When you think about purchasing an annuity, the cost is undoubtedly one of the things that you will want to know about. How much does an annuity cost? What’s the price of an annuity? This guide will answer those questions and give you a breakdown of the factors influencing an annuity’s cost.
How Much Does It Cost To Purchase An Annuity?
Cost-wise, annuities are generally cheap, averaging 0% to 4% annually. This is because the insurer usually compensates the financial professional through a commission based on the dollar amount invested in each annuity contract by an individual. However, there are times when the insurance company doesn’t pay a commission to the financial professional; instead, they get paid a percentage of the premium (value of the account) as payment which is deducted periodically by the said company. This fee, generally speaking, costs 1% to 3%.
Single-Premium Annuities
A single-premium annuity is an investment made all at once. In the past, minimum investments were $5,000 or $10,000, but that has since increased to $25,000.
Flexible-Premium Annuities
With the flexible-premium annuity, the annuity is funded with a series of payments. The minimum investment is usually $5,000 or $10,000.
Immediate Annuities
The immediate annuity is available immediately, typically funded with a single payment. The minimum investment is usually $25,000 to $30,000.
Fixed Annuities
Fixed annuities and MYGAs can cost as little as $2,500 to open a contract. Interest rates can often be determined by the premium amount used to purchase the annuity. The maximum premium is typically $1 million without preapproval from the insurance company.
Fixed Index Annuities
Fixed index annuities can cost as little as $5,000 to open a contract. The maximum premium is $1 million without preapproval from the insurance company.
Long-Term Care Annuities
To open a contract, long-term care annuities can cost as little as $35,000.
What Are The Costs Of Annuities?
The costs of annuities can vary depending on the type of annuity and the provider. However, there are generally three main types of costs associated with annuities:
- Initial investment or deposit – This is the amount you must pay to purchase an annuity contract. The initial investment may be a lump sum payment or made over time through periodic payments.
- Maintenance fees are the ongoing fees charged by the annuity provider to keep your account active and cover the costs of administering the contract.
- Surrender charges – If you cash out or terminate your annuity contract early, you may be subject to surrender charges, which can be a significant percentage of your initial investment.
Annuity Purchase Guidelines
Before we discuss the fees related to owning an annuity, let’s first go over the guidelines for purchasing one.
Most often, individuals purchase annuities from insurance agents or financial advisors. They will discuss the advantages and disadvantages with you before having you fill out an application. Some fixed annuities can be bought directly online.
Different companies have set minimum and maximum dollar amounts you can put down at once when you’re looking to buy an annuity. The minimum deposit is the minimum investment needed to “purchase” the annuity. Usually, this number falls around $2,500 with some wiggle room on either side, depending on the company. On the other hand, there’s no absolute limit regarding a maximum deposit–it differs significantly based on how large (or small) the given annuity company is.
The amount of money you can deposit into an annuity account varies by company. For example, while a large corporation might have no problem with a single $1 million deposit, smaller companies may limit deposits to $500,000 or less. Additionally, some firms also place restrictions on the total value of all annuities purchased through them. Be sure to check with your carrier for their limits before making any decisions.
Annuity Fees
Even if you think you understand how annuities work, you must also learn about the fees attached. Many times, these fees are not outlined in your contract. If you’re unsure about any of the fees, ask your insurer or Contact a financial advisor before making any decisions. Again, one must understand all components and aspects related to an annuity before purchasing one.
Agent Commissions
The majority of annuity products pay agents commissions.
Insurance companies disclose the commission an agent earns in the crediting rate. Life insurance companies make this profit from selling, managing, and administering annuities. Usually, commissions comprise the total cost of buying an annuity.
As a buyer, you should confirm that the agent is not selling you an overpriced product only to get a higher commission. Fortunately, most insurance companies have safeguards to protect your interests during annuity sales.
The best interest obligation is a guideline typically used when buying a variable annuity, which means that agents have to act in the customer’s best interest. Additional tools like suitability forms (required for all annuities) review your finances and goals to ensure the product meets your requirements.
Information like your net worth and liquid assets may be requested on suitability forms.
At the insurer, a compliance officer will review suitability forms before issuing the policy. Agent commissions can differ based on the total contract value and annuity type, but they usually fall between 1% and 7%. The commission is often higher for more complex annuities.
Annual Administrative Fees
Many annuities have an annual administrative fee to help the insurance company cover its costs. This can include processing new business and maintaining systems, among other things. These fees are usually calculated in one of two ways:
- Administrative fees can be a percentage of your annuity’s total value or may be charged at a flat rate. In most instances, these charges don’t amount to more than .30% of the contract’s yearly value.
- Services and products typically have fixed administrative fees between $50 and $100 annually.
Companies usually waive administrative fees for clients who deposit more significant premiums. However, these types of fees are often charged with variable annuities.
Surrender Charges
An annuity is an insurance product that pays out income, usually monthly. Most annuities have a surrender charge period during which you must pay a fee to withdraw money from the account.
Surrender charges are a fee charged when you cash out your annuity. They typically come in the form of a percentage of the total value of the annuity, and they usually decrease each year you own the contract. So, for example, you may have to pay a 10% surrender charge in the first year, which would decrease by 1% each following year.
Surrender charges are standard, with annuities lasting from 2 to 10 years. However, some providers allow you to take out a percentage of the total value annually without penalty.
This percentage is usually between 1% – 10%. If you bought your annuity with qualified funds and have to take a required minimum distribution (RMD), this can also be withdrawn without being charged.
It is essential to check with your annuity provider to see if penalty-free withdrawals or Required Minimum Distributions are allowed. Some annuity contracts also have a market value adjustment provision (MVA).
Anytime a surrender charge is assessed, an MVA (market value adjustment) will also be looked at in your contract. This number can make the total value of your annuity go up or down, and it’s not always easy to understand. So before you buy an annuity with this kind of provision, take the time to learn how it works.
Investment Expense Ratios
You’re investing your money into stocks or mutual funds with a variable annuity. Each fund has an expense ratio – the yearly cost of managing and administering the fund.
It’s important to remember that the commission fees your agent charges are usually factored into the interest rate you’re given. Therefore, these commissions are a hidden cost along with other surcharges and account fees.
Inquiring about agent commissions and investment expenses is essential to comprehend the annuity costs comprehensively.
Mortality Expenses (M&E)
The insurance company charges a death benefit fee, simply a guarantee to pay out to your beneficiaries. The fee ranges from .50% to 1.5% of the policy value and is applied yearly for variable annuities; it does not apply to fixed fixed-indexed annuities.
Rider Costs
Annuity riders are extra features that provide guarantees, like guaranteed minimum living or death benefits. They can cost .25% – 1.00% of the account value per year, but adding more riders will increase the amount insurance companies deduct from your account each year.
Other Fees
In addition to the annual administrative fee, some annuities come with other expenses like transfer charges, management fees, distribution charges, third-party transfer charges, contract fees, and redemption fees. Also, watch out for general admin fees, which could be a percentage of your total account value (usually between 0.2% and 1%).
Always ask your insurer or financial advisor about any fees with the annuity contract you’re considering investing in.
Annuity Cost Broken Down By Product Type
In the next section, we’ll discuss annuity fees by product type. By reading this guide, you’ll learn how to pick an annuity that helps you hit your personal finance goals.
Fixed Annuity Fees
When you purchase a fixed annuity, the insurance company provides you with a fixed interest rate for a set period. This guarantees that your money will receive a specific return on investment for your chosen term length. In general, fixed annuities offer better rates than those available from bank certificates of deposit (CDs) or savings accounts. Additionally, because they have relatively few features compared to other types of annuities, fixed annuities also tend to be less expensive; costs are typically limited to commissions and surrender charges (which can be avoided if you keep your money in the contract during its surrender charge period).
Fees for fixed deferred annuities tend to be lower than those of income annuities (immediate), fixed-indexed annuities, or variable annuities.
Fixed-Indexed Annuity Fees
With a fixed-indexed annuity, you can choose how your money grows by allocating it toward specific market indexes (e.g., the S&P 500). This is a medium-risk investment with the potential for enhanced growth, as opposed to picking a conservative fixed rate.
Your earnings have the potential to grow when markets do well, but you may have little-to-no earnings if markets plunge. Indexed annuities usually don’t come with high upfront sales fees; however, they typically carry steep surrender charges or other hidden costs. In addition, insurance companies often pass along opportunity costs to investors.
If you’re considering purchasing an annuity, remember that the insurance company will make money by limiting your potential returns through fees. So ask questions about this complex financial product’s costs and other features from your agent or financial advisor before committing.
Variable Annuity Fees
Though variable annuities have both risk and volatility, they offer investors the opportunity for maximum growth. With a variable annuity, you select from among various investment options (usually mutual funds) in which to invest.
The success or failure of your investments will significantly impact the amount of money you have. In addition to commission and administration expenses, variable annuities typically have investment management fees, which can be .25% – 2.00% of the account value annually.
In addition to the standard policy fees, there is a standalone administrative fee for objects such as mailings and continuous service. This oscillates between .10%. and 30% yearly and is applied to the policy’s value.
Single-Premium Immediate Annuity (SPIA) Fees
This product is perfect for those who want to supplement their retirement income immediately.
Retirees generally purchase these products soon after retirement and promise income to help them meet their long-term financial goals.
Yearly fees for buying an immediate annuity are usually low, averaging 0-1.25%. Again, this is because the insurance company invests your deposited money.
The fees you incur depend on the investment strategies you select. Also, like other types of annuities, be sure your agent is truthful about any fees from the beginning.
What to Ask your Financial Advisor Regarding Fees
A fixed annuity, such as a multi-year guarantee annuity (MYGA), is one type of insurance policy you can purchase. When talking to your agent about this option, be sure to inquire about how commissions work and how they will affect your guaranteed crediting rate. In general, it is smarter–and can earn you more money in the long run–to bypass agents altogether and buy annuities directly from the source.
Next Steps
An annuity is a great retirement planning tool. You pay into it now, and the money grows tax-deferred. Then, when you’re ready to retire, you can start receiving monthly payments from the fund. The IRS taxes only the earnings and any pre-tax money in your premium when you receive payouts from an annuity.
When estimating an annuity’s cost, you must weigh its features’ worth. The value of an annuity comes from two key components:
- By investing your money now, you can earn a competitive, tax-deferred interest rate that will grow over time.
- The ability to create an income stream that lasts a lifetime.
Be mindful of fees when you’re looking to buy an annuity. Much like any other product, some costs come with owning an annuity. By being aware of these beforehand, it’ll be easier for you down the line once it comes time to have conversations with providers and possibly sign a contract.
Still, have more questions? Please contact a financial advisor or us. If you’re prepared to buy an annuity, we offer fixed, fixed-indexed, immediate, and MYGA annuities at The Annuity Expert, which provide guaranteed lifetime income.
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