How Much Does an Annuity Cost?

Adding an annuity to your retirement plan can provide a guaranteed stream of income. However, its fees can be difficult to decode without an insurance or investing expert. This is what you need to know about the costs of different annuities, so you can make an informed decision about the best one for you.

Consider working with a financial advisor for help planning for retirement.

Annuity Fees: What You Can Expect

When you buy an annuity, you buy a contract with an insurance company. You pay the insurer, which then pays you back through an annuity.

Annuities generally charge these 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 apply to additions that are not standard features, such as an upgraded death benefit.
• Contingent deferred sales charge fees. This is a fee you might have to pay if you decide to get out of your annuity contract early.
• Mortality and expense risk charge fee. Because an annuity contract involves some risk for the insurance company, this fee helps 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. The agent who sells you the contract may also charge a commission.

These fees are simply an overview of what you might pay. They are not specific to any one type of annuity. Once you begin looking at individual annuity products, you may encounter additional fees.

Fixed Annuity Fees

A fixed annuity allows your funds to grow on a tax-deferred basis.

The insurance company guarantees payments at a fixed rate of return. Because of this guarantee, a fixed annuity typically carries the lowest risk. This is because you know upfront how much interest your money will earn over time. 

Fixed annuities are also the least complex type of annuity structure. Therefore, they tend to have the fewest fees.

There are two types of fixed annuities to consider when comparing associated fees: fixed deferred annuities and fixed indexed annuities.

Fixed Deferred Annuity Fees

Fixed deferred annuities allow you to begin receiving your annuity payments at a later date.

The annuity guarantees your interest rate and reflects your earnings after deducting basic annuity expenses. You may also pay a surrender charge if you decide to cash out some or all of your annuity early. The amount you pay depends on the contract’s structure.

Some fixed deferred annuities, for example, may charge a single flat surrender charge. Others may tier the rate, charging a lower fee for each additional year that you keep the annuity. With a tiered rate, you may 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. These investments are linked to a stock market index, such as the S&P 500. However, it’s common for indexed annuities to cap the percentage of returns you can earn.

Although this type of fixed annuity has no upfront commission, don’t forget the spread, or margin fee. This allows the insurance company to manage the balance between risk and return.

This fee, expressed as a percentage, can be deducted from gains on your annuity’s market index. So, say your annuity’s index realizes a 10% gain and the spread or margin fee is 3%. The annuity will have a 7% net gain.

Variable Annuity Fees

Variable annuities can also be used to bolster retirement income. However, they differ from fixed annuities in one key way: their guarantee.

The underlying investments still earn interest, but there is no guarantee for the rate of return. The only thing you can count on is the initial principal.

For that reason, variable annuities tend to be riskier than fixed annuities. However, there’s also the potential for greater returns.

A variable annuity can also be more expensive because the insurance company compensates for the higher risk it assumes. Therefore, you may see higher charges for commission fees, mortality and expense risk fees and add-ons, such as a living benefit rider or an enhanced death benefit rider.

Another important cost to consider is the annuity’s expense ratio. 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.

For example, a variable annuity with a fund has a 2% expense ratio. Here, it’s crucial to consider the potential return on investment, since you can 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.

• Long-term care annuity. A long-term care annuity helps pay for long-term care costs so you don’t have to access other assets. This can be more affordable than long-term care insurance due to its lower fees. However, it will likely offer a lower rate of return than other annuity options.
• Single premium annuity. A single premium annuity uses one lump sum upfront to fund the annuity contract. There may be no maintenance or management fees if annuity payments begin immediately.
• Flexible premium annuities. Flexible premium annuities allow you to make a series of payments over time. They are typically deferred, meaning your payments begin at some point in the future.

Depending on which company you purchase from, you may be able to avoid surrender charges with a flexible premium option.

How to Reduce Fee Costs for Annuities

It’s important to understand how you can 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 this requires more independent research, 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 your funds for several years, negotiating a longer surrender period may reduce overall costs. Just be sure you understand the implications of tying up your money for an extended period.

Optional riders, such as guaranteed minimum income benefits or death benefits, can add 0.5% to 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.

What Annuity Fees Actually Cost You Over Time

Individual annuity fees can look reasonable in isolation. A 1.25% mortality and expense charge, a 0.15% administrative fee, a 0.75% fund expense ratio and a 1% rider for a guaranteed income benefit each seem modest on their own.

But those fees stack. In this example, the total annual cost is 3.15% of your account balance, deducted every year for the life of the contract. Understanding any single fee matters less than understanding what you’re paying in total.

The compounding effect of those combined fees is where the real cost becomes clear. On a $300,000 variable annuity earning a gross return of 7% annually, a total fee load of 3.15% leaves a 3.85% net return. After 20 years, your account would grow to roughly $639,000. The same $300,000 invested at the same gross return but with a total fee of 0.50%, which is typical for a low-cost index fund, would reach approximately $1,097,000.

That’s a difference of over $450,000, and it’s entirely due to fees. The guaranteed income rider may be worth something to you, but you should know exactly what you’re paying for it.

Comparing Annuity Fees

Finding the total fee in an annuity contract is harder than it should be.

Unlike a mutual fund prospectus, which lists the expense ratio in a standardized format, annuity contracts spread fee disclosures across multiple sections. The mortality and expense charge may appear in one part of the document and the fund expenses in another. Meanwhile, rider fees may be in a separate schedule.

No single line in the contract shows the total annual cost. You must add up the numbers from each section yourself, which is one reason many buyers underestimate what they’re paying.

When comparing annuity products, ask your advisor for the total annual cost expressed as a single percentage. If they can’t give you a straight answer, that is cause for concern. Any reputable provider should be able to state the all-in cost clearly.

Once you have this total, compare it against a standard brokerage account. The difference represents the price you’re paying for the annuity’s guarantees, tax deferral and insurance features. Whether that price is reasonable depends on how much you value those features relative to the drag on your returns.

It’s also worth understanding how fees change over the life of the contract. Surrender charges typically decline over time and eventually disappear. However, mortality and expense charges, administrative fees and rider costs usually persist for as long as you hold the annuity.

A product that looks competitive in the early years because of a bonus or promotional rate may carry higher ongoing fees that erode that initial advantage. The important number is the total cost you’ll pay over the full period of the contract - not just what it costs in year one.

Bottom Line

Before purchasing an annuity, carefully evaluate whether the benefits outweigh the costs for your specific situation. A financial advisor can help you navigate these complexities and determine whether an annuity aligns with your retirement strategy. By thoroughly understanding an annuity’s costs and what you get 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. 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, start 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.

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