Most annuity issuers impose various fees and charges for the insurance benefits and administration of an annuity. These fees may seem small, but they can add up over time. Indeed, if two different companies offer similar products, the fees being charged should be one of the overriding considerations in your decision-making process.
Because variable annuities are comprised of more components than fixed annuities, they tend to have higher fees. However, there are some charges associated with fixed annuities.
Variable Annuities
You will typically pay an annual maintenance charge for variable annuities, usually not over $50. This charge may be waived once the value of your annuity exceeds a certain amount (e.g., $25,000).
Another common expense is the investment management fee. This fee allows the issuer to pay an investment management group to manage the subaccount investments. The investment management fee is typically a percentage of the value of your annuity, usually between .25 and 1 percent.
The mortality risk and expense charge (M&E charge) is imposed to protect insurance companies against the risk that you will live longer than projected or that their expenses will be greater than expected. The annual M&E charge typically ranges from 1 to 1.5 percent of the value of your annuity.
Companies also often reserve the right to charge a transfer fee for switching funds within the variable annuity portfolios. A fee may be charged if you exceed a certain number of transfers each year.
Most annuities charge a fee for full or partial surrenders that occur within a certain period of time after you purchase the annuity. Surrender charges are usually applicable during the first 5 to 10 years of the annuity contract. Surrender charges vary from one issuer to the next, but they typically begin at 7 percent and are reduced by 1 percent each year you own the policy.
If you withdraw funds (or receive funds by surrendering the policy) before age 59½, the portion of the funds that represents earnings may be subject to a 10 percent early withdrawal penalty tax in addition to any income tax due. This penalty is levied by the IRS, not by the annuity issuer.
Note: Variable annuities are long-term investments suitable for retirement funding and are subject to market fluctuations and investment risk, including the possibility of loss of principal. Variable annuities are sold by prospectus, which contains information about the variable annuity, including a description of applicable fees and charges. These include, but are not limited to, mortality and expense risk charges, administrative fees, and charges for optional benefits and riders. The prospectus can be obtained from the insurance company offering the variable annuity or from your financial professional. Read it carefully before you invest.
Fixed Annuities
Fixed annuities typically charge very few explicit fees other than an annual maintenance charge. The insurance company makes its profit on the difference between what it earns on the money you invest and the interest it credits to your annuity. Fixed annuities are subject to surrender fees, which are similar to the surrender fees associated with variable annuities. Surrenders and withdrawals before age 59½ are also subject to the 10 percent early withdrawal penalty tax.
If you have questions or need assistance, contact the Experts at Henssler Financial:experts@henssler.com or 770-429-9166.
Disclosures
The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
