The Truth About Annuity Fees And Surrender Charges

Annuities get a bad reputation for fees. Some of that criticism is deserved. Some of it is misunderstanding. Here is what you actually need to know.

Most fixed and fixed indexed annuities do not have upfront sales charges or annual management fees. The costs are built into the product through the crediting rate. The insurance company keeps a margin, and you get the rest. That is why two carriers may offer different rates on similar products.

The fee you hear about most is the surrender charge. This applies if you withdraw more than your free amount during the surrender period, typically 5 to 10 years. Charges usually start at 7% to 9% and decline each year until they reach zero. If you need access to your money in the short term, an annuity with a long surrender period is not the right choice.

Optional riders have explicit costs. An income rider or death benefit rider typically charges 0.5% to 1.5% per year. These are optional. If a rider does not solve a specific problem in your plan, do not add it.

The key is to ask for a full breakdown in dollars, not just percentages. A 1% rider on a $300,000 contract costs $3,000 per year. Over 15 years, that is $45,000. Know what you are paying and what you are getting for it.