"Annuities have high fees" is one of the most common things I hear. In some cases it's absolutely true. But in many cases it's a misunderstanding of how costs actually work in different types of annuities. So let's break it down honestly.
Where "high fees" is true.
Variable annuities. These carry mortality and expense charges, fund expenses, and optional rider fees that can stack up to 3% or more every year. They also expose you to market losses. If that's the only annuity someone has seen, "high fees" is a fair conclusion.
Where it usually isn't.
Fixed and fixed indexed annuities typically have no annual fee on the base contract. The insurance company makes its margin on the spread between what it earns on its bond portfolio and what it credits to you. That's the cost — it shows up as a cap or participation rate, not as a line-item fee.
The exception is an optional income rider, which usually costs around 1% a year. That's a real cost, and you should only pay it if guaranteed lifetime income is something you actually want. If you don't need the rider, don't buy the rider.
What to ask before you sign anything.
- Is there an annual fee on the base contract? If so, how much and for what?
- What does the income rider cost, and what exactly does it guarantee?
- What are the current cap, participation rate, or spread — and how often can the carrier change them?
If you get clear answers to those three, you understand the cost. If you get a brochure instead, keep asking.
Happy to walk through any contract you've been shown and tell you plainly what it costs.
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Author of Indexed Annuity Secrets and founder of Pacific Ridgeway Insurance Solutions in San Diego. Navy veteran. Licensed financial professional, CA #4132743.
Fixed indexed annuities are insurance products, not investments. Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. This article is for educational purposes only and is not financial, investment, tax, or insurance advice.