The Truth About "Hidden" Annuity Fees

On a daily basis, consumers are bombarded with warnings from the financial press to beware of the "Hidden" costs and "High" fees associated with annuities. These misconceptions have undoubtedly kept some people from buying these financial products. Many annuities have come a long way in terms of lowering costs and clearing up confusion among shoppers. Also, stricter suitability standards mandated by State Insurance Commissioners have also made the annuity shopping experience a more transparent one.

 

While determining if an annuity is the right financial vehicle to help you solve for your specific needs, shoppers could benefit from knowing the rules of the road. By asking the right questions up front, and by having a better understanding of the features you might be paying for, you should be able to get a much clearer sense of whether an annuity may fit your needs.

 

Start by following some basic guidelines for evaluating the potential costs of annuities. Then, dig a little deeper into the details of any specific fees and determine whether it's worth paying for added features that may appeal to you.

 

Understanding the Big Picture

There are different types of fees that are specific to certain types of annuities. You should consider some general guidelines when contemplating annuity costs. For example:

 

Know your needs. The fees you pay for annuity features can reduce your overall return, so opt only for those features that you will use. If your situation and planning needs warrant these added features, then make sure you try to pay a reasonable price for a product with those features. For example, if maximizing money left to heirs is an important consideration, may be worth the added cost for a feature that provides more for heirs after you die.

 

Understand the product. Some annuities can be complex products to understand. When you're considering a purchase, it's important to understand how the proposed annuity works, what its benefits may be, and, perhaps most importantly, what role it can help play in your overall financial plan. Be sure to carefully read the marketing materials and prospectus (if applicable). If you don't understand what you're paying for, make sure to ask questions and receive full disclosure before making a decision.

 

Focus on value, including the price. It's important to evaluate any annuity's costs versus the guarantees it promises. Not all guarantees are created equal. Some guarantees involve cumbersome restrictions that may diminish their appeal, regardless of price. On the other hand, keep in mind that when you buy an annuity, part of what you are paying for is the creditworthiness of the insurance company standing behind those guarantees.

 

Get Familiar with Fee Types

While you don't have to become an expert on all annuity fees, knowing the most common types will help you evaluate products and ask the right questions. Generally, there are four typed of annuity fees:

 

Insurance charges. Also known as mortality and expense (M&E) fees and administrative fees, these charges pay for insurance guarantees that are automatically included in the annuity, and the selling and administrative expenses of the contract.

 

Surrender charges. Most insurance companies limit the amount of withdrawals one can take during the initial years of a contract, and place a surrender charge on any withdrawals above a preset limit. Be careful, as surrender charges can be significant and be imposed for an extended time period. Be sure to ask for details on any surrender charges to help ensure that you have enough flexibility.

 

Investment management fees. These are assessed depending on the investment options within variable annuities, and are similar to management fees on mutual funds. Check the annuity prospectus for any underlying funds to learn how much you might pay for investment management fees.

 

Rider charges. Riders are optional guarantees available in some annuities. There is typically an additional cost to purchase a rider in an annuity.

 

Fees Vary Among Annuities

It is really misleading to lump all annuities together when the pundits sound the alarm about "Hidden" and "High" fees. Different types of annuities - whether variable or fixed,- income or deferred - charge different types of fees (see the chart below). Generally, variable annuities charge explicit fees, while fixed annuities tend to embed their costs in the interest rate (like CDs) or income payout amount.

 

Types of Annuities and Their Key Expense Components

 

 

Getting Good Value

There are a few other important considerations before making an annuity purchase.

 

Consider the totality of all costs. Rather than focusing on any single fee component, it's wise to look at all the associated costs together.

 

Buy from someone reputable. Whether you're working through an advisor or directly through a distributor, get the facts on the firm's financial strength and business practices. What is the company's rating with third-party ratings agencies? Is it known for fair claims-paying practices? How reliable is its customer service? Dealing with a company that's fair and financially sound may help save you from financial headaches in the long run.

 

Educate yourself. Knowledge is power. The marketing materials and prospectus (if applicable) can be invaluable in determining whether the benefits offered by the product are worth the associated costs. But, if it's not clearly spelled out, make sure to ask your financial advisor about any potential costs that might not be apparent.

 

Recent economic challenges have made it more important than ever to do your homework comparison shop when it comes to major purchases. Buying an annuity should be no different. It's easier to understand what you're buying if you do your homework. For more information, visit our website.$

 

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