Annuity Fees and Charges: What You Are Actually Paying

Add the fees in dollars before you keep the annuity or replace it. A percent on a brochure is not the bill. The bill is the mortality and expense charge, the rider, the funds inside the contract, and the surrender charge if you leave early.

This is a fee checklist, not a ranking of products. A full annuity review uses your statement. The notes below tell you which lines to find first.

The fees that show up

1. Mortality and expense (M&E). Common on variable annuities. It is a percent of the account value, taken every year, for the insurance part of the contract. It is not the same as the fund expense.
2. Administration fee. A smaller annual charge, sometimes a flat dollar amount, sometimes a percent. It sits next to the M&E on the statement.
3. Fund expenses. If the contract holds subaccounts, each fund has its own expense ratio. You pay that on top of the contract charges. A statement that only lists the M&E is missing this line.
4. Rider fee. An income rider or a death-benefit rider is optional and priced separately. The fee is often a percent of the benefit base, not of the cash you could walk away with.
5. Surrender charge. This is not an annual fee. It applies when you take out more than the free-withdrawal amount during the surrender period. A contract can look cheap on the annual fees and still cost several thousand dollars to leave.
6. The cap or the spread. A fixed-indexed contract may not list an M&E. The insurer is paid by limiting the index credit. A cap of 6 percent means the contract does not credit the rest of a year when the index rises more than that. That limit is a cost even when no fee line appears.

A simple example

These numbers are hypothetical. They are not a quote.

Account value: $180,000. Income base: $240,000. M&E: 1.25 percent of the account value, about $2,250 a year. Income rider: 1 percent of the income base, about $2,400 a year. Average fund expense: 0.50 percent of the account value, about $900 a year.

The annual total in this example is about $5,550 before any surrender charge. A 5 percent surrender charge on the account value is about $9,000 more if the owner leaves this year.

The useful question is whether the income base is worth about $5,550 a year. That depends on the payout rate, the owner’s age, and whether anyone still needs the death benefit. The percent on the brochure does not answer it.

What changes the answer

• Variable, fixed, or fixed-indexed. A variable contract usually lists more fees. A fixed-indexed contract can hide the cost in the cap. Read the one you own, not a generic average.
• Benefit base versus account value. A rider priced on the larger number costs more than the same percent on the cash value.
• Qualified or not. Fees inside an IRA annuity do not create a separate tax deduction. The tax follows the IRA rules when money comes out.
• A replacement. A new contract with a lower M&E can still cost more if it starts a new surrender period and drops the rider.

The common mistake

People compare one fee line and ignore the rest. The M&E can be 1.25 percent while the rider and the funds add as much again. The other mistake is treating a missing fee line on a fixed-indexed contract as “no cost.” The cap is the cost.

Questions to ask with the statement in hand

• What did I pay last year, in dollars, for M&E, admin, funds, and riders?
• Is the rider fee on the account value or on the benefit base?
• What is the surrender charge in dollars if I leave this month?
• How much can I withdraw this year with no surrender charge?
• If I exchange it, what are the new fees and the new surrender schedule?

When a review helps

Ask for a review when you cannot find the fees in dollars, or when someone has proposed a replacement based on one lower percent. Bring the contract and the latest annual statement.

The comparison is the work on the annuity review page. The eight checks before a move are in Should I keep my annuity or move it?. What the surrender charge is, and what happens when the period ends, is in What is a surrender charge on an annuity?.

If you want the fees added up before you sign a replacement, request an annuity review.