Tags: Annuities | Fees | Penalties

Know the Fees You Are Paying

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Thursday, 06 Nov 2014 10:54 AM Current | Bio | Archive

The major disadvantage of many annuities can be summed up in a word — fees.
Although fees are listed in the contract or prospectus, because of the complexity of annuities, many people find it hard to understand the fee structure.

Two of the most common fees include surrender fees and commission fees. But the commission fees built into annuities are not unique; almost all financial and insurance products include commissions or service fees. Let's dig down for the facts:

Surrender Fees. Annuities are all built with some type of surrender charges, which place restrictions on taking money out of the annuity in the first years of the contract.

Generally speaking, most annuities allow you to withdraw 10 percent annually without penalty. But if an unexpected event causes you to need more than the annual 10 percent, typically there will be a surrender charge. The surrender period and charges are outlined in the annuity contract. And while most annuities set a surrender period of five to 10 years, there are contracts that include surrender charges beyond 10 years so it is important to look for these charges in the contract.

The worst time to withdraw more than 10 percent of the fund is within the first year, when the surrender fees are at their highest. After that, the surrender fee gradually decreases until it reaches zero.

For instance, if you have an annuity of $100,000 and need to withdraw $12,000 during the second year you have the annuity, you can take out the first $10,000 without being hit with any surrender fee or penalty, but you could be charged a 7 percent fee on the remaining $2,000 according to the terms of the contact.

The same withdrawal made during the fifth year of the annuity might be levied a 4 percent surrender fee on the excess $2,000 due to the phase-out fee structure.

There are good reasons for surrender charges. They serve the purpose of providing the insurance company with something of a guarantee of the amount of money it'll have to invest with in the near future.

When the insurance company goes to bundle money up to buy bonds or mortgages or whatever it chooses to invest in, it knows it has that money and is able to link investments to lengths of surrenders. That can be advantageous because it helps the insurance company remain fiscally healthy while offering you a higher rate of return for the longer surrender charge periods. You want your insurance company to be profitable and sound financially.

However, many agree a surrender period that exceeds 10 years is a red flag and a sign to sidestep that annuity. You should only purchase an annuity with as much money as you can comfortably put aside and forget about.

Even though there are ways to get at some money in event of emergency, you can’t be afraid of financial commitment when purchasing annuities. If you’re looking for a spot to tuck money for a year or two, an annuity is most likely not for you.

Commission Fees. Annuities are sold by either insurance brokers or other salespeople — your financial planner may be licensed to sell them — who collect a commission for the sale. If reasonable, that commission is a fair cost of doing business, and what many don’t realize is it’s a one-time thing.

Let’s look a little closer at the commission charge. Generally when an insurance agent sells an annuity product, he or she will receive a commission. The agent has to service the policy for its lifetime, which could be 10, 15, 20 years, or more. When you look at it in terms of covering the cost of providing a service to the client for the life of the contract, the commission is reasonable.

And remember, many safe investment vehicles come with commissions. For example, if you put $500,000 into a mutual fund, you may be paying as much as $5,000 to $10,000 every year in advisory and administrative fees. In 10 years, your payout in advisory fees could be as much as $100,000. The commission fee for your annuity would amount to a fraction of that for the same $500,000.

Of course, you can protect yourself by asking for references and checking with the Better Business Bureau and your state’s Department of Insurance before entering into any sort of financial contract with an insurance agent or salesperson selling annuities.

Tax Penalties 1/2. A benefit of purchasing annuities — except immediate annuities — is potential growth while enjoying a tax-deferred status.

However, you should be aware that there are restrictions to that benefit, particularly if you withdraw money prior to age 59 1/2 or defer distributions beyond age 70 1/2. There will be a 10 percent penalty for those early withdrawals, similar to penalties enforced for early withdrawals from 401(k) plans or IRAs, and up to a 50 percent excise tax for the minimum distribution amounts required to be distributed after age 70 1/2.

In addition, some annuities carry a state premium tax, which varies from state to state. The tax is levied on the amount you originally deposited into the annuity. You can pay it either when you surrender the annuity or if you annuitize the annuity.

The price tag for this tax varies by state and annuity but can run from 0.25 up to 2.50 percent. You are encouraged to consult with your own legal or tax professional to confirm how the tax treatment of an annuity may apply to you.

Annuities are one of the most misunderstood financial products on the market today. Some of that trepidation is warranted — there are unfortunately plenty of some annuity products on the market that don’t make financial sense for most individuals.

However, to discard the idea of an annuity out of hand may be a big mistake, especially for those seeking reliable, long-term income streams to fund a retirement. With that in mind, you should explore the options in the marketplace and talk to your financial adviser to see whether there are annuity products that are indeed a good fit for you.

You can find out more about Fixed, Indexed, and Variable Annuities in Crown Atlantic's new report "The Annuity Primer: Get Guaranteed Income for Life." Go online to CrownAtlantic.com/Protect or call today 855-221-5546.

Joe Stark is the CEO of Crown Atlantic Insurance, LLC in Boca Raton, Fla. Stark is an insurance industry veteran with more than 25 years of experience. For more of his reports, Go Here Now.
 
 



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JoeStark
Although fees are listed in the contract or prospectus, because of the complexity of annuities, many people find it hard to understand the fee structure.
Annuities, Fees, Penalties
1085
2014-54-06
Thursday, 06 Nov 2014 10:54 AM
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