With any type of financial product, there is always a chance that there are fees, and very high fees can eliminate almost any benefit to using the product. Keep in mind when reading this that every annuity contract is different. You are contracting with the insurance company for this annuity, so make sure you understand what you are signing. Know the fees and risks before you buy.
The main word you want to look at when you are reading your contract regarding fees is the word “variable.” When fees are variable, they can get out of control. You may even end up realizing you were tricked by the insurance salesperson. For this reason, always work with someone who is certified and who is really interested in making sure your future is taken care of and not just after making money.
Let’s look at a few variable fees that you might notice, and what they mean.
* Administrative Expenses – This is a fee that is supposed to cover the mail you receive and other services that you get. It can be as high as 0.30% of the value of the entire policy each year. That could mean a payment as large as $3000 a year if you have a million-dollar valuation.
* Mortality Expenses – Most annuities come with a death benefit too if you should die, and it helps guarantee that your beneficiaries get out of it what you have put in it before interest payments. These expenses can be quite high and up to as high as 1.5% of the value of your policy. If you had a million-dollar valuation, that would be another $15,000 a year.
* Surrender Charges – When you buy insurance, sometimes the salesperson or agent is paid commission right away. The problem with this is that you can always cancel your policy, and this protects the agent from loss by getting that money from you even if you cancel early.
* Cost of Riders – You can add extra features to your policy, called a rider. But, if you want additional guarantees such as death benefits for a partner or loved one, there is a cost. Again, these can be costly and sometimes are 1% of the policy value every single year. 1000 dollars a year is a lot to pay.
* Investment Expense Ratio – If you invest in a variable annuity, you will have an investment fee for the stocks and bonds that the fund is being invested in. This can be very costly, adding up to 2% of the value of your investment each year.
At this point, you may be wondering if an annuity is even worth it. But realize that not all annuities have these fees. You can shop for annuities and find all types of fees, some higher than the ones listed and some lower. Knowing about the potential for enormous fees means that you can do your due diligence and avoid high fees so you can better protect your investment.