How Much Does an Annuity Cost?

Adding an annuity to your retirement plan could make sense if you’re looking for a guaranteed stream of income. However, the fees associated with one can be difficult to decode if you’re not an insurance or investing expert. Here’s what you need to know about the costs of different types of annuities, so you can make an informed decision about which one is right for you.

Consider working with a financial advisor as you plan for your retirement.

Annuity Fees: What You Can Expect

When you buy an annuity, you’re buying a contract with an insurance company. The basic premise of the contract is that you pay money to the insurer, which then pays the money back to you in the form of an annuity. Generally speaking, annuities can charge the following kinds of fees:

Administrative fees: These are fees you pay the insurance company to maintain your annuity contract.
Underlying investment fees: You’ll also pay a separate management fee for each investment included in your annuity.
Add-on/rider fees: Add-on and rider fees may be charged if you add something onto your annuity contract that isn’t considered a standard feature, such as an upgraded death benefit.
Contingent deferred sales charge fees: This is a fee you might have to pay if you decide to end your annuity contract early.
Mortality and expense risk charge fee: Because an annuity contract involves a certain amount of risk for the insurance company, this fee is designed to cover it.

There may also be additional miscellaneous fees you might pay. For example, the insurance company might charge a separate underwriting fee to establish the contract, or the agent who sells you the contract may earn a commission fee.

The fees listed above are an overview of what you might pay and are not specific to any one type of annuity. Once you start looking at individual annuity products, you might encounter additional fees.

Fixed Annuity Fees

how much does an annuity cost A fixed annuity allows the money you have spent to grow on a tax-deferred basis. The insurance company guarantees that you’ll receive payments from the annuity at a fixed rate of return. This type of annuity is typically considered to carry the lowest risk, since you know upfront how much interest your money will earn over time. Fixed annuities are also the least complicated type of annuity structure, so they tend to have the fewest fees. There are two types of fixed annuities to keep in mind when comparing associated fees:

Fixed deferred annuity fees

Fixed deferred annuities allow you to begin receiving your annuity payments at a later date. Again, the interest rate you earn is guaranteed. This rate reflects what you earn after basic annuity expenses, like the ones listed above, are deducted. In terms of additional fees, you may pay a surrender charge if you decide to cash out some or all of your annuity early. The amount you’ll pay depends on how the contract is structured.

Some fixed deferred annuities, for example, might charge one flat surrender-charge rate while others tier the rate, charging a lower fee for each additional year that you keep the annuity. With a tiered rate, you might pay 7% during the first year of the surrender period, 6% the second year and so on until the surrender charge reaches zero.

Fixed indexed annuity fees

With a fixed indexed annuity, your rate of return is based on how well the investments in the contract perform. Those investments are linked to a stock market index, such as the S&P 500. It’s common for indexed annuities to cap the percentage of returns you can earn.

This type of fixed annuity may not have an upfront commission charge, but there is another cost to consider: The spread, or margin fee, allows the insurance company to manage the balance between risk and return. This fee, represented as a percentage, can be subtracted from gains associated with the market index your annuity is linked to. So if your annuity’s index realizes a 10% gain and the spread or margin fee is 3%, the annuity would have a net gain of 7%.

Variable Annuity Fees

Variable annuities can also be used to bolster retirement income, but they differ from fixed annuities in one key way. With this type of contract, the underlying investments still earn interest, but the rate of return is not guaranteed. The only thing you can count on receiving from the annuity is the initial amount of principal you invested. For that reason, variable annuities tend to be higher risk compared to fixed annuities, but there’s also the potential for greater returns.

A variable annuity can also end up being more expensive because the insurance company has to compensate for the higher degree of risk it’s taking on. That means you may see higher charges across the board for commission fees, the mortality and expense-risk fee and add-ons such as a living-benefit rider or an enhanced-death benefit rider.

Another important cost to pay attention to is the expense ratio of the funds the annuity is invested in. The expense ratio represents the annual cost of owning a fund, expressed as a percentage of the fund’s assets. The higher the fee, the more expensive it is to own. Let’s say, for example, a variable annuity with a fund has an expense ratio of 2%. Here, it’s crucial to consider the potential return on your investment, since it’s possible to purchase funds outside of an annuity with much lower expense ratios.

Other Annuity Types and Fees

Fixed and variable annuities are typically the most common contracts, but there are other specialized annuities you can buy. A long-term care annuity, for example, is designed to help pay for the costs of long-term care so you don’t have to spend money from other assets. For some people, this can be more affordable than purchasing long-term care insurance. These types of annuities might come with lower fees, but they will probably also offer a lower rate of return compared to other annuity options.

Single premium and flexible premium annuities are two more possibilities. With the former, you pay one lump sum upfront to fund the annuity contract. Flexible premium annuities, on the other hand, allow you to make a series of payments over time.

With a single premium annuity, there may be no maintenance or management fees if the payments from the annuity begin immediately. Flexible premium annuities are typically deferred, meaning your payments begin some time in the future. Depending on which company you purchase the annuity from, you may be able to avoid paying surrender charges with a flexible premium option.

How to Reduce Fee Costs for Annuities

It’s important to understand what you can do to reduce fees when buying an annuity. Some annuity providers offer fee reductions when your investment reaches certain thresholds. These “breakpoints” can substantially lower your ongoing expenses. Ask potential providers if they offer tiered fee structures and calculate how these might benefit you over time.

Cutting out the middleman can lead to significant savings. Many insurance companies now offer direct-sold annuities with lower expense ratios and no sales commissions. While you’ll need to do more research independently, the fee savings can be substantial.

Longer surrender periods typically come with lower fees or higher initial bonuses. If you’re certain you won’t need access to your funds for several years, negotiating a longer surrender period might reduce your overall costs. Just be sure you understand the implications of tying up your money for an extended period.

Optional riders like guaranteed minimum income benefits or death benefits can add 0.5-1.5% to annual fees. While these features provide valuable protections, they significantly increase costs. Carefully evaluate whether each rider truly addresses a need in your financial plan before adding it to your annuity contract.

Bottom Line

how much does an annuity cost Before purchasing an annuity, carefully evaluate whether the benefits—guaranteed income, tax advantages and potential growth — outweigh the costs for your specific situation. Working with a trusted financial advisor can help you navigate these complexities and determine if an annuity aligns with your retirement strategy. By thoroughly understanding how much an annuity costs and what you’re getting in return, you can make an informed decision that supports your long-term financial security and peace of mind.

Retirement Planning Tips

A financial advisor can help you weigh the pros and cons of an annuity. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
When researching annuities, look beyond the cost of the contract and consider the quality of the company issuing the annuity. One of the biggest risks associated with annuities is the possibility that the insurance company experiences financial issues and won’t be able to make annuity payments as agreed. For that reason, it’s important to make sure the insurance company you work with is reputable and financially sound.