How Much Does an Annuity Cost?

Annuities are complex financial products, and it’s important to understand all the ins and outs before purchasing one. Here’s what you need to know about how much annuities cost.

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What Is an Annuity?

An annuity is a contract between an insurance company and an individual. The individual pays the insurance company a sum of money, either all at once or in periodic payments, and the insurance company promises to provide a series of payments to the individual, often for the rest of their life.

Annuities are often marketed as retirement savings vehicles, and they can be useful. But they can also be expensive compared to other options, so it’s important to understand all the costs associated with this type of investment.

How Much Does an Annuity Cost?

Annuities have several different kinds of costs, which can lead to some confusion. Here’s a breakdown of the most common costs and what they entail.

Commission

The annuity company pays the salesperson a commission on the sale of the annuity. This is a percentage of the premium that the individual pays for the contract, and it can be a lump sum at the time of the sale, or a “trail” over the first several years of the contract.

Everyone should get paid for their work, and annuity salespeople are no different. But it’s important to remember that anyone trying to sell you an annuity will get paid a significant sum to do so. This is particularly important to keep in mind if someone suggests you move the money from an existing annuity into a new contract.

Expense Ratios

Variable annuities invest in mutual funds, and mutual funds have fees. These fees are passed on to the annuity owner in the form of expense ratios.

Mortality and Expense Charges

An annuity is an insurance contract, so the company charges a fee to provide a death benefit. The death benefit is in effect during the accumulation phase of the contract, that is, prior to annuitization.

Optional Features

Many annuities have options, or riders, you can purchase at additional cost. These costs are usually a percentage of the annuity value and may be assessed annually. For example, many variable annuities have guaranteed withdrawal benefits, which provide for a minimum amount you can withdraw from the contract, regardless of market performance.

A guaranteed death benefit is another optional feature. In most cases, when you begin taking payments from an annuity contract, you annuitize it, which means turning the contract value into an income stream. Once you annuitize, there is no longer a death benefit, so if you receive three payments and then die, that’s all you get — your heirs get nothing. Some contracts allow you to purchase a minimum amount your heirs will get.

Surrender Charges

This can be the most expensive fee for an annuity, but it’s also the one that’s the easiest to avoid. An annuity is meant to be a long-term investment, so annuity companies will charge you for taking your money out early. A surrender charge may be as much as 7% or 8% of the contract value in the first year and then declines, usually by one percent per year until, at year seven or eight, it is zero. You can avoid this charge by not withdrawing your money, at least until the surrender period ends.

Key Takeaways

These fees can add up to as much as 3% or more per year in a variable annuity contract — excluding the surrender charges. Be sure you factor this in when comparing an annuity to another option for your retirement investment.

FAQ

Here are the answers to some of the most frequently asked questions about annuities.

• How much does a $100,000 annuity pay per month?

  • The monthly payout from a $100,000 annuity ranges, anywhere from $400 to $700, depending on multiple factors like the type of annuity, your age at the beginning of payouts and interest rates.

• What is the average cost of annuity fees?

  • The average cost of annuity fees can go up to 3% or more depending on the type of annuity and the number of riders.

• Is an annuity a good investment?

  • An annuity can be a good investment for those seeking stable returns in retirement but you should consider all the fees and lack of liquidity before committing to make sure it aligns with your long-term goals.

This article originally appeared on GOBankingRates.com: How Much Does an Annuity Cost?