With all of the competition in the investment world today, one of the hot topics discussed by both the securities side of the industry and the insurance side of the industry is fees. Fees can come in all shapes and sizes and can vary greatly depending on the type of investment vehicle, insurance product, or investment service being offered. Often times fees are charged by the financial advisor for his or her services. In addition to those fees, products like mutual funds have management fees of their own that the fund charges to actively manage the account. For the purposes of this article, let’s take a closer look specifically at the different types of annuities and the fees associated with them.
Immediate annuities, otherwise known as Single Premium Immediate Annuities or SPIAs, do not have fees. The purchaser basically exchanges a lump sum of cash for lifetime income or income for a specified period of time. Since an immediate annuity cannot be surrendered, it has no surrender fees. When the owner dies, lifetime income payments either stop or are paid for a specified period of time to the beneficiaries. Immediate annuities are the purest form of a “self-made pension”.
Fixed annuities do not have fees, unless you consider an early withdrawal penalty or surrender fee. When someone purchases a fixed annuity, the insurance company guarantees a certain interest rate for a specified period of time. For multi-year guaranteed annuities, the rate guarantee period typically ranges from 3 years up to 10 years. The insurance company usually offers a higher rate of interest the longer the guarantee period.
Like fixed annuities, the only fees associated with Fixed Index Annuities are surrender fees. Of course, surrender fees never come into play unless the owner of the annuity doesn’t “play by the rules” and wait until the surrender period is over to withdrawal more than the insurance company allows. With a Fixed Index Annuity, the purchaser’s principal is protected and guaranteed. The insurance company credits a certain rate based on the performance of a stock market index like the S&P 500. Typically, this rate is capped at a certain level, which is basically the tradeoff for the insurance company protecting the principal from participating in market losses.
Variable annuities, in contrast to fixed and index annuities, have two types of fees. The first types of fees are insurance fees which can range from 1% to 2% annually. In addition to insurance fees, variable annuities also charge investment fees. These fees can be as high as 2% per year depending on the product. Overall, fees vary greatly depending on the insurance carrier and product but can be as high as 4% per year.
In an effort to be fair and balanced, I should mention optional riders and the fees associated with them. Even though fixed and index annuities do not have fees like variable annuities, owners of these products can add optional riders to the policies that come with a cost. They can be added to variable annuity contracts as well. Different riders serve different purposes, but usually either guarantee income for life, enhance a death benefit, or provide some type of long-term care coverage. The fees on these riders can range from .50% up to nearly 2% per year.