Variable Annuity Fees

Common Fees and Expenses of Variable Annuities

When considering whether a variable annuity is right for you, it can help to understand the fees and expenses attached. Some — like rider fees or surrender charges — are avoidable or only apply in specific situations. Others must be paid to fulfill your contract.

Commissions

Annuities are often purchased with the help of an insurance agent or financial professional. These agents are typically rewarded with a commission for helping you identify and set up your annuity.

But keep in mind: this charge is typically built into the price of your annuity contract. This is not an additional fee beyond what you already pay for the annuity.

That being said, some may find it helpful to ask their agents exactly how they earn a commission.

Mortality and Expense Charges

Mortality and expense charges are another common fee found throughout several types of annuities that acts as a buffer to protect the carrier from the risk of starting an annuity contract with you.

These charges are paid as a small percentage of your overall contract. According to the U.S. Securities and Exchange Commission, the charge is usually around 1.25% of the contract value and is an annual expense.

Indexed annuities and fixed annuities also typically require a mortality and expense charge. Immediate annuities are the only type that doesn’t since they are simple products that are immediately converted into payments.

Rider Fees

Riders are optional benefits that can be added to your variable annuity at an additional cost. This can include adding a guaranteed minimum living benefit or a guaranteed minimum death benefit.

You pay a fee in exchange for adding these riders to your contract. So, the more riders you add, the more expensive your annuity will become.

Conversely, you can keep your costs lower if you opt to forego any riders and remain with the traditional form of the contract.

Whether riders are necessary will likely depend on your financial situation.

Administrative Fees

Administrative fees are paid to help fund the expense of managing your contract. This is generally a simple fee and – unlike the mortality and expense costs – is not even large enough to be paid as a percentage of your contract.

It is a simple flat fee that you will be charged each year and will likely come in at well below $50.

Administrative fees are found on all types of annuities.

Underlying Fund Expenses

Underlying fund expenses are charges that you will not directly pay but are still important to be aware of, particularly since they are often unique to variable annuities.

This charge refers to the expenses that you pay as part of the mutual funds or other options that your variable annuity’s portfolio is invested into.

These charges are a standard part of many types of investing, but often don’t apply to other types of annuities since they are not exposed to real investments the way that variable annuities are.

Surrender Charges

Surrender fees are a key part of any annuity contract, variable or otherwise. The good news is that you will only ever have to worry about this expense if you withdraw money from your contract early.

Annuities include a surrender period where you cannot take money out of your contract without facing a fee. This period usually lasts for several years after purchase, since this time is meant for your annuity to grow in value.

There is no surrender charge owed if you convert your annuity into lifetime payments or take money out after the agreed-upon lifetime of the contract.

But if for some reason you need to withdraw money early into the contract, a penalty will be owed. 

Surrender charges usually steadily decrease each year until reaching zero. Many annuity contracts also include provisions that allow you to withdraw as much as 10% of the contract value without needing to pay the charge at all.

Variable annuities have aquired a poor reputation over the past decades, but they aren’t ‘gotcha’ products than anything else in the financial industry. They are a tool and should be used for their most effective use. When they are, they can be an excellent addition to a financial plan. It is when they aren’t used appropriately or shoehorned into a plan that problems arise.

What is that use case? Most broadly, it is as a supplemental retirement account that is funded after all other options have been exhausted. For example, if you have maxed out a 401(k), HSA, or IRA and want to avoid taxes from investment income on your surplus money, then a variable annuity could be an option. If this money can be allocated exclusively for retirement or a legacy to heirs, the uncapped contributions of a variable annuity lets you put significant money to work in a tax-sheltered vehicle.

Stephen Kates, CFP®Principal Financial Analyst for Annuity.org

Stephen Kates, CFP® is a personal finance expert specializing in financial planning and education. He serves as the Principal Financial Analyst for Annuity.org, where he delves into industry trends to support consumers and financial advisors on wealth management, annuities, retirement planning, and investing.

How do Variable Annuity Fees Compare to Other Types of Annuities?

Variable annuities tend to have more fees attached to them than other types of annuities. Part of the reason for this is that fees often go hand-in-hand with complexity, and variable annuities tend to be much more complex than other types of annuity products.

It’s essentially an unavoidable part of seeking a variable annuity. These products serve as investment vehicles, allowing you to set up a portfolio and invest in mutual funds.

This is simply a more expensive process than setting up a SPIA, where you hand over a lump sum and are immediately given guaranteed payments.

Some charges, such as underlying fund expenses, are a direct result from investing.

Variable annuities also may require more riders than other types of annuity contracts. You rarely have to include a rider in your contract, but variable annuity customers may be interested in several options that can help to provide more security and certainty to their contract.