What is it?
For the most part, annuities will impose various administrative charges and fees. At first, the expense may seem minimal. However, over time, the cumulative effect of the charges and fees can be substantial. These expenses typically arise when dealing with variable annuities. However, fixed annuity contracts may also assess fees in the form of surrender charges.
Fixed annuities
Fixed annuities usually do not impose express charges and fees (except for surrender charges). Because there are fewer fees involved with fixed annuities, it may seem that it is the cheaper alternative to the variable annuity. However, this may not always be the case, because a fixed annuity will usually contain implicit charges that are reflected in the interest rates in the underlying contract. These implicit charges arise when the insurance company sets the interest rate that it promises to pay at a lower rate than the rate it expects to earn on its investments (sometimes, the difference is called the spread). This spread allows the insurance company to make sure that it will recover its administrative costs.
Variable annuities
Annual maintenance charge
The annual maintenance charges for variable annuities may typically range from $0 to $100. These charges are usually deducted from the various investment accounts in which the annuity holder has placed his or her funds.
Investment management fees
Investment management fees pay for an investment management group that advises the insurance company on which investments to buy and sell. Investment management fees for variable annuities may range from 0.25 percent to 0.75 percent. While a variable annuity account can be charged a flat percentage rate, some variable annuity contracts will call for each type of fund to incur a different percentage cost.
Mortality and expense risk charge (M & E charge)
The mortality and expense risk charge (M & E charge) is imposed by insurance companies to protect against risk associated with the annuity contract (e.g., an annuitized contract paying out income longer than mortality tables projected the life expectancy of the annuitant). Generally, the M & E charge ranges between 1 percent and 1.5 percent of the value of the variable annuity account. The M & E charge is deducted proportionately from the variable accounts, similar to the annual maintenance charge (discussed previously).
Transfer fee
Some variable annuities will charge a fee for the transfer of funds between investment accounts. These charges can range anywhere between $0 and $15 per transfer. Some annuity contracts will allow a certain number of transfers per year without charge, assessing a charge for any transfers over the permitted number.
Surrender charge
Most annuity contracts will assess a charge for partial and full surrenders from the contract during a certain time period after the annuity is purchased (usually 5 to 10 years). This charge is often referred to as the surrender charge and can have a wide range that decreases over time. Depending on the annuity contract, the surrender charge percentage will be applied either to the full amount surrendered or the portion of the withdrawal that exceeds the earnings of the contract. Some annuity contracts allow some withdrawals without a surrender charge (e.g., 10 percent of the contract value or the contract earnings). The surrender charge is intended to prevent annuity owners from moving funds in and out of the annuity and allows the insurance company to recoup its losses if the contract does not remain in force for a lengthy time period.
Miscellaneous fees
Variable annuities might also levy charges for administrative expenses, such as record maintenance, accounting, and reporting. In addition, a variable annuity may charge extra for certain guarantees to be written into the annuity contract. Finally, several states levy a state premium tax on annuity premiums. The tax is generally a percentage of the gross premium paid and it is generally deducted prior to the computation of sales charges. Some insurance companies choose to add the cost of the tax into the price of the premium, rather than levy a direct tax.
In conclusion, understanding the expenses associated with annuities is crucial for making informed financial decisions. Each component can significantly impact your returns over time, whether it’s administrative charges, investment management fees, or surrender charges. At Scarlet Oak Financial Services, we specialize in guiding individuals through the complexities of annuities and other financial instruments. Contact us today to gain clarity on your annuity expenses and take proactive steps toward securing your financial future. Scarlet Oak Financial Services can be reached at 800.871.1219 or contact us here. Click here to sign up for our newsletter with the latest economic news.
Source:
Broadridge Investor Communication Solutions, Inc. prepared this material for use by Scarlet Oak Financial Services.
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on individual circumstances. Scarlet Oak Financial Services provide these materials for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
