Do annuities come with fees? This is a question that comes up often. Short answer: Some do, yes. However, others only come with fees when you select certain additional benefits, or if you violate certain terms of the contract. Importantly, whether you pay fees or not, and how much you pay, depends upon two factors: The type of annuity that you purchase, and the details in the contract. In this post, we’ll go over the different types of annuities, and the fees they come with, to help you determine if an annuity may be right for you.
Factors That Determine Fees
You might pay fees, depending on the factors mentioned previously. It’s important to note that there are other types besides just the ones we’ll list here. Typically, the most common fees that come with annuities fall into two types: Administrative fees (meaning the insurance company sets them, and you have to pay them no matter what) and optional fees (fees that are due to the actions of the annuity owner, not the issuing company.) An example of an optional fee includes a surrender charge, which must be paid if you take out more money than agreed upon or take out money too early. Another example is an income rider, which you can choose to pay in order to get certain added benefits.
Other Types of Fees
Some annuities come with underwriting fees, which go to the issuing insurance company. There may also be a commission for the annuity to pay the licensed insurance agent. However, the annuity owner doesn’t usually pay these costs upfront. Instead, the insurance company determines what the rate of return may be after taking these fees into account. So, in other words, they pay the fee, and then adjust your rate in accordance.
Fees Differ For Different Annuities
Three main types of annuities exist: Variable annuities, fixed annuities, and fixed indexed annuities (FIAs.) Each type has its own structure and therefore has a different setup for its fees. Here are the three types of annuities, and the fees you might typically pay with each:
Variable Annuities – Variable annuities tend to have the most line-item fees of the three. The most common of these include insurance charges, investment management fees, and flat contract fees. The rate of return of variable annuities fluctuates, and as a result, it also tends to come with higher risk as opposed to the other two types.
Fixed Annuities – This type of annuity offers a fixed rate of return. This rate already takes into account the aforementioned fees. As a result, you won’t typically see them in your agreement. Also, surrender fees are still a possibility with this type of annuity.
FIAs – With an FIA, the owner gets a reasonable rate of return over time, based on the performance of a stock market index. However, an FIA also ensures that you do not lose your principal amount, unlike a variable annuity. Your account can’t drop below your initial amount, regardless of market conditions. This is ensured by the issuing insurance company. FIAs are more like fixed annuities in terms of fees. Usually, the only fees are surrender charges and rider fees. Anything else counts as an expense to the insurance company, who will then factor it into their rate of return calculation.
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