Although you buy them as a source of retirement income, all annuities are insurance company products and part of what you’re paying for is the insurance that a contract provides.
With a fixed deferred annuity, a minimum rate of return is insured, as well as the option of lifetime income if you annuitize. With an immediate fixed contract, your lifetime income is insured.
With a variable annuity, there’s insurance to cover:
The guaranteed
death benefit
Fixed
annual fees for the life of the contract
The option
of lifetime income if you choose to annuitize
A guarantee
of minimum annuity purchase rate
Together these
charges are known as mortality and expense (M&E)
fees. They typically amount to 1% to 1.5% of the total
value of your annuity each year.
You’ll also pay an annual administrative
fee to cover the cost of managing your annuity investments,
usually a fixed amount in the $30 to $50 range, and management
fees figured annually as a percentage of your account
balance. With some annuities, these asset-based fees
may be up to 1.5% higher than equivalent mutual fund
management fees.
However, if you choose a fixed account
as one of your investments within the account, the fee
is paid from the account’s interest margin. That’s
the difference between the interest the annuity company
is earning on its investments and the interest it is
paying you.
Changes Coming?
Variable annuity issuers may consider eliminating the guaranteed death benefit because it increases the cost of insuring annuities. Since the cost is passed on to the buyers, it may add more expense than they’re willing to bear. However, many people consider the death benefit a major attraction of annuities, so the effect of such a change is hard to predict.
