The Best Annuity Fees and Features

January 12, 2022

Have you ever shopped for a car? Even if you aren't a car aficionado, most people are aware that fundamental safety features such as antilock brakes and airbags should be included in every vehicle.

Power windows, heat and air conditioning, comfy seats, and an audio system are all things that most of us would appreciate.

You may then further refine your search by engine and gearbox type, towing capacity, and whether you want front-wheel or rear-wheel drive. You should also think about features like Bluetooth capabilities and the ability to start the car remotely.

TL;DR: There are several factors to consider when purchasing a vehicle. This is also true in the case of annuities.

Annuity fundamentals

Annuities may be confusing and daunting for many individuals. It's like being surrounded by high-tech vehicles with everything from touchscreen dashboards to semiautonomous driving.

However, you may not feel as overwhelmed if you learn more about the car and take it for a test drive.

An annuity is a good example of this. They're not as difficult as you would think.

The majority of annuities are simple to understand. So, with that in mind, let's go through the fundamentals of annuities so you may feel more at ease with them.

An annuity is designed to protect you against the danger of outliving your income. What do you mean by that?

You'll get a guaranteed income stream in return for a one-time payment or a series of payments to an annuity business. This is often a contract between you and an insurance provider.

Annuity classification

This is when things start to get interesting. Annuities, like automobiles, are divided into many types. These are some of them:

  • With a fixed annuity, you'll get a guaranteed rate of return regardless of whether the underlying investment is fixed or variable. A fixed-rate of return is also given for the duration of the contract. With a variable annuity, the market's performance has an impact on your balance and payments. It's comparable to a personal retirement account (IRA).
  • Is accumulation (delayed) or pay-out (immediate) the main goal? To put it another way, do you want to get paid in the future or do you want your money now?
  • The payment commitment's length, amount, or lifespan. You may choose to receive payments for the rest of your life or for a certain length of time, such as 20 years.
  • Is your tax status qualified or nonqualified? The money used to buy qualifying annuities is tax-free, but the money used to buy non-qualified annuities has already been taxed.
  • Payment arrangements for the premiums. A premium is a monetary contribution to the annuity plan and firm. The investment may be made in one single payment or over time. Furthermore, after the first investment, you may continue to pay premiums.

Annuities may be classified in more than one of these categories. You might, for example, purchase a nonqualified deferred variable annuity or an instant fixed annuity.

10 annuity features you must have

Let's focus on the must-have characteristics your annuity should have now that you're less cautious about getting behind the wheel of annuities.

1. A steady source of revenue

You may receive periodic income for the remainder of your life or for a fixed length of time with an annuity. As a result, if you have a steady income source in addition to 401(k)s and Social Security, you are less likely to outlive your assets.

This is a substantial benefit in the post-pension age.

An instant annuity is a financial product that converts a one-time investment into a regular stream of payments for the remainder of the owner's life. There are three main ways to be paid:

  • The first financial commitment;
  • Profits from investments;
  • A group of investors who, according to actuarial estimates, are unlikely to live long.

This pooling enables annuity providers to guarantee a lifelong income, and it is undoubtedly annuities' most distinguishing characteristic.

2. Premium features and security

Depending on the kind of annuity, you generally have three alternatives for paying for it:

  • Both immediate and delayed annuities accept single premium payments. Single-premium annuities are often acquired using funds obtained from a retirement plan, a savings account, a life insurance policy, or the sale of a house.
  • You may choose to make recurring payments of the same premium amounts at regular intervals until the payouts commence with a delayed annuity. You may also pay a variable premium amount in installments over a certain length of time.
  • You can pick the best annuity for your financial position if you have premium alternatives. In addition, your annuity should give premium protection, which means you won't lose the money you put in.

3. The ability to postpone paying taxes on investment earnings

While many assets are taxed on a yearly basis, annuity profits, like as capital gains and investment income, are not taxed until the money is withdrawn. Annuities, like 401(k)s and IRAs, postpone taxes.

Unlike these retirement schemes, however, there are no restrictions on how much money may be invested.

Furthermore, unlike 401(k)s and IRAs, annuities have a significantly lower minimum withdrawal requirement.

4. Contributions are unrestricted

In general, regardless of your income level, there is no limit to how much money you may invest in an annuity after taxes. To put it another way, there should be no yearly restrictions on the amount of money you may put into an annuity.

This provides annuities a significant edge over contribution-limited 401(k)s and IRAs. In 2021, the maximum 401(k) contribution was $19,500, or $26,000 if you were over 50 years old. In 2022, the figure for individuals over 50 will be $27,000, while for those under 50, it will be $20,500.

In 2021 and 2022, you may put up to $6,000 in a Roth or regular IRA. The maximum for people over the age of 50 is $7,000.

5. A variety of investing alternatives are available

Many annuity firms provide a variety of investing alternatives. A fixed annuity, like a bank CD, pays a set interest rate to its investors. Due, for example, guarantees a three percent interest return on your money.

A variable annuity allows you to invest in stocks, bonds, or mutual funds. Annuity businesses have begun putting in place "floors" to restrict the amount to which investment drops from a point of growing growth.

6. Benefits upon death

Most annuities should include death benefit protection. That implies that when you die, your beneficiary will get the money you contributed, less any withdrawals you've made.

A variable annuity's death benefit is either the account value minus withdrawals, or the amount you paid in premiums. This will be the greater of the two options.

These advantages are detailed in each annuity contract. Before signing the contract, make sure you understand them completely.

7. The advantages of living

While most annuities provide a guaranteed source of income, they also provide optional principal protection advantages for a fee. These advantages, also known as living benefits, safeguard your account value and future profits from the effects of market decreases.

On certain days, several insurance companies increase the benefit amount by a certain percentage or by the contract value. For example, the highest contract anniversary value may be used to calculate a benefit. You might alternatively calculate it by multiplying your yearly purchase payments (less earlier withdrawals) by 3% every year.

  • A lifelong withdrawal benefit is guaranteed (GLWB). If the contract's value falls below zero, you'll get a refund of your purchase price (loan payments minus earlier withdrawals) in yearly withdrawals for a certain length of time or for the rest of your life.
  • Minimum income benefit that is guaranteed (GMIB). This benefit ensures a basic amount of income in the future, regardless of how the market moves.
  • A minimum accumulating benefit is guaranteed (GMAB). This benefit ensures a minimum future balance regardless of investment performance.

8. Transfers between investment alternatives are tax-free

Unlike mutual funds and other aftertax investments, annuities allow owners to modify how their assets are invested without suffering tax repercussions. If you're employing a rebalancing approach, this is very useful.

Investors rebalance their portfolios to restore their assets to the proportions that best meet their risk/reward goals.

Also, owing to the 1035 Exchange, you may switch from one annuity to another without incurring penalties. Why would you do anything like this?

If your variable annuity's performance has been inconsistent and you're nearing retirement, you might switch to a more stable fixed annuity.

9. No withdrawals are required

If your annuity is not part of an IRA or eligible retirement plan, you do not have to take required minimum distributions after 72.

10. Long-term care

Did you know that 70% of adults aged 65 and over will need long-term care? What's more alarming?

The nationwide median cost of care in a nursing home for a private room is $102,000 per year. As if that weren't awful enough, the cost of long-term care has been rising since 2004.

What are your options for dealing with this issue? Get a long-term care annuity first.

"A long-term care annuity," as explained by the guys at Fidelity, is a hybrid policy that "provides long-term care insurance at a multiple of the initial investment amount." "The investment grows tax-free at a fixed rate of return, and gains are received income tax-free if used for long-term care expenses."

They explain that if you qualify for long-term care benefits, the coverage will lower the account value as well as the long-term care pool. The insurer will give the remaining long-term care pool benefits, which is basically the insurance component of your policy, after the value of your account has been depleted.

"However, today's low-interest-rate environment has made providing annuities with long-term care coverage difficult for insurers," they write. "It's important to note, however, that these products have yet to gain significant market traction, and as a result, they may not be available through your insurance company."

Fees for a typical annuity

While the benefits outlined above might make an annuity enticing, the costs associated with them are a substantial drawback. They may be costly if you aren't aware of them. So, how much are we talking about here in terms of fees?

You may expect commissions regardless of the annuity type — typically 1 to 10% of the contract's total value. After all, the individual who sold you the annuity is responsible for feeding his or her family.

You may be able to get a no-load annuity, however. There are no commission costs since certain financial institutions and insurance firms sell them directly

Penalties and surrender fees should also be considered. If you make an early withdrawal, these are often applied.

If you're under the age of 59 12, for example, the IRS will charge you a 10% penalty. In addition, if you sell part or all of your annuity before payments begin, you will be charged a surrender fee by the annuity firm.

Aside from these generic annuity expenses, other forms of annuities will have different fees.

Annuity costs are due right away

Immediate annuities are often exempt from standard fees. However, annuity owners should be aware that if the payment is more substantial, they may have to accept a reduction in income distributions.

It's also worth noting that single premium instant annuities may have a commission attached.

Fees for deferred income annuities

There are no costs with deferred annuities, commonly known as longevity annuities. When payments are favorable to you, however, your income distribution amount is lowered.

Commissions are also included in these pensions.

Fees for annuities are fixed

Fixed Annuity fees will be calculated using lower interest rates.

Fees for fixed index annuities are fixed

If you hold a fixed index annuity, you are liable for annuity rider expenses. It is, however, your choice whether or not to include these elements in your contract.

Boosting the cap rate or increasing the death benefit are two examples. Fees of up to 1.75 percent of an account's worth are fairly unusual.

However, this varies depending on the benefit.

An example is an annuity firm that offers an optional upsell. Unlike the ordinary non-fee option, this rider increases the contract's potential upside.

However, these costs should be approached with caution. Some rides or advantages that are "built-in" may need a yearly cost. This may be true whether or not you want it to be.

Fees for variable annuities

Variable annuities are the most costly of all annuity forms. The reason for this is that variable goods are more expensive.

Doesn't it seem unjust? Variable annuities, on the other hand, are investment rather than insurance contracts.

As a consequence, if you buy a deferred variable annuity, below is a list of typical investment management costs you might anticipate to pay.

  • M&E (Mortality & Expenses): M&E is a kind of life insurance that gives death benefits to your heirs. An investing fee of up to 1.5 percent of your account's value may be assessed.
  • Administrative Fees: An annual fee of up to.30 percent of the contract value is charged to preserve ownership of your contract.
  • Investment Expense Ratio: An advisory fee will be charged on the stocks and bonds you choose for your variable annuity account, also known as a subaccount. Annually, you may anticipate to pay up to 2% of the entire value of your annuity.
  • Fees for income riders are comparable to those for index annuities. Guaranteed Lifetime Withdrawal Benefit: Fees for income riders are similar to those for index annuities. Annually, a percentage of the account value is usually levied.
  • Enhanced Death Benefit Riders: To safeguard your beneficiaries' assets, you may buy an extra estate planning rider. The fee might be considerable on an annual basis, up to.50 percent of the account balance.

The charge structure for each form of annuity is different. Thankfully, most annuity providers are upfront about the benefits of their product and how much it will cost you at first.

In other words, you won't have to worry about any "hidden fees" in your contract.

Thanks to Albert Costill at Business 2 Community whose reporting provided the original basis for this story.

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