How Much Does An Annuity Cost?

Let's say you're ready to buy an annuity. You're eager to pay your lump-sum premium and then rest easy knowing your money is growing tax-deferred.

But are there any other costs associated with owning an annuity? Well, kind of. The annuity contract that the insurance company presents to you will often include some additional annuity costs. And, to be an informed buyer, you must do your due diligence.

That’s why we encourage you to learn about the common costs of an annuity before signing on the dotted line. No matter the type of annuity, there are costs (some obvious and some not so much) that come with it. That’s why we’re discussing the costs of owning an annuity.

We’ll review some of the standard fees and the financial products that have them.

What Is an Annuity?

Before we get into the costs and fees associated with annuity ownership, let's review what an annuity is. Annuities are insurance products sold by insurance companies. There are many different types of annuities, but they all pretty much work in the same way.

First, you pay the insurer a premium (a deposit of money). You can either deposit the premium in a lump sum or through a series of monthly annuity payments. The money then grows tax-deferred for a period of time at a certain crediting rate (the rate depends on the type of annuity purchased).

When you're ready, you can take your money back in a lump sum or you can annuitize the product and begin receiving the premium back plus all of the earnings. Typically, annuitization payouts are made as a series of payments.

With a deferred annuity, the money grows for the specific time outlined in the annuity contract. When the growth period ends, or when it makes sense for your financial situation, you can annuitize the account and begin receiving your stream of income.

With an immediate annuity (also known as an income annuity), it's a little different. You pay the premium, and almost immediately the account is annuitized, so you can quickly begin receiving the guaranteed income. 

People usually use annuities to help supplement retirement income. So, when considering financial products for your retirement plan, consider an annuity.

Annuity Purchase Guidelines

Before we talk about the fees associated with owning an annuity, let’s talk about what the guidelines are for purchasing one.

Generally, you buy annuities from insurance agents or financial advisors. They speak with you about the pros and cons, and you fill out the application. You can also buy certain fixed annuities directly online.

When it comes to purchasing an annuity, different annuity companies have minimum and maximum premium amounts that dictate how much you can deposit at one time. The minimum deposit is the minimum amount you can invest to “purchase” the annuity. Most companies have a minimum deposit of $2,500, although some annuity companies set their minimum higher. Maximum deposits vary quite a bit, depending on the annuity company's size.

Larger companies may be comfortable with single deposits of as much as $2 million, whereas smaller companies may set a lower limit, such as $500,000. Companies may also limit the total amount you can have in all annuities purchased with the company.

Check with the carrier for specific limits.

Annuity Fees

With a solid understanding of how annuities work, we can get into the nitty-gritty of their fees. There are quite a few common fees to look for when purchasing an annuity. And not all of these fees are outlined in your annuity contract. If you're unsure about the fees associated with your annuity, speak directly to your insurer or contact a financial advisor. And never buy an annuity until you understand all of the fees associated with it.

Agent Commissions

Most annuity products (except for annuities sold directly to the consumer) pay commissions to agents.

Commissions are usually built into the crediting rate the insurer can offer you and are generally not disclosed in your annuity contract. Commissions are a portion of the overall cost of buying an annuity (costs that life insurance companies incur to sell, manage, and administer the annuity).

Earning a commission is a core part of an agent's overall compensation. Therefore, as a buyer, you need to ensure that the agent isn't simply selling you a product because it pays a high commission. The good news is that almost all insurance companies have guidelines in place that help protect your interests during an annuity transaction.

Guidelines may include the best interest obligation, typically used when purchasing a variable annuity, which requires that agents act in the best interest of the consumer. These guidelines also feature tools like suitability forms (required for all types of annuities) that review your current financial situation and goals to ensure the product is suitable for your needs. If suitability forms are required, you may be asked for information such as your net worth and liquid assets.

Suitability forms will be reviewed by a compliance officer at the insurer before the policy is issued. Agent commissions can range from 1% to 10% of the total contract value, depending on the annuity type. The more complex the annuity, the higher the commission.

Annual Administrative Fees

Many annuities have annual administrative fees. These fees cover the costs of running the insurance company, including processing new business, maintaining systems, and other administrative expenses. Administrative fees are usually calculated in one of two ways: as a percentage of your annuity’s total value or on a flat-rate basis. Most administrative fees do not exceed .30% of the annuity contract value per year. Fixed fees vary by product and company, but they’re usually about $50 to $100 each year.

Some companies waive administrative fees for larger premium deposits. Administrative fees are usually associated with variable annuities.

Surrender Charges

Before you annuitize your annuity and begin receiving monthly income payments, you may need access to your funds. Most annuities have a surrender charge period. During the surrender charge period, you must pay a fee to withdraw money.

This fee is called a surrender charge. Surrender charges come in the form of a percentage of the annuity value, and they typically decrease each year you own the annuity. For example, you may have a 9% surrender charge in the first year of the contract that decreases by 1% each subsequent year.

Surrender charges are in effect for the entirety of the surrender period, which lasts anywhere from 1 to 10 years. Some annuity providers allow for some percentage of the annuity's value to be taken each year as a penalty-free withdrawal.

This percentage is typically between 1% - 10%. If you have purchased your annuity with qualified funds and are required to take a required minimum distribution (RMD), this may also be able to be withdrawn without a surrender charge.

Whether an annuity offers a penalty-free withdrawal or allows RMDs to be taken penalty-free depends on the specific contract, so be sure to check with your individual annuity provider to see if your annuity contract includes these provisions. Annuity contracts may also contain a market value adjustment provision (MVA).

If your contract has an MVA it will typically be assessed any time a surrender charge is assessed. An MVA can increase or decrease the value of your annuity and it can be complicated. If your annuity has an MVA provision, make sure you understand how it works prior to purchasing the annuity.

Investment Expense Ratios

When you buy a variable annuity, you place your money in investments, sometimes linked to stocks or mutual funds. These funds each charge an expense ratio, which is the annual cost of managing and administering each fund.

These investment expenses are in addition to the agent commissions, surrender charges, and other account fees. As a reminder, commission costs are usually factored into the interest rate, making them a hidden fee.

So when you ask about investment expenses, remember to ask about the agent commissions. That way, you'll stay informed of all of the annuity costs.

Mortality Expenses (M&E)

These are fees that the insurance company charges for a death benefit.

Often, the death benefit is just a guarantee to pay out to your beneficiaries (at the very least, they’ll receive your premium back). This is a fee for variable annuities, and it can range from .50% – 1.5% of the policy value per year. The fee is not applicable to fixed-indexed or fixed annuities.

Costs of Riders

Riders are extra features for your annuity.

They provide you with additional guarantees, like guaranteed minimum living benefits or death benefits. Depending on how beneficial it is, riders can cost .25% – 1.00% or more of the account value per year. The more riders you add to your contract, the more the insurance company will deduct from your account value each year.

Other Fees

Annuities can include other expenses. Additional annuity fees can cover transfer charges, management fees, distribution charges, third-party transfer charges, contract fees, underwriting fees, and redemption fees. Additionally, some annuity contracts have general fees.

Though they are often listed as distribution fees or administrative fees, they can be extra to the annual administrative fees covered earlier. These charges can range anywhere from 0.2% to just over 1% of the total annuity account value.

It is important to ask your insurer or financial advisor for the details of all fees associated with the annuity contract you’re considering.

How Much are Annuities by Product Type

As we mentioned earlier, different annuities have different fees associated with them. In this next section, we break down the fees by the type of annuity product. With this guide, you'll be better able to choose a product that fits your personal finance goals.

Fixed Annuity Fees

Fixed annuities offer low risk with steady growth.

With a fixed annuity, annuity buyers have a fixed annuity rate for a specific period of time (typically three, five, or seven years). This means your money is sure to receive a guaranteed rate of return for the guarantee term you choose. A fixed annuity often offers a better rate than a bank certificate of deposit (CD) or savings account. Because of their simple features, fixed annuities have the lowest cost associated with them and primarily consist of commission expenses and surrender charges (which can be avoided if you leave your money in the contract during the surrender charge period).

Fixed deferred annuities tend to have lower fees than income annuities (immediate), fixed-indexed annuities, or variable annuities.

Fixed-Indexed Annuity Fees

Fixed-indexed annuities are a medium-risk product with enhanced growth. Instead of choosing a fixed rate, a fixed-indexed annuity lets you choose specific market index performances (like the S&P 500) that will be used to determine the amount of interest that will be credited to your annuity.

When markets do well, your earnings grow. But when markets do poorly, you may have limited or no earnings. Indexed annuities typically do not have up-front sales fees, but may carry significant surrender charges or have other hidden costs. There are also opportunity costs passed along to you by the insurance company.

These costs ensure that the insurance company profits by limiting your potential returns. Always ask your agent or financial advisor about these costs and other features of this complex financial product.

Variable Annuity Fees

Variable annuities have a lot of risk and volatility, but they also have the maximum possible growth. With a variable annuity, you choose the investment options (typically mutual funds) to invest in.

Your earnings increase or decrease depending on the performance of the investments. In addition to commission and administration expenses, variable annuities usually have investment management fees, which can range from .25% – 2.00% of the account value per year. Many variable annuity policies have a separate administrative fee to cover the cost of mailings and ongoing service.

This fee can range from .10% – .30% of the policy value per year.

Single-Premium Immediate Annuity Fees

If you want to supplement your retirement savings and social security income right away, this is the product for you.

Generally purchased by retirees soon after retirement, these products promise a stream of income, helping you meet your long-term financial goals.

Costs for purchasing an immediate annuity are typically low, averaging between 1% and 5% each year. This is because the insurance company invests the deposited money on your behalf. However, the fees depend on the investment style you choose. Like the other types of annuities, make sure your agent is transparent about any charges or fees up-front.

What to Ask your Financial Advisor Regarding Fees

One type of fixed annuity is a multi-year guarantee annuity (MYGA). If you purchase one of these, ask your agent about commissions and how they affect your guaranteed crediting rate. As we mentioned earlier, buying annuities directly without an agent can save the commission expense and maximize the crediting rate the insurance company gives you.

Canvas Annuity is an example of an insurer that pays no commission to agents and allows you to buy directly online.

Because Canvas doesn't pay its agents commission, it can provide you with some of the highest annuity crediting rates around. If you are considering a fixed-indexed annuity, ask your agent to outline the specific fees associated with the product, including the so-called opportunity costs.

Finally, if you choose a variable annuity, consider purchasing it from an agent who is associated with a financial advisor. When you buy a variable annuity, you will be asked how you want your annuity deposit to be invested. The financial advisor can ask the right questions about your risk tolerance and exposure, which are all important considerations for a variable annuity.

Ask About Fees Before Buying Your Annuity

An annuity is a terrific option for retirement planning, and now you know the costs of owning one.

Remember that you pay into it now, and the money grows. Then, when you need it, you can begin receiving monthly payments. The money grows tax-deferred, and when you receive payouts, you only pay the IRS income tax on the earnings and any pre-tax money in the premium.

So when you think about an annuity’s cost, you also need to consider its value. The true value lies in two key features:

1. Its ability to earn a competitive, tax-deferred interest rate on money now for when you need it later.
2. Its ability to turn money into income for life.

When you're ready to buy your annuity, don't forget to ask your insurer about the fees. As the owner, you must be aware of the fees associated with owning an annuity. Now that you know the typical annuity costs, you can bring them up with an agent or insurance company before entering into an annuity contract.

And if you have any additional questions, speak with a financial advisor.

Ready to buy your annuity? At Canvas, we have MYGA annuities that can provide you with guaranteed lifetime income.

Because our agents don't work on commission, we pass the savings onto you with some of the highest annuity crediting rates around. Check out our annuities today and start seeing how much you can earn!

Citations

1. SmartAsset, (Lake, 2020) -- Breaking Down Annuity Fees and Charges

2. The Balance, (Haithcock, 2020) -- The Levels of Commission Agents Earn on Annuities

3. National Association of Insurance Commissioners (NAIC, 2021) -- Annuity Suitability & Best Interest Standard