Annuities are a great way to ensure retirement income, but most people associate it with lots of fees. So, let’s break down the fees associated with purchasing an annuity.
How to Buy an Annuity
First, you need to understand the purchasing process to see where the following fees come from. When you decide to buy an annuity, you are deciding to convert a lump sum of money into a steady, guaranteed income stream. All you have to do to start one is make an initial contribution (a minimum between $2,000 to $25,000) and sign the contract, then make monthly payments for a designated amount of time called the accumulation phase.
The contract will outline all of your fees, even if it’s in fine print. For instance, the person who signed you up to the annuity will be paid through your purchase. Then, your annuity will need to be managed. Also, the annuity provider will associate fees with higher-risk clients.
When you purchase an annuity, someone from the provider company will work with you through the contract, purchase, and through your lifetime. These agents are paid based on commission, i.e. a percentage of your purchase. For instance, your agent’s commission can range anywhere from 1% to 10%. This is typically paid every year, and likely won’t be explicitly stated in your contract.
The commission you pay will relate to the complexity of your annuity. Since your agent will be managing it on your behalf, they get paid more relative to the work they have to put in. Here are the average percentages based on the type of annuity:
- Fixed index annuity: 6% to 8%
- Deferred income annuity: 2% to 4%
- Single premium immediate annuity: 1% to 3%
- Multi-year guaranteed annuity: 1% to 3%
Apart from the commission, you’ll also have to pay an administrative fee for holding your account. Typically, it’s about 0.3% of your annuity, or a flat fee of about $25 or $30 a year.
Mortality expenses are relative to the risk to insure you. If you are older or have health problems, your annuity provider may charge a fee similar to commission to make up for this risk. This annual fee can range from 0.5% to 1.5% of the policy value.
Others — Review Your Contract!
Other charges may include:
- Transfer charges
- Distribution charges
- Third party transfer charges
- Contract fees
- Underwriting fees
- Redemption fees.
If you’re concerned about these fees, it’s okay! You won’t be faced with all of them at once, and they are relatively small. Just remember — even though these fees are reasonable, annuities have a reputation for being fee-heavy because they aren’t prepared for them. Review your contact to know what fees you should expect.
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Game Changing Benefits is your partner for a solid, easy-to-understand annuity. To learn more, call us at 972-331-1060.