, a variable annuity that offers a wide selection of investment funds. Even the most expensive contracts don’t exceed a 10% commission, though.

6. Annuity Riders

Each type of annuity comes with a specified set of features that are built to enhance its overall benefit to you, the client. But many insurance companies will provide an additional array of features known as riders. These could affect your contract’s death benefit payout, income payments and a variety of other areas.

Read Also: What is OTC Tax?

While annuity riders are optional, adding them to your contract will cost you an extra fee. These charges can range from fairly insignificant to quite high. So before you decide to accept or deny a rider, figure out how much the added feature will help you out in the long run.

7. Other Fees

Depending on what type of annuity you purchase, there are other fees you might pay. You may encounter a premium tax, which is what an insurance company uses to offset any state or federal taxes they incur when selling the annuity. Other miscellaneous costs include redemption or transfer fees if you decide to sell the annuity to someone else and underwriting or distribution fees when you receive payouts from the annuity.

In addition to the above fees, there’s also the premium you have to pay to buy into your contract. The required premium amount depends on the value of the annuity contract you want to purchase and the type of annuity. There can also be a difference in how you pay your premium.

A single premium annuity, for example, requires just one payment for funding. So if you’re rolling over an old 401(k) or IRA, you might use the proceeds to purchase an annuity with a single lump sum. An annuity that has a flexible premium may be paid in a series of payments or through a combination of an initial lump sum and ongoing premium payments.

Every insurance company sets its own minimum initial premium rules. While these requirements typically won’t exceed $100,000, the lowest they’ll normally go is $2,500.

How Taxes Affect Annuities

One final category of costs to consider with an annuity is how your payments will be taxed once you begin taking withdrawals. Taxation depends largely on whether you have a qualified or non-qualified annuity.

Qualified annuities are funded with pre-tax dollars and are typically purchased through a tax-advantaged plan, such as a 401(k) or traditional IRA. When you begin taking distributions from the contract at age 59.5 or later, those payouts are taxed at your ordinary income tax rate. A 10% income tax penalty applies to any early withdrawals made prior to age 59.5 unless you qualify for an exception.

Non-qualified annuities are funded with after-tax dollars, similar to a Roth IRA. The difference is that the earnings on your annuity are taxable at your ordinary income tax rate when you withdraw them. The same 10% early withdrawal penalty also applies to these types of annuities. The penalty only affects your earnings, not the principal amount.

Annuities can add another stream of income to your retirement plan. However, it’s important to understand the upfront and ongoing costs you’ll be on the hook for. It’s also helpful to look at how costs vary from one type of annuity to another. Make sure to factor in what’s best for both your eventual retirement income needs and your current budget. Of course, it’s also important to make sure you have fully considered equities and fixed-income securities as a means of generating funds for your retirement.

How You Can Find the Fees You’re Paying in an Annuity

Annuities, as an investment vehicle, can be unwieldy beasts. Nevertheless, we’ve detailed the ins and outs of annuities in articles covering when annuities make sense, what you need to know before you buy, and why it’s smart to pick the simplest annuity.

One thing we haven’t done, though, is take a deep dive into the fees that come with annuities. Annuity fees are almost always complicated, opaque, and steep, so it’s important for every investor to thoroughly understand what they’re getting into.

Here’s a look at how you can identify the fees associated with an annuity based on an analysis of a specific contract: the deferred variable annuity.

There are many articles out there making claims about the total fees annuities charge, Selena Maranjian notes the average is an unsightly 2.3% of the contract value. However, there are few, if any, articles that break down how to identify all of the fees on your own.

For unacquainted investors who are looking at annuities as potential investments, a good way to start is to read this article and then ask the annuity salesperson to lay out each and every fee, charge, or expense involved over the life of the contract. This is likely to be a demanding exercise, but you have the list below to ensure your annuity salesperson is covering all the bases.

If you’re holding an annuity today, then use this article as a reference while you to dig into your contract and pinpoint every fee that your investment carries. I’ll warn you right now that the example chosen is not so pretty.

Even when you know the names of these fees, they can be difficult to find. The contract I’m referencing for this article is a deferred variable annuity contract with a guaranteed minimum income benefit (GMIB). This particular annuity has three defining characteristics, all embedded in the name:

  1. Deferred means it does not start paying out immediately, but will begin to at a contract-defined point in the future.
  2. Variable means payments will depend on the amount you contribute and the performance of the underlying investments. The market, in other words, can cause a varied outcome.
  3. A guaranteed minimum income benefit means the annuity holder will receive a guaranteed minimum rate of return on the principal, regardless of market performance. Similar features include guaranteed minimum accumulation benefit (GMAB) and guaranteed minimum withdrawal benefit (GMWB).

As you can see, this particular annuity has some bells and whistles that make it more or less comprehensive of the fees you may encounter. Other well-known contracts include “deferred fixed” and “fixed income” annuities.

There’s a key thing to be aware of when looking through your paperwork. First off, be aware that without your paperwork, it’s much more difficult to find all the fees. In marketing materials, there seems to be selective disclosure, if any.

Second, your paperwork will contain both generic information and information specific to your annuity. The latter can sometimes be called the “data pages.” The “data pages” are a treasure trove of information on fees — if you’re willing to dig.

Without further ado, here’s a rundown of fees that could be part of an annuity contract.

General fees

General fees are fees that are part of every annuity. We can’t say whether the industry refers to them as such, but nearly everyone levies them on clients. They tend to have names like “operations,” “administration,” or “distribution” fees, and they represent the costs of setting up and managing the annuity contract throughout its duration.

General fees are measured in percentage terms of the total account value (as are all percentage-based fees mentioned). Here’s a real-world example of what those fees could amount to, based on a current prospectus for a variable annuity contract from Axa Equitable Life Insurance Company:

Operations fee0.80% to 1.05%
Administration fee0.30% to 0.35%
Distribution fee0.20% to 0.25%

When you add them all up, the total contract fee will likely come to 1.3% to 1.65% of the total contract value.

Investment management fees

Variable annuities, as mentioned above, have underlying funds that are invested in the stock market. For the management of those funds, there are investment management fees.

These funds could include mutual funds or exchange-traded funds that track a market index. You’ll see the fees they charge referred to as “expense ratios,” “12b-1 fees,” or “service fees,” which the Axa example above states will range from 0.59% for an index fund to a whopping 3.14% for a pricey mutual fund. The high end of that range can be offset by “fee waivers and/or expense reimbursements,” which could bring that eye-watering fee down from the stratosphere to 1.20%.


Beyond the general fees and investment management fees, there are special “add-ons” to annuities that come with an extra charge. These include extras like a guaranteed minimum income benefit (GMIB), which is a minimum amount the insurance company will pay you, regardless of the performance of your annuity.

There are variations on the GMIB that could be reflected in acronyms like “GRIP,” “GIA,” “RIG,” and “MAP.” It may also be called an “Income Guard.” Each of these is more broadly classified as a benefit “rider,” meaning it’s a special attachment to the annuity itself.

The fees on riders are more difficult to assess because they’re only applicable to a portion of the contract value that could be referred to as the “benefit base.” That base can vary based on what you commit to in your contract negotiation. For the purposes of our example, we’ll assume the benefit base is 50% of the contract value.

In any case, a typical charge for the rider attachment is anywhere from 1.15% to 2.30% of that benefit base.

All told, these three major components add up quickly. Combined, annual fees can tally anywhere from 2.46% to nearly 6%!

General fees1.30%1.65%
Investment Management fees0.59%3.14%
Riders (example is 50% of contract value)0.57%1.15%
Fee total2.46%5.94%

If you thought mutual funds had a bad rap for high fees, brace yourself for annuities. What the fees above can do to your savings is nausea-inducing.

Let’s consider some of the long-run consequences of these fees, assuming you’re paying a total of 4.2% on an annuity that’s worth $100,000 and earns 6% annually for 10 years:

  • Investment value at end without fees: $447,712
  • Investment value at end with fees: $328,330
  • Amount surrendered to fees: $119,382
  • Reduction in value due to fees: 26.7%

Bottom Line

As you can see, there’s a reason we’ve recommended that annuity investors keep things simple. Digging through the fees in an annuity contract is no easy task, and I’ve left off some of the exceptional ones, which also can be the hardest-hitting. Those would include the “withdrawal charge,” which ensures that clients are locked into the contract for anywhere from five to seven years. If a client needs to terminate the contract for one reason or another, they’ll need to pay a one-time fee that can reach up to 7% of the total contributions paid into the contract.

Because the withdrawal charge is not part of the ongoing fees, I’ve excluded it. I’ve done the same with things like “transfer charges,” “administrative charges,” “distribution charges,” “third-party transfer charges,” “charges for taxes,” “contract fees,” “and redemption fees.” That doesn’t mean you shouldn’t suss those out before purchasing, or even after the fact, to be fully aware of what you’re paying.

Deferred variable annuities like this one can be costly in the long run. As an investor, you’re essentially handing over your savings to a company that promises to pay you a stream of income for life. For that privilege, you’ll pay more fees — and bigger fees — than a vanilla dividend index fund charges.

Add in the inflationary effects on a fixed income stream, and annuities become an even tougher pill to swallow.

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