Annuities have a reputation problem, and a lot of it comes down to fees.
The pitch sounds simple: hand over a lump sum, get a guaranteed stream of payments later.
What the brochure often glosses over is how many different charges can stack up along the way, quietly eating into your returns before you ever see a payout.
The first fee to know is the mortality and expense charge, usually called M&E.
This is an annual percentage of your account value, often running somewhere between 1% and 1.5%, that pays the insurer for the guaranteed death benefit and the cost of managing the pool of policyholders.
It comes out whether your investments go up or down that year.
Then there are administrative fees, typically a flat $25 to $50 a year or a small percentage, plus fund expenses inside any subaccounts you pick.
Those subaccount fees look a lot like the expense ratios in a 401(k) or IRA, often 0.5% to 1% or more.
Add them together and a plain variable annuity can easily run 2% to 3% a year before you buy a single rider.
Living benefit riders, like guaranteed lifetime withdrawal benefits, can add 0.5% to 1.5% or more on top of everything else.
Income riders on fixed indexed annuities can push total annual costs toward 3% or higher.
On a $100,000 account, a 3% annual drag is $3,000 gone in a single year, and that compounds.
If you pull money out in the early years, you can pay a penalty that starts around 7% and steps down over a seven-to-ten-year schedule.
Many contracts also charge a market value adjustment if you bail early, which can sting more when interest rates have moved against you.
Ask for the total annual cost in dollars, not just percentages.
Request the fee table from the prospectus or contract, and add up M&E, admin, fund fees, and every rider you're considering.
If a salesperson can't put a single number on your yearly cost, that's your answer.
Ask one more question: what does this annuity do that a low-cost index fund plus a simple withdrawal plan can't?
Sometimes there's a real answer, like locking in lifetime income you can't outlive.
Fixed indexed annuities with caps and participation rates can also limit your upside in good years, which is a cost that never shows up on the fee table.
Annuities aren't automatically bad, but the fees are real, recurring, and easy to underestimate.
Final Thoughts
Get every number in writing, compare the total cost to plain alternatives, and walk away from anyone who dodges the question.