Potentially High Fees
Some annuities may hit you with higher fees than others. Variable annuities, in particular, are one type that can include hefty fees, but other types of annuities have disadvantages that are important to consider, as well.
These fees and charges are commonly associated with variable annuities, although exact fees vary based on the annuity you choose and its provider.
- Administrative fees: 0.15% of account value or $25-$30 for flat-fee contracts
- Mortality and expense risk charge: 1.25%
- Underlying fund expenses: 0.6% to 3% annually
- Optional riders: 0.25% to 1.5% of account value
When exploring an annuity, it’s important to understand the different options available and how their fees vary.
For example, unlike variable annuities, multi-year guaranteed annuities (MYGAs) do not typically include high fees. These allow you to grow your money at a fixed interest rate for a set period – and without the worry of too many fees cutting into your profit.
As I design a financial plan for a client, I use products that best fit their needs and goals. Annuities many times are a good fit, but then there are times they are not a good fit. I always discuss advantages and disadvantages and make sure my clients understand. I recently had a client that had money in a CD and wanted to buy a MYGA as rates are higher, and he won’t have to pay taxes as it grows. However, he told me that he needs to use the money while in the annuity phase and I advised him that annuities are not liquid and have penalties for taking out more than 10% in his case. I deterred him and advised him to keep his money in a bank, if he needs it liquid.
Aamir M. Chalisa, MBA, LUTCF, MDRTGeneral Manager at Futurity First Insurance GroupAamir M. Chalisa is a seasoned financial services leader with over 30 years of experience in insurance, wealth management and retirement planning. As General Manager of Futurity First Insurance Group’s Oak Brook branch, he oversees one of the company’s top-performing teams. Aamir has held leadership roles at MetLife, Prudential and Nationwide and is a Million Dollar Round Table (MDRT) qualifier, recognized for his expertise in life and annuity sales and commitment to helping clients achieve lasting financial security.
Limited Liquidity
When considering an annuity, you must decide how much of a financial commitment you are willing to make.
This is especially important because once your annuity is issued and you have paid your funds, it can be difficult or even impossible to get your money back before the end of the agreed-upon term.
When comparing annuity products, pay special attention to how they handle early withdrawals. Most annuities have a surrender schedule that details any penalties for taking out money early. Some annuities include a 10% free withdrawal feature, allowing you to withdraw up to 10% of your contract’s value without incurring a penalty.
Additionally, many annuity contracts include provisions that allow you to withdraw the full value of the contract penalty-free if you enter a nursing home or are diagnosed with a terminal illness.
Losing Purchasing Power Due to Inflation
When converting your annuity into guaranteed lifetime payments, consider not only the immediate benefit of these payments but also how their value can affect your retirement income in 10 or 15 years.
Annuity payments are often fixed, meaning you receive the same amount at whatever interval you have chosen, such as monthly or biannually, for your lifetime. This means those payments will lose value over time as inflation continues.
One option to consider is adding an inflation rider to your contract, as this type of rider is commonly offered by annuity carriers. This allows you to structure your contract so your payments grow by a few percentage points each year, helping to keep up with inflation.
Keep in mind that, with most companies, an inflation rider restructures your contract rather than providing additional funds. For example, your initial payments may be smaller than they would be without the rider, allowing for future growth instead.
Complexity of Products
Many customers can be confused by the complexity surrounding annuity products.
Part of the reason for this confusion is that the term “annuity applies to a diverse group of products that operate in very different ways. For example, the ideal customer for a variable annuity and the ideal customer for a single premium immediate annuity (SPIA) may have little in common with one another. Therefore, getting a handle on the many different types of annuities and understanding which option makes the most sense for you can take time.
Annuities also allow for a high amount of customizability within the contract itself. This can be a major benefit for experienced investors or those working with a financial advisor, but it can also add confusion for someone who is newer to annuities.
Working with a financial professional or insurance agent can lessen some of this burden, giving you the chance to lean on their expertise while you narrow down your choices.
Drawn Out Buying Process
Some financial investments are relatively simple transactions that don’t take long to purchase. However, this is generally not the case with annuities.
Due to the complexity of these products and the large amount of funds often involved, it can take some time to fully set up your annuity.
You also likely will have to share in-depth financial information during the buying process, as this is legally required for your safety.
Annuity providers follow suitability guidelines, meaning they must verify an annuity product makes financial sense for you before they may sell it to you.
This extra precaution helps you avoid scams or buying products you don’t actually need. However, this can easily slow down the buying process.
Access to Information
Access to information on annuity products can vary widely from carrier to carrier, sometimes making product comparisons difficult.
Some companies provide in-depth information and brochures that are easily accessible online, so you can learn everything you might need to know about a product before reaching out. Other companies, particularly smaller players in the market, may not be as forthcoming and require you to contact them directly or work with an agent to access the same level of information.
This is another situation where working with a financial professional can help. Advisors often have access to product data that is not publicly available and can provide you with insight into different carriers based on their industry experience.
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