Guaranteed Income: With or Without Fees?

A few weeks ago I covered a topic on income annuities without fees.  It’s a very popular request because annuity fees have been given such a bad rap.  As I’ve always said, you should only pay a fee if it provides an additional benefit that you really want.  In the past several years a fair number of products with free income riders have come to the market and I’ve talked about them a lot, including a detailed podcast just a few weeks ago.  So if you can get it for free, why would anyone pay for an income rider on an indexed annuity?  Well, there has to be more benefit, otherwise it makes no sense.

This came to light in a case I’m working on right now.  Kathy set up an appointment and needed help sorting through the options.  She is 68 and plans to retire completely in two years.  During our first call, I learned that she has plenty of money to create the additional $2000 per month that she needs to supplement social security at age 70.  There are lots of ways to do this but she really doesn’t want to pay fees so that narrows it down to just a few annuities that would work.

After running the numbers I found that it would cost roughly $350K which was right at the top end of what she was planning to spend.  We scheduled a second appointment and I dug into the options to try to find what I thought would be the best plan.  Knowing that a different annuity with a fee for the income rider would cost less, I ran those numbers as well to find out what the price difference is.  If she were willing to pay a fee, the same amount of guaranteed income could be secured for only $275K, a savings of seventy five thousand dollars.

Why is there such a big difference?  First is that the fee allows the insurance company to pad their reserves significantly so they can afford to keep paying the income just in case the annuitant lives longer than expected.  You either pay a fee along the way or spend more in the beginning to get the same income.  Second, in maximum income contracts, other benefits are reduced.  Each of the example contracts below has a residual account value with ongoing growth tied to a market index.  Both are fixed indexed annuities with a guaranteed lifetime income rider.  Paying the fee gives you maximum income but lower growth potential in the underlying account.  One contract is for maximum income and the other gives you a better chance for leaving a remainder to your heirs.  Which benefit is more important to you?

I’m going to share the numbers so that hopefully this point hits home.  Showing the full illustrations adds more complexity than is necessary so I’ll explain each in a few bullet points below.  

Guaranteed Lifetime Income with 1.25% Annual Fee:

$275K premium in exchange for $24,970 annually for life starting in two years

Additional long term care enhancement that doubles payments for up to five years if long term care is needed

With conservative estimates there is projected to be no remainder cash value after 20 years (2 years deferral, 18 years of income) Payments continue as long as she lives regardless

Total aggregate income in 20 years of $449,460 which increases with every extra payments she lives to receive

Guaranteed Lifetime Income with 0% Annual Fee:

$350K premium in exchange for $24,156 annually for life starting in two years

With with conservative estimates there is projected to be $106,590 remaining in account after 20 years (2 years deferral, 18 years of income) Payments continue as long as she lives regardless

Total aggregate income in 20 years of $434,808 plus the additional $106K brings the total output to $541,398 with continued income for as long as she lives

Now I understand that the income for both is not identical but it was easier to use round figures for the premium.  We can adjust the purchase price down to the penny to peg it at exactly $2000 per month if we need to.  If we ignore the slight income difference then the product with no fee comes out ahead because of the remaining cash value.  But it cost $75K more in the beginning so it’s not a true apples to apples comparison.

Some people would choose to pay less money to produce the income while others will choose to pay no fee even if it costs more.  Kathy has a choice to make and these are truly the two best options to get the job done.  Saving money to produce income by paying a fee leaves additional funds to invest elsewhere that will grow over time to create additional planning opportunities but it complicates the matter for some people.  Paying more for a contract without a fee is an all in one investment.  If managed by me and whoever buys it to produce maximum growth then there will likely be money remaining for heirs at the end of the contract.

Like everything else it’s a matter of preference and I like to explain all the options so each person can come to his or her own conclusion.  If you’d like to run the numbers specific to your situation then set up an appointment or give me a call.

All my best,


Written By

Bryan Anderson

2 thoughts on “Guaranteed Income: With or Without Fees?

  1. Thanks Bryan. This was just what I needed. It is so easy to get overloaded and confused with talking or listening to various annuity sales people, and others who hate annuities like Fisher.

  2. Thanks, great article. How about running the same amounts for a married couple with life time I come for both and what the income and final outcomes would look like in that situation.

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