When it comes time to think about retirement and what investment plans are the best for you and your family, the option of annuities usually comes up in conversation. Although they can seem beneficial in some situations, annuities aren’t designed for every financial situation and can come with unexpected high costs. Of course, just like any other investment opportunity, it’s extremely important to take into consideration the drawbacks it might potentially have. However, in the case of annuities, the #1 drawback is cost.
For clarification, annuities are fixed sums of money that are paid to someone annually. Although they are typically a form of investment, annuities can also be given to individuals in settlement cases. Initially, many individuals, especially those close to retiring, believe that annuities are a beneficial investment that will carry them through their retirement years. However, annuities do come at a cost. Many times, these costs aren’t disclosed upfront and are also a bit difficult for investors to determine at first. With this in mind, it’s important to remember that if there isn’t a fee initially listed on your contract, that doesn’t mean you won’t be paying it. Annuities are filled with hidden fees. Let’s take a closer look:
With annuities and annuities salesmen, comes commission fees. The person who sells you an annuity is sure to get a cut of the sale, and a substantial one at that. However, to avoid this outcome, many individuals may decide to go through an ‘investment advisor’. Typically, annuity commission ranges from 6% to 10% of the sale.
Management fees are typically very high in certain forms of annuities–, especially with variable annuities. Since these kinds of annuities invest your money in mutual funds, fees (expense ratios) are charged to the owner of the annuity.
Also known as M&E fees (mortality and expense), these fees are charged to ensure that certain guarantees that come with the annuity are covered. Some insurance costs can total to 2%-3% per year.
Another common charge that comes with annuity purchasing are fees called surrender charges. Surrender charges are put in place to ensure that the annuity owners won’t pull out their money earlier than agreed on. If they do surrender their annuity and pull their money earlier than they are supposed to, they will be required to pay numerous surrender charges. Typically, surrender charges are 7% of the annuity’s value after one year and then will decrease by 1% every year after. However, many surrender fees start at a much higher percentage.
Other potential fees include underwriting fees, IRS penalties fees–usually in the case of an early withdrawal–fees for added features, etc. If you decided to add other members of your family (riders) to your policy, you will be required to pay extra charges as well.
As you can see, there are plenty of fees associated with annuity purchasing. So, before investing, it’s so important to have all the facts about annuities in front of you.
With so many hidden fees, will annuities ever be worth their total cost? Most importantly, is this something that’s worth investing your money in? Honestly, it truly depends on the individual’s financial background and the type of annuity/company they decide to invest in. For example, one could save money on commission fees if they decide to invest their money in a direct-sold annuity. However, if you find that an annuity is the right investment tool for you, be sure to ask your investment advisor or salesperson specific questions regarding any associated fees that come with your annuity plan.