The internet will tell you annuities are "full of hidden fees." Some are. Many are not. The honest approach is to know exactly what each type charges, and decide whether the guarantee you get is worth the cost.
Where fees actually live
- Variable annuities: often the highest cost, mortality & expense charges plus subaccount fees can run 2%+ per year
- Fixed indexed annuities: typically no explicit annual fee, the "cost" is the cap or participation rate that limits your upside
- Optional income or death-benefit riders: usually 0.5%–1.25% per year for the guarantee
- Surrender charges: a declining penalty for withdrawing more than the free amount during the early years
How to read the trade-off
With a fixed indexed annuity, you are usually not paying a visible fee, you are trading some upside for a 0% floor. If protecting principal and securing lifetime income matters more to you than maximizing return on that slice of money, that trade can be worth it.
Questions to ask before you sign
- What is the surrender period, and what can I withdraw penalty-free each year?
- Exactly which riders am I paying for, and do I need them?
- What are the caps/participation rates, and can the insurer change them?
- What is the insurer's financial strength rating?
A good annuity is transparent about all of this. If the person selling it cannot explain the costs in plain English, that is your answer.