Annuity Fees: What To Expect

Hey, Stan The Annuity Man, America's annuity agent, licensed in all 50 states. Today, we're going to talk about annuity fees. Who else in the world is going to speak about annuity fees but me, Stan The Annuity Man.

The reason you need to know that is you need to know what you're buying. These are contracts, and all annuities have either a built-in fee, or the agent's getting paid a fee, or there's an annual fee, or there's a rider fee. I mean, annuity companies have the big buildings for a reason. They don't give anything away. They have the big logos on the plane for a reason. They charge fees.

Let's go over the fees in detail and have some fun with it so that you understand what you're buying before you buy it.

Commissions

You would be sick not to know about annuity fees, right? So, let's talk about fees on products. Now, first of all, let's get the gorilla in the room into the room. And the gorilla is commissions. That's a fee. Now, with all annuities, the commissions are built into the policy regardless of type. If any agent says to you the following, "Well, there are no commissions paid on this." They're lying. There are commissions paid. They're built into the policy. One thing you have to understand, which is easy, is that the contract is easier to understand; the simpler the contract is, the less moving parts the contract has, the lower the commission. The more complicated, the more convoluted the policy is; if you need help understanding it, there's a high commission to it. The other thing about commissions, like Deferred Income Annuities, is that the longer the surrender charge period, the higher the commission.

Annuity Types

There are agents out there that sell 10 years or more Deferred Annuities. Why? Because they pay the highest commission. That doesn't mean you need one, but you have to understand, all commissions are built into the policy. So, simplistic annuities, like Single Premium Immediate Annuities, Deferred Income Annuities, Qualified Longevity Annuity Contracts, and Multi-Year Guarantee Annuities, are very simple products. There are no moving parts; there are no annual fees. It's a straight transfer of risk. Yes, the annuity company's making money. They take your money in, invest it in investment-grade bonds, and then pay it back over a lifetime. And they do that with millions and millions of people.

It's a good business because annuity companies know when we're going to die. People always say, "Well, you always say annuity companies have the big buildings for a reason. Why is that?" Well, life insurance companies who issue annuities know when we're going to die. That's what actuaries do. The reason that the property and casualty companies are always going out of business is they don't know when the hurricane's going to hit. They don't know when the tornado's going to hit. I live in Florida some of the time, near the beach, and when hurricanes come in, you see these companies having some serious issues that do property and casualty. So, that's how that works.

Let's keep digging into the commission part because, with annuities, that's a lot of the fees. So, there are no moving parts on Immediate Annuities, Qualified Longevity, Annuity Contracts, Deferred Income Annuities, or Multi-Year Guarantee Annuities. Those have no annual fees. You're not going to see fees taken out. The annuity agent, whoever sells it to you, the advisor, they do get paid. It's typically an upfront amount that comes out of the annuity company reserve, so it doesn't come out of your amount, that commission. If you put in $100,000 in any type of annuity on your statement, you'll see $100,000, but you have to understand that that annuity agent did get paid.

Fixed Index Annuities

Now, Fixed Index Annuities are a little different. Those are the go-go products. Everyone's trying to sell it and they over-hype it and over-pitch it as a market product. It's not. It's a CD-type product, which is good. It's a Fixed Annuity and a life insurance product. It is not a security. But when you buy an Index Annuity and don't attach any type of rider or attached benefit, there are no annual fees. You're not going to get charged an annual fee. Did the annuity agent make a commission? Yes, just like I explained previously, but let's talk about when Index Annuities do have fees.

When you attach an Income Rider, an attached benefit to a policy, you can only use it for income, and it guarantees a lifetime income stream. I have written a book on that; you can download it for free. However, Income Riders are attached benefits that pay you for the rest of your life, and you can choose when that income will start.

But let's visualize this. Draw a line down the blank sheet of paper. One side is the accumulation value side. The other side is the Income Rider. Typically, Income Riders have a fee for the policy's life. Now, the fee does not come from the Income Rider's side. It comes from the accumulation side, that index call option. So, let's say the average is anywhere from a half of 1% to 1%, but let's just say, just for poops and giggles, as they say, a 1% annual fee comes out of the accumulation value for an Index Annuity when you attach an Income Rider.

Now, if you're looking for a future lifetime income stream and trying to quote the highest contractual guarantees for that, and an Income Rider wins, that's great. The fee doesn't come from the Income Rider side but from the accumulation value side. Understand this, which is what people don't tell you with the majority of Income Riders, that 1% fee grows.

Example

Let me give you an example. You have an Income Rider that increases contractually by 7.2% every single year. Now, that's not yield. That's not Jimmy Carter's yield; you can't take out the money, peel off the interest, transfer it, or cash it in, but it's going to grow by that amount you can use for income. Let's say you put $100,000 in, the fee is 1%, and it grows every year by 7.2%, which you can only use for income, and you get to year 10. What happens? The fee's actually increased. It's doubled. It's gone from one to 2%. So, it's growing every year, that 1%, by 7.2%.

The reason I use 7.2 is the rule of 72. Every 10 years, it doubles. But in this case, the 1%, you turn on income at 10 years, and when you lock that in, then the fee is 2% of that amount. In other words, it increases. That's not with all riders, that's with some, but a lot of them have that. You have to be conscious of the fees involved with riders.

Riders can be attached to Variable Annuities as well. But with Index Annuities, which is the go-go product, you might want to ask the agent, "Hey, what's the fee on the rider?" And we sell more riders than anybody on the planet. But the point is, we always say, "Hey, there's a fee coming out of that. It's coming out of the accumulation value." It doesn't matter if you're only buying the contractual guarantee, but that fee is for the life of the policy.

Surrender Chargers

Last thing about fees, I know this has been riveting, but one of the fees is the surrender charges. When you buy a Deferred Annuity, like a Multi-Year Guarantee Annuity, a Variable Annuity, or a Fixed Index Annuity, there's a specific term that you lock them in. Variable Annuities do have some no loads, but that's not what we're talking about. We're talking about the load annuities that pay commissions to agents. Typically, there's a specific period of time that has a surrender charge time period. Now, that is a fee. If you hold it for that term, they don't charge you that, but if you come out of that annuity, they will charge you a surrender charge if it's within that specific timeframe.

I'll give you an example. If you bought a ten-year Indexed Annuity, and you got out and said, "Send me the money in year six, there's going to be a surrender charge, which is, in essence, a fee to get out of that. If you held it to year 11 and you said, "Hey, Stan, send me the money," there's no fee. Why? Because you've gone past that surrender charge period.

So, I've covered a lot with this fee stuff, but you need to understand that if you work with us at The Annuity Man, we'll be transparent about that and tell you what those fees are so you can make an informed decision. And with that, I'll see you on the following Stan The Annuity Man blog.

Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.