Understanding Fixed Indexed Annuity Fees
When understanding index annuities, hidden fees often come up. It’s a common misconception that truly comes from an uneducated place.
You’ll often hear, “annuities would be fine if not for the hidden fees.”
In almost every case, this is nothing more than a scare tactic because all but one annuity that I’ve seen has the fees clearly disclosed upfront. There is a reason why fees are valuable and a reason why fees don’t exist on a lot of products. You need to understand both.
Ken Fisher does an excellent job warning people about annuity fees. So much so that many people disregard annuities altogether because of the perception that what he writes pertains to all annuities.
This is not the case. Many are surprised to hear that I actually agree with most of what he says. I do, however, think his writing is misleading because he never specifies that he is talking about variable annuities. So what he writes doesn’t apply to the majority of products available.
Table of Contents
- Understanding Fixed and Variable Annuities: A Brief Overview
- How Do Fees Work in an Index Annuity?
- What Are Some of the Fees in an Index Annuity?
- The No Fee Index Annuities and Best Annuities Without Fees
- The Real Cost of Fees
- Final Thoughts: Finding the Best Solution
- Your Financial Future Awaits
Understanding Fixed and Variable Annuities: A Brief Overview
For the purposes of this article, I’m going to reference fixed and variable annuities.
I’ll use the term ‘fixed’ to generally apply to both fixed-rate products and fixed indexed products. Both have the same foundation, so that’s where you need to focus.
Do Fixed Index Annuities Have Fees?
Fixed annuities, including fixed index annuities, generally don’t have fees. Before anything else is added, every basic fixed contract is a spread product. It means an insurance company invests your money, earns yield, and subtracts a portion for expenses and profits. What’s left is the yield stated in the contract.
|Insurance companies take their piece before you even come into the picture.
You don’t buy a higher rate minus a fee; you get the advertised rate, and the insurance company took their piece before you even came into the picture.
How Do Fees Work in an Index Annuity?
Fees only come into play when you add something to the base contract. Some people want an income guarantee, additional death benefit, or some kind of long-term care payment.
If you want the additional benefit, you will have to pay a fee. If you don’t want to pay the fee, then don’t take the benefit. Fees are a choice in fixed annuities, including fee-based index annuities.
What Are Some of the Fees in an Index Annuity?
In variable annuities, fees can include mutual fund expenses and any insurance you want on the account value, future income payments, or even a protected death benefit. Total costs can approach 4% only because insuring all those things against market risk is very expensive.
The No Fee Index Annuities and Best Annuities Without Fees
I don’t sell variable annuities, not only because high fees create sticker shock but also because I’ve found you can do better with the right mix of a fixed annuity and market securities.
On one side, you have the protection you need, while on the other, you get the upside growth you want. This combination can reduce fees to near zero, depending on how you invest in market securities. If you’re looking for the best annuities without fees, consider this approach.
The Real Cost of Fees
Fees always cost something in the end. Aside from the out-of-pocket cost, there is always an unrealized cost, which is often much bigger.
I suggest you avoid fees if at all possible. Knowing how to do that requires you to understand why fees exist and how you can avoid them if you don’t want the benefits provided.
Final Thoughts: Finding the Best Solution
|90% of the contracts I’ve placed with customers have no fees whatsoever
Like everything else, this is very simple, and it’s best to avoid the hysteria if your goal is to find the best solution. I have sold some contracts with fees to those who wanted an additional guarantee. But, 90% of the contracts I’ve placed with customers have no fees whatsoever.
I wouldn’t mind a few comments from current contract owners who can confirm my claim, for the benefit of any pessimists in the crowd.
Your Financial Future Awaits
Understanding index annuity fees is crucial for making an informed decision. Whether you opt for no-fee index annuities or fee-based index annuities, the choice is yours. The key is to be educated and make the decision that best suits your financial goals.