Paying for annuity guarantees

Normally, when you invest, the higher your potential for gain, the higher your risk of loss. What makes variable annuities attractive to some investors is that they typically offer some guarantees mitigating that risk, for a cost.

Most common is the death benefit, which allows you to name a beneficiary who would receive the entire value of your premiums, or payments, or some other minimum in case you die before you begin to receive income from the annuity. Some contracts also offer a stepped-up death benefit, which periodically sets the value of your account permanently above a certain threshold.

And some contracts give you the option of other guarantees, such as a guaranteed minimum annuity payment no matter how poorly the underlying investments perform.

	Lower fees Some annuity providers offer less costly contracts than their competitors. If you're considering a variable annuity, expense is one of the factors you want to consider, along with the contract's investment alternatives and the claims-paying ability of the issuer.

If you're a risk-averse investor, these guarantees may offer a way to enjoy the benefits of strong investment performance without being hurt if the market falls. But the more you pay for insurance and other features, the less money you'll actually invest. In other words, by limiting your downside, you limit your upside, too. That's why it's important to spend money only on features that you think you'll need, and to examine whether you can get equal benefits at lower cost in other products.

Adding up the costs
Commissions and surrender fees aren't the only costs of owning a deferred variable annuity. You'll also pay administrative charges, mortality and expense charges to cover the death benefit, and other annual fees, including those for investment management, which are deducted from the value of your account. Together these annual fees average about one percentage point higher than the fees you pay to own mutual funds making similar investments.

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