6 Annuity Costs You Weren't Aware Of

Annuity costs can significantly cut into the amount of money that you have available to you during your retirement. Annuities can be a great way to provide a regular income during your retirement years, but insurance companies keep finding ways to charge you for this type of investment. Here are some of the annuity costs that you may not be aware of.

1. Commission

One cost that you may have to pay when purchasing an annuity is a commission expense. When you purchase an annuity contract, you will have to work with an insurance agent. Insurance agents work on commission on the policies and products that they sell. This fee will be deducted from the amount of money that you pay in premiums, or annuity payments. This fee does not benefit you in any way because it simply goes into the pocket of the agent that sold you the annuity.

2. Underwriting

You might also have to pay an underwriting fee for this type of investment. The process of writing the annuity contract requires underwriters. There is an expense fee for an underwriting service. They have to determine how much you need to pay them in order to guarantee a certain amount of payment during your retirement years. This requires a great deal of calculation and expertise.

3. Management Fees

Many annuities also charge management fees to their clients. This fee is designed to cover the costs associated with having an investment manager. In many cases, people pay into an annuity and allow the insurance company to invest their money for them. They are not concerned about what happens to the money, as long as they have a payment once they are ready to retire. With this arrangement, they have to pay a fund manager to make the individual investment decisions for the fund. 

4. Penalties

In some cases, you might also be charged penalties when dealing with an annuity. If you get out of your annuity contract within a certain amount of time, you will most likely have to pay surrender charges. This typically occurs if you sell your annuity within six years. This fee will be represented as a specific percentage of how much you withdraw. In addition, you will also have to pay a 10 percent early distribution penalty in taxes.

5. Mutual Fund Fees

Many times, the fund manager will take your money and invest it into various mutual funds. When they invest in mutual funds, these mutual funds also have management expenses that must be paid. While you are not directly bill for these expenses, they are deducted from the amount of the returns that are generated for the annuity.

6. Margin

In some cases, investors get to choose the investments that they put their money into as is the case with a variable annuity. When this happens, insurance companies might charge a margin which comes out of the amount of money that you earn from investing.