Retirees say they would rather die than run out of money! Not so fast! Annuities provide income for life.– Rick Maraj
The Retirement landscape has changed, and more and more investors are beginning to realize the importance of guaranteed income for life. As a result, there has been a lot of attention placed on annuities recently. Annuities can be one of the most misunderstood investments out there!! What are the different types? Do annuities have fees? Do I lose control of my money? And the list goes on and on? However, whether it be a traditional stock market portfolio or another type of insurance product, Fees are always a hot topic. Let’s focus primarily on the types of fees associated with the different types of annuities.
We will focus on the more popular types of Annuities: Immediate, Fixed, Fixed-Index and Variable.
An Immediate Annuity works a lot like a traditional company-sponsored “pension” plan. You deposit a lump sum of money in exchange for a guaranteed income payment for life or for a specific “period” of time. That period could be 5, 10, 15, 20, or 25 years in most cases. There are no direct fees to the consumer here, but there are some limitations. The agent gets paid directly from the issuing Insurance co. These types of annuities usually start paying out immediately, hence the name “immediate” annuity. This annuity, by design, is a straightforward product; that’s why there are no fees, and the compensation to the agent is minimal.
Fixed Annuities work just like bank-issued CDs. They pay a “fixed” rate for a specific period, either 2, 3, 5, or 7 years. You get a fixed guaranteed rate for the “term,” once the term ends, your principal is returned with the interest that accrued over the past years. Some of these accounts allow you to withdraw the interest every year. The agent gets paid a minimal amount, again, as these are simple accounts by design.
A Fixed-Index Annuity is a bit more complex than the first two options. Fixed-Index annuities earn their interest or “growth” from the performance of an underlying equity index. You “participate” in the “upside” growth of that index but not the downside. So, If the index closes “down” from the previous year, you don’t go “backward”; you just don’t earn interest that year. At least you didn’t suffer any losses! The floor is always zero “0”. These types have “riders” you can purchase, which come with a fee. These “riders” are unnecessary, but they offer some significant benefits for a small annual fee. The issuing Insurance company compensates the agent, and the total fees, including some or even all these rider benefits, may vary from .5-2%.
The Variable Annuity happens to have the most fees. In some cases, you can see fees as high as 4-6%! This type of annuity is classified as a security. Its principal is not protected and is subject to “market” volatility. That means you CAN lose value in this type of account. Certain riders can be purchased (for a fee), as we will discuss here. The “Variable” annuity comes with a “prospectus,” like traditional stock (equity) investments. Here you can find a full breakdown of all the fees associated with this type of account.
Here is a list of the fees most common with a “variable” annuity:
The six most common fees you will find are Mortality Expense (M&E), Administrative, Investment Expense Ratio, Income rider, Death Benefit rider, and lastly, the annual fee paid to the Agent/Advisor. These fees could add up to a whopping 4-6% annually in some cases! So here, you would have to earn 4-6% consistently just to stay even! Take withdrawals or any “market” corrections into consideration, and you may find yourself losing significant value over time.
Now that you know what types of fees are associated with each type of annuity, it is imperative you ask questions and do your homework! It’s best to consult with a highly qualified agent who is fully aware of what options are available and can dissect all the fees associated with the account you are considering. Each of these annuities provides very specific benefits, so know exactly what your needs and goals are before you commit.