In the race to find the dumbest statements commonly used when referring to annuities there are two primary statements that I hear far too often. The first is the obligatory “I Hate Annuities.” It’s like saying that you “hate all restaurants.”
That’s obviously ridiculous because you can’t have tried everyone to know that you hate them all. It’s incredible that people actually believe that all annuities are bad while they collect their annuitized Social Security payments. Believe it or not but that Social Security is an annuity type.
The other primary piece of annuity misinformation is the senseless comment that “all annuities are expensive.” Every time I hear this, I make the correlation that it would be like me giving advice on ballet. I could bloviate and try, but it wouldn’t be based on any foundational information.
The bottom line is that when it comes to annuity fees, most annuity types have none. Yes, you read right. None. There are only a couple of those annuity insurance products that can have annual fees, but the majority have none.
When I shoot factual holes in the “all annuities have high fees” nonsense, some people fire back with “opportunity costs.” Not the same thing my friends. The other reflex is to talk about agent commissions. All annuity commissions paid to the agent are “built into” the policy. In other words, you do not see them. For instance, if you put $100,000 into an annuity of any type, you are going $100,000 on your statement. Also, there are some annuities that are “no-load” and pay no hidden commission to the selling agent or financial advisor.
Let’s go through the primary types of annuities that are available to the consumer and lay out the specific fees and charges (if any) with each contract. For the record, all annuity types are issued by life insurance companies.
Fixed Index Annuities (FIAs): No annual fees…unless an Income Rider is attached at the time of application.
*Income Riders, if attached, have an annual fee for the life of the policy that are typically around 1%.
Variable Annuities (VAs): There are very good No-Load VAs available that have 100% liquidity day one. Load VAs can have high annual fees that cover items like mortality expenses and administrative fees. Those annual fees can range from 1% to over 3%, depending on the policy that you choose.
SPIAs, DIAs, and QLACs are “annuitized” income products with no moving parts and no surrender charges because the payment stream is irrevocable. Built in agent commissions are very low because of the simplicity of the strategy.
FIAs, MYGAs, and VAs all typically have a surrender charge period for a specific duration. That surrender fee is usually on a declining scale over that sales charge period.
Recently, there has been a growth in VAs and FIAs that are designed to be managed for a fee. Those management fees are typically negotiated with your advisor and most have short surrender charge periods or none at all.
Annuities are not one size fits all. When it comes to retirement planning and putting together a retirement income strategy or overall financial plan annuities can have a place. Annuities are contracts, and in my opinion, should only be purchased for their contractual guarantees.
As I laid out above for the annuities with fees, it depends on the annuity type. Not all annuities have fees, but some types do. Your agent or advisor should transparently tell you about all fees if any. You can always check the policy or call the carrier directly to verify and clarify any needed questions.
When it comes to annuity fees, here is what to expect. 1) Commissions are built-in to the product and hidden from the consumer. Just remember that the simpler the strategy, the lower the commission. There’s a reason that too many agents lead with complex product types. 2) Most annuity types have no annual fees. Only Variable Annuities (VAs) and Fixed Index Annuities (FIAs) can have annual fees. FIAs have no fees unless an Income Rider is attached at the time of application, and VAs can be purchased in a no-load version.
Annuity rumors, one liners, and non-educated annuity advice should be taken with a grain of salt. Do your own research. Ask for a specimen policy to read. Take your time. Fake annuity news is alive and well, so don’t be influenced by agenda’s or group think.
Annuities are transfer of risk strategies, pure and simple. You either need to transfer that risk, or you don’t. Your decision to buy one is that simple.