Taking The Mystery Out Of Annuity Fees

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TAKING THE MYSTERY OUT OF ANNUITY FEES

By Michael Albertson, President, AnnuityAlert

Misunderstandings about the fees charged in annuity purchases have undoubtedly kept some individuals from taking a closer look at an investment idea that has been around since Rome was founded.

Fortunately, many annuity and insurance providers have come a long way in clearing up confusion about annuity fees, while in some cases actually lowering their costs.

Before making an annuity purchase, take the time to know these rules of the road:

·      Know what you need The fees you pay for annuity features can reduce your overall return, so opt only for these features that you will use. For instance, if maximizing money left to heirs is an important consideration, it may be worth paying for a feature that provides more for heirs after you die.

·      Know what you are buying If you don’t understand ...
... what you’re paying for, make sure to ask questions and receive full disclosure before making a decision to buy.

·      Not all guarantees are created equal Some guarantees1 involve restrictions. This may diminish their appeal, regardless of the price. Part of what you are paying for is the creditworthiness of the insurance company standing behind those guarantees.

·      Different fees for different benefits Generally, there are four types of annuity fees:

o   Insurance charges Also known as mortality and expense fees and administrative fees, these charges pay for insurance guarantees that are automatically included in the annuity.

o   Surrender charges Most insurance companies limit the amount of withdrawals you can take during the initial years of a contract, and place a surrender charge on any withdrawals above that limit. Take a close look: surrender charges can be significant and can be imposed for an extended time period.

o   Investment management fees These are assessed depending on the investment options within variable annuities, and are similar to management fees on mutual funds. Check the annuity prospectus for any underlying funds to learn how much you might pay.

o   Rider charge Riders are optional guarantees available in some annuities at an additional cost.

Different types of annuities—whether variable or fixed, income or deferred—charge different types of fees. Generally, variable annuities charge an annual annuity fee, while fixed annuities tend to embed their costs in the purchase price.

AN OVERVIEW OF ANNUITY TYPES AND KEY EXPENSES

 
Variable
Fixed
Deferred
·      Insurance charges (mortality and expense, administrative fees)
·      Underlying investment management fees
·      Surrender charges
·      Rider fee (if available)
·      Flat contract fees
 
·      Surrender charges
·      The interest rate reflects reductions for expenses and profits
Income
·      Insurance charges (mortality and expense, administrative fees)
·      Underlying investment management fees
·      Rider fee (if available)
 
·      The payout rate reflects reductions for expenses and profits

Most importantly, ask yourself: “What features do I really want to pay for?” Then, with the help of a financial advisor, examine the variety of choices available – and weigh the advantages most appropriate for your situation.

Then, before investing, consider the investment objectives, risks, charges, and expenses of the annuity and its investment options.

Keep in mind that investing in a variable annuity involves risk of loss - investment returns, contract value, and, for variable income annuities, payment amount are not guaranteed and will fluctuate. Withdrawals of taxable amounts from an annuity are also subject to ordinary income tax and, if taken prior to age 59½, may be subject to a 10% IRS penalty.

About Michael Albertson President of AnnuityAlert, Michael Albertson has more than a decade of experience in providing advice and insights to individuals and families who are facing investment challenges. Michael is also the author of DECISION ROADMAP: Are annuities right for you?Free downloads are available at www.annuityalert.com. Michael can be contacted at mike@annuityalert.com or 800.000.0000.

1Guarantees apply to certain insurance and annuity products (not securities, variable or investment advisory products) and are subject to product terms, exclusions and limitations and the insurer's claims-paying ability and financial strength.