Variable annuity fees can be as high as 3.00% or more per year. Take the time to understand all the fees and charges before you buy.
The variable annuity fees you incur will fall into the following categories:
- Mortality Expenses (M&E)
This is a fee charged by the insurance company to provide you with a death benefit (often just a guarantee to pay out to your beneficiaries at least what was put in). This variable annuity fee can range from .50 – 1.5% of the policy value per year.
- Administrative Expenses
Many variable annuity policies have a separate administrative fee to cover the costs of mailings and ongoing service. This fee can range from .10 - .30% of the policy value per year.
- Investment Expense Ratio
Inside a variable annuity, the underlying stock and bond investment choices, called sub-accounts, will have an investment management fee which can range from .25 – 2.00% of the value in that account per year.
- Additional Cost of Riders
Riders are extra features on your variable annuity policy that provide you with additional guarantees or death benefits. Depending on the extent of the benefit, riders can cost .25 – 1.00% of the policy value per year.
- Surrender Charges
Many policies pay an upfront commission to the person who sells the policy to you. A surrender charge is put on the variable annuity policy so that if you cancel the policy early, the insurance company can thus recoup the commission they had to pay out.
Avoid policies with surrender charges.
Surrender charges can vary from 3 years to 15 years in length, which limits your flexibility. If your circumstances change, you will have only limited access to your money if there is a high surrender charge to get to it.
In addition to understanding variable annuity fees and expenses, find out how much the person you buy the annuity from will make on the sale.
Don’t accept an answer like “My company pays me.” The way someone answers this question will tell you a lot about the type of person you are dealing with.
An insurance company may pay commissions as high as 5-9% of the amount you invest. These financial salespeople may not have any other solutions to present to you, and this is not acceptable. Keep in mind, you can also buy no-load annuities that have much lower expenses because they do not pay commissions. Before you purchase anything from a financial salesperson who will receive a commission, you may want to talk to a fee-only financial advisor.