One major complaint that naysayers have with annuities are the fees. They say annuities are “expensive.”
Well, let’s talk about those fees. We’ll begin our discussion with the most fee-laden variety, the variable annuity (VA). The typical VA has average annual charges near 4.5 percent, all-in. Here’s the breakdown of what’s included:
Administrative Service Charge: A fee that is typically expressed as a percentage of the annuity’s account value (AV), and covers the cost of transferring funds between sub-accounts, issuing policy statements and tracking the deposits in the contract.
- Contract Maintenance Charge: A yearly charge that is assessed against an annuity to cover the insurance company’s administrative expenses associated with servicing the contract.
- Mortality & Expense Risk Charge (M&E): A fee that is typically expressed as a percentage of the annuity’s AV, and compensates the insurance company for the risks it assumes under the contract.
- Underlying Fund Expenses: A fee that is expressed as a percentage of the annuity’s AV; this charge is imposed by the mutual fund investment companies that offer the underlying mutual fund options on the contract.
Optional Rider Fees: A charge that is expressed as a percentage of the annuity’s AV, which compensates the insurance company for the risks it assumes in offering one or more of several benefits that:
- Guaranteed Lifetime Withdrawal Benefits (GLWBs)‑permit the owner to take annual withdrawals for life, even if the annuity’s AV declines to zero.
- Guaranteed Minimum Accumulation Benefits (GMABs)‑guarantee that the owner never receives less than a certain amount of AV at a stated point in the future.
- Guaranteed Minimum Death Benefits (GMDBs)‑guarantee that the owner’s beneficiaries never receive less than a certain amount for the death benefit at a stated point in the future.
- Guaranteed Minimum Income Benefits (GMIBs)-guarantee that the owner never receives less than a certain amount of income upon annuitization at a stated point in the future.
I guess I can understand why so many people perceive “annuities” to be expensive products given the aforementioned features. However, just because VAs are predominant in terms of sales, they shouldn’t be used as a basis for judgment of all annuities. With that, it would be prudent to discuss some of the fees that are charged on indexed annuities (IAs).
There is no such thing as a fee on an indexed annuity. Although some IAs offer optional GLWBs that have an annual fee based on the AV, you will never find a fee on an indexed annuity alone. Plus, these annuities never lose money as a result of market fluctuation and they still give you the ability to earn (limited) interest, based on the market’s performance.
Expensive? I think not.