Considering an Annuity? Read this First

While annuities can offer valuable benefits—such as guaranteed income or principal protection—they can also come with high fees and commissions that may lead to buyer's remorse. Here's what you should know before purchasing an annuity.

Layers of Fees

When market volatility rises, some investors seek refuge from daily price swings. One product that often gains popularity in these moments is an annuity. Depending on the type of annuity you choose, you may encounter several types of fees, including:

• Administrative Fees: These cover the ongoing costs of managing the annuity. They may be charged as a flat fee or as a percentage of your account's value each year.
  
  
• Surrender Charges: Many annuities impose a penalty if you withdraw funds or cancel the contract within a set time frame (usually several years). These charges are typically outlined in your annuity contract.
  
  
• Mortality and Expense (M&E): These ongoing fees cover the costs of guaranteed benefits from the annuity, such as death benefits. Usually, these fees are a percentage of the account's value.
  
  
• Commission: Many annuities pay a commission to the agent who sells the contract. This is often a one-time fee based on the amount you invest and can vary widely between products.
  
  
• Investment Fees: If you purchase a variable annuity, you'll pay fees for the underlying investment options. These fees are typically an ongoing percentage of the value of the money invested in them, but they can vary significantly according to the contract and investment options available.
  
  
• Rider Fees: Riders are optional features—such as guaranteed income or principal protection—that can be added to an annuity. These typically come with additional, ongoing costs expressed as a percentage of your account value. Rider fees can significantly add to the overall cost of the annuity, so close scrutiny of this section is important.

Lower-Cost Annuity Options

Some insurance companies now offer "no-load" or "commission-free" annuities through financial advisors. These annuities eliminate commissions, which helps lower overall costs. Advisors working with these platforms can compare multiple annuity products, helping clients identify options that offer the right features at more competitive prices.

Already in an Expensive Annuity?

If you already own an annuity with high fees, you may still have options:

• If You're Out of the Surrender Period: You might be eligible for a tax-free exchange (known as a 1035 exchange) into a lower-cost annuity. Before making the switch, be sure to compare features and fees.
  
  
• If You're Still Within the Surrender Period: Review your contract carefully. Many annuities allow you to withdraw a certain percentage annually (often 10%) without triggering surrender charges. You could use this feature to gradually transition to a more cost-effective product.
  
  

Summary

The annuity marketplace has evolved, and many modern annuities now offer reduced fees and greater transparency. Before purchasing, make sure you fully understand the costs involved. Use the Layers of Fees section above as a reference when comparing products.

Ask your advisor how they are compensated—are they receiving a commission from the annuity provider, or are they fee-only? Understanding these details can help you make a well-informed decision that aligns with your financial goals.

Taking the time to compare your options and understand the fine print can help you avoid regrets and choose a solution that fits your long-term needs.

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