Annuity Fees and Surrender Charges


byNikhil Bhauwala

Tue Mar 12 2024

Author @ AdvisorWorld.com Inc
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Annuities offer a simple way to plan for retirement, without the need for the annuitant to personally manage investments. After you make a few choices the insurance provider performs the routine work necessary to maintain and deliver on the contract.

An annuity contract is like most financial products that require professional maintenance. As such it comes with costs that are incurred by the annuitant. The costs represent a percentage of the annuity’s overall value.

The more complex the annuity, the more fees you can expect to incur. The total amount of these costs varies by product. They are typically deducted from the payments and cash value of the contract.

Part of the consideration that needs to be made along with how much monthly income is required and your current budget is what fees will be incurred.

Administration and Management Fees

Professional money managers will be monitoring the equities that the annuity participates in and assessing financial risks. They will be managing these equities to ensure the contract achieves its objective. These assets may include mutual funds, which carry their own fees.

Along with investment management, proper record keeping and accounting is also required to maintain compliance with regulations and provide accurate reporting to the fund manager, underwriter, auditors, and annuitants.

The administration and management fees compensate these professionals. These fees vary by provider, however they typically do not exceed 2.5% of the value of your annuity.


The agent that helped to sell the annuity contract is paid a commission by the issuing company, very much like any sales commission that financial advisors can earn. It is not uncommon for the insurance company to roll this fee into the contract rather than itemize it in a fee schedule.

These fees vary, based upon how robust and complex the annuity contract is. The more features it offers, the higher the commissions will be. For example, in a fixed index annuity that is designed to accumulate in value, returns are based on the performance of the underlying index such as the S&P.

In this type of contract, the commissions could be up to 10% of the value. A simple contract which may offer immediate payout or a fixed interest rate over a set number of years will have lower fees associated with it, as low as 1 or 2%.

Surrender Charges

An annuity contract is written based on the anticipation that it will be in force for the specified period, also known as the maturity. The premiums collected from the annuitant are invested to ensure performance of the contract and properly account for risks incurred by the insurance company during the life of the contract.

Prior to maturity withdrawals are not anticipated over and above the scheduled payment amounts. This period before maturity is known as the surrender-fee period. If you wish to withdraw from your annuity during this period, outside of the scheduled payouts, or cancel your contract you will incur a surrender charge.

How much you will be required to pay in surrender charges depends on the contract, though it is usually based on a declining fee schedule where the charges are reduced or get eliminated as the surrender-fee period expires.

Mortality and Expense Risks

As an annuity is an insurance product as opposed to a security such as shares of a company, there are risks that the insurance company is inheriting with the contract. Despite these risks, the insurer guarantees that the purchase rates and charges will not change even if your life expectancy changes. Mortality and expense risk charges compensate the insurer for assuming this risk.

These charges may not be itemized in a fee schedule, but are also part of the overall costs that are included with your contract. These fees can be up to 2% of the contract value.

Annuity Riders

An annuity contract is an insurance product and, as with any other insurance product you buy, you can add optional features and benefits. These are called riders and can range in cost depending on which annuity and riders you as the annuitant chooses.

There are various types of riders you can choose from. One of the most common is a death benefit rider. In the event you pass away, the remaining value of the annuity will be paid out to your beneficiary.

Another common rider is the guaranteed minimum withdrawal benefit. This allows the contract owner to withdraw a certain amount each year without having to pay any penalties. This type of rider can be beneficial to account for unexpected emergencies or expenses that may arise.

There are other types of riders available as well that can be considered based on your circumstances and requirements. One type of rider is a guaranteed minimum accumulation benefit, which can provide protection against changes in market conditions. Another type is an enhanced earnings benefit, which helps offset taxes on earnings that are payable should you pass away.

It is worthwhile to ask your advisor what riders are available to you. The benefits they can provide in the long run are worth considering. The additional costs of these riders can range anywhere up to 2% of the value of annuity.

Other Fees

When you purchase an annuity contract, there is a premium you will be required to pay. This premium depends on the value and type of annuity. Every insurance company will set its own initial premium requirements.

There are other fees that you might also need to pay, depending on the type of annuity you choose. The insurance company might incur taxes when selling the contract so they may offset that expense with a premium tax. There may also be other costs such as transfer fees if you decide to sell your annuity to someone else or distribution fees when you receive payouts.

Bottom Line

It is important and helpful for the annuitant to understand the upfront and ongoing costs they will incur during the life of the contract. It is also beneficial to investigate how costs vary from one type of annuity to another. Once you take the costs into consideration you will be better able to decide on which type of annuity best meets your retirement goals and current budget.

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