How Annuity Fees and Commissions Work
Annuities offer a way to guarantee income in retirement, creating periodic payments that can last the rest of your life. But, as a complex financial product, they can be expensive to set up and maintain. Depending on the type, annuities can contain numerous fees and commissions that buyers should be aware of. These can range from standard administrative fees to surrender charges.
- Written by Christian Simmons
Christian Simmons is a writer for RetireGuide and a member of the Association for Financial Counseling & Planning Education (AFCPE®). He covers Medicare and important retirement topics. Christian is a former winner of a Florida Society of News Editors journalism contest and has written professionally since 2016.Read More
- Edited ByLamia Chowdhury
Lamia Chowdhury is a financial content editor for RetireGuide and has over three years of marketing experience in the finance industry. She has written copy for both digital and print pieces ranging from blogs, radio scripts and search ads to billboards, brochures, mailers and more.Read More
- Financially Reviewed ByToby Walters, CFA®
Toby Walters, CFA®
Chartered Financial Analyst and Paraplanner
Toby Walters, CFA®, has over 25 years of financial research experience. With a knowledge and understanding of researching and analyzing financial data, he has developed a unique and experienced viewpoint on money matters. He has been a chartered financial analyst since 2003, and most recently a portfolio analyst and paraplanner.Read More
- Published: March 16, 2023
- Updated: April 26, 2023
- 9 min read time
- This page features 4 Cited Research Articles
- Edited By
Annuities offer a way to guarantee income in retirement and help ensure that you never have to worry about outliving your savings. When you buy an annuity, you typically invest into it either over time or in a lump sum.
That money is then annuitized, meaning it is converted into a stream of periodic payments that can last through your retirement.
Annuities contain obvious benefits for seniors, offering lifelong security that is not always guaranteed by other traditional retirement strategies.
But due to the complexity of annuities and the fact that they are products sold by private companies, they can come with many fees, commissions and expenses.
As a general rule, the more complex the structure of the annuity, the higher the fees and expenses. Your free look period of a week to 10 days is a great opportunity to review the expenses and commissions of an annuity you plan to purchase. Of the various charges, commissions may be the most difficult to determine since they may be included as part of the purchase price.
Types of Annuity Fees
Buyers should be aware of several different types of annuity fees. These fees differ in how much they may cost you, when they take effect and by the type of annuity that you opt to purchase.
- Administrative Fees
- Surrender Fees
- Mortality and Expense Fees
It’s important to remember that the type and amount of fees can also vary based on the company that is selling it. Not all costs are uniform.
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One of the most common fees for buyers to be aware of when considering an annuity are administrative fees.
These are essentially general fees that come with maintaining the annuity, and they are often owed on a yearly basis.
Administrative fees generally are not overly expensive but are something to keep an eye on when comparing annuities and understanding what costs you will incur after the annuity has been purchased.
Mortality and Expense Fees
Mortality and expense fees are not automatically a part of every type of annuity, but they are something that potential buyers should be cognizant of.
According to the U.S. Securities and Exchange Commission, mortality and expense fees are a compensatory fee that is made to the annuity provider in exchange for taking on the risk of selling the product to you.
Those risks include if you unexpectedly die after purchasing the annuity, for example. The mortality and expense fees can vary by contract and type of annuity but are typically in the range of 1.25% per year.
Unlike some other common fees, surrender fees are not automatically owed — or even owed regularly — by the annuity buyer.
These fees are charges that you face if you go outside the set rules of your annuity contract and withdraw money when you are not supposed to.
This can include taking out more money from the annuity than you are supposed to or withdrawing money earlier than you were allowed to.
Surrender fees vary heavily by contract, but they can be significant. According to Insurance Information Institute, initial surrender charges can be as high as 7%. But that number can drop over time.
Surrender fees are typically highest immediately after the contract becomes active and can steadily decrease over the years from there.
So, a surrender fee several years after an annuity was purchased may not be as steep as if you attempted to make a withdrawal very early into the contract.
Like other financial products and services, commissions are a common feature of annuities.
Typically, the provider employee or agent who helped you purchase the annuity will receive a commission for doing so. But one difference to note is that the commission is often baked directly into the purchasing price or fees of the annuity, so it may not be readily clear as a separate charge.
The exact commission also varies by the type of annuity and provider selling it. According to an article from Investor Lawyers, commissions in some cases can be as high as 10%.
Comparing Annuity Fees and Commissions
Comparing annuity fees and commissions is an important step to finding the right annuity to purchase and determining whether the investment makes sense for you.
Part of successfully comparing fees is understanding the factors that impact them. Different providers will have different fees, which can make it important to compare not just types of annuities but the companies selling them, too.
For example, the same style of annuity may have very different fees between two providers.
But the type of annuity does matter as well. Simpler products with more straightforward features may generally include lower fees and commissions.
On the flip side, complex annuities with add-ons and riders can easily have much higher fees.
The easiest way to minimize the fees and commissions you may owe is to compare products to help ensure you are selecting the option that makes the most sense for your situation.
How Are Commissions for Annuities Calculated?
There is not necessarily a set formula for calculating the commission that will be owed on an annuity. Different providers will have different set commissions.
The commission owed will vary by the type of annuity as well.
Generally, you may expect to pay a higher commission on a more complex product, especially one that took a lot of time to refine, modify and fit to your liking.
In contrast, purchasing a more simplistic and ready-made product may result in a lower commission.
Since commissions can be included directly with other annuity purchasing fees, it can be important to be aware of what the commission will be and how it compares to other fees.
Can Annuity Fees and Commissions Change Over Time?
Whether the fees and commissions connected to your annuity will change over time does depend on the annuity and who is selling it.
There are one-time fees that should not repeat and likely will not change, including up-front or purchasing fees.
Many other fees are charged annually and as a percentage, meaning that their value can change with the value of the annuity.
According to the Wisconsin Office of the Commissioner of Insurance, some annuity charges are fixed, but a provider may be able to change others over time.
This will also depend on whether you opted for a front-loaded or back-loaded contract. Some annuity contracts require the fees to be paid at the start of the contract, while others save this step for later in the lifetime of the annuity.
High Commissions vs. Low Commission Annuities
It’s important to remember that commissions are not standardized or set in stone, meaning that you will see different options depending on the type of annuity and the provider.
If you are looking for a low-commission annuity, then it may make sense to stick to the simpler options. Think something like a straightforward fixed annuity that is not an overly complex financial product and can be readily available for purchase.
On the other hand, it’s important to be aware of the types of annuities that can come with a high commission. These can include more unwieldy and diverse products like variable annuities or those that have had multiple riders attached to them.
The more complex the annuity becomes and the more work that goes into setting it up, the more risk you run of facing a high commission.
How Does the NAIC Protect Annuity Buyers?
If you are interested in purchasing an annuity, there are risks to be aware of. This includes the fact that annuities are not FDIC insured, so it is critical to select a reputable provider.
The National Association of Insurance Commissioners (NAIC) can help consumers make the right choice.
The NAIC monitors the industry and helps protect the public by providing accurate and up-to-date information on insurance providers and the market.
It can be a strong resource and includes useful info on who the top insurers are and where you can safely purchase an annuity.
Annuity Fees and Commissions FAQs
4 Cited Research Articles
- Wisconsin Office of the Commissioner of Insurance. (2018, February). Consumer’s Guide to Understanding Annuities. Retrieved from https://oci.wi.gov/Documents/Consumers/PI-214.pdf
- Insurance Information Institute. (n.d.). What Are Surrender Fees? Retrieved from https://www.iii.org/article/what-are-surrender-fees
- Investor Lawyers. (n.d.). How Investors Got Into Trouble with Annuities. Retrieved from https://www.investorlawyers.com/how-investors-got-into-trouble-with-annuities.html
- U.S. Securities and Exchange Commission. (n.d.). Variable Annuities. Retrieved from https://www.sec.gov/investor/pubs/sec-guide-to-variable-annuities.pdf
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