Are you thinking about an annuity for some of your retirement savings? Are you worried about fees? The good news is that many annuities don’t have fees, but it also depends on the annuity type you are talking about. There are five kinds: variable, immediate, fixed, multi-year guarantee, and fixed index annuities.
Variable annuities offer the most growth potential, but they also have the risk of market losses and tend to be fee heavy. The other four kinds fall into the fixed column.
Fixed annuities and multi-year guarantee annuities have guaranteed rates for a set period. Fixed index annuities can earn interest based on a market index’s performance, but the growth potential is limited. Immediate annuities start paying you income right away, while with these other fixed-type annuities you usually start income payments some years down the road.
Let’s go back to our overall fixed annuity focus. Most fixed annuities don’t have fees. Fixed index annuities don’t have upfront fees, but some add-ons to a base contract may have fees. It depends on whether you would like those add-on benefits on top of what a base contract gives you.
What about surrender charges and things like that? All annuities are long-term vehicles, and they have maturity periods. If you wish to take advantage of the benefits, then keep your money in the annuity until it matures. Otherwise, there might be a surrender charge. It’s a way for the insurance company to manage risk and keep its promises to you and many other customers.
In this article, we will go over why fixed annuities don’t have fees and how they work.
The Nature of Fixed Annuities
Unlike variable annuities, where you gain or lose money depending on what the market does, fixed annuities protect your money. That is why they are called “fixed.” They promise benefits like protecting your principal and providing lifetime income. Your fixed annuity can also let your money grow with a guaranteed interest rate for a set period.
Of course, these benefits come with some trade-offs. It’s good to understand them so that you have a solid idea of what your options look like with fixed annuities.
Costs Built into the Fixed Annuity Contract Design
Most fixed annuities have costs designed into the contract. These costs aren’t separate fees you pay every month. Nor are they explicit or direct fees. Instead, they are built into the annuity itself. For example, there will be limits on the growth potential of your money in exchange for those annuity benefits.
You might be wondering about how your financial professional is paid with annuities – and if there are any fees that affect you. The good news is that with fixed annuities, the payment isn’t taken from your annuity premium. Rather, it comes from the insurance company’s coffers, so 100% of the money you put into your fixed annuity goes to work for you from day one.
So, there aren’t fees tied to the payment of your financial professional that will affect the benefits that you will receive from your fixed annuity.
What About Annuity Surrender Charges?
On their face, surrender charges seem like a bad thing. But they are actually neutral. A surrender charge is simply a means for an insurance company to keep its contractual promises to you and hundreds of thousands of other contract holders.
An annuity is a long-term commitment. To support its obligations over that period, the insurance company puts the annuity premium money into long-term investments, such as bonds. If someone decides to exit the contract early, that will disrupt the schedule of those underlying investments – and the insurance company’s ability to meet its promises.
If an example from history would help, think about the bank runs of the Great Depression. At the time, people worried about having enough money to pay for their household expenses. Huge crowds flocked to banks to withdraw their deposits. It created a huge, sudden run on deposit funds that overwhelmed the banks. And the banks couldn’t keep up.
Now, let’s go back to annuities. Life insurance companies are in the business of managing risk well. People rely upon insurance companies for financial security and protection. What’s more, those assurances are for the long haul. While it’s not likely to happen, a massive run on annuity monies would greatly stress the ability of the life insurance company to meet its long-term obligations.
Surrender charges are an economic incentive for annuity owners not to exit their contracts before they have matured. In turn, the life insurance company can make good on its promises to you and uphold those annuity benefits.
If surrender charges are still a concern, talk to your financial professional about early surrender charges in any annuities you are considering.
What Influences Annuity Pricing?
We talked about how fixed annuities have costs baked into their contract design. What sorts of things play into annuity pricing? At a high level, here are a few factors:
- Bond yields – the majority of fixed annuity premiums are put into bonds and other low-risk, long-term investments
- Annuity premiums – insurance companies take the gross amount of premium they collect in a year and use that in their budgeting decisions. The more money, the better the guarantees they can offer.
- Mortality rates – Insurance companies pay attention to mortality data. When mortality rates are on the rise, for instance, the insurer’s financial obligations decrease, because there are fewer people to receive annuity payments. They price those trends into their annuity products.
- Overhead expenses – Just like with any other business, insurance companies have overhead expenses to meet. They factor those into their annuity product pricing.
- Cash reserves – The amount of cash reserves that a life insurance company has matters. Companies with larger reserves can offer more competitive annuity products and benefits. They also tend to be more established.
Annuity Riders and Fees
Let’s say that you have a fixed annuity or a fixed index annuity. The base contract has some nice benefits, but you want more than what the base contract offers.
In that case, you might be interested in annuities with “riders” – extra benefits that you can add to your base annuity contract. While the annuity itself might not have fees, the riders often do.
For example, a fixed index annuity might offer an “income rider” that will pay you lifetime withdrawals and, at the same time, some annuity money access if you need it. That rider might cost 0.95% per year. Adding more riders might mean more fees.
Talk to your financial professional about any rider benefits, what fees they might charge, and what (if anything) might make sense for you.
Looking for the Right Annuity?
Annuities offer great value with their contractual guarantees, but sometimes they can be complex. Fixed annuities don’t come with fees, while variable annuities do. If you want add-on benefits to your fixed-type annuity, it usually comes with a fee. So, any rider benefits need to make sense for your financial situation.
Above all, the right annuity needs to solve a clear problem or gap in your financial plan. Do you need more monthly assured income? Do you need to protect a certain amount of your nest egg from market risk? Want to leave a minimum death benefit for your loved ones? Need funds for long-term care?
Annuities can help problem-solve in these situations and others with their guarantees. But you need the right one for your needs. An experienced and independent financial professional can help you walk through your retirement what-ifs, zero in on what matters, and lay out a course of action to follow. They can also explain why certain annuities might fit your personal circumstances.
If you are looking for someone to help you, many independent and knowledgeable financial professionals are available here at SafeMoney.com. Use our “Find a Financial Professional” section to connect with someone directly and discuss your situation. You can request an initial appointment to get your questions answered. If you want a personal referral, please call us at 877.476.9723.