Annuities have a reputation problem, and it's not hard to see why.
The products are often sold by commission-based agents, the fee structures are buried in dense contracts, and the person explaining it to you usually has a financial incentive to make it sound simple.
So let's walk through what the fees actually are, what they cost in real dollars, and where the money goes.
There are two main phases to think about: the accumulation phase, when your money is growing, and the payout phase, when you're receiving income.
The most common is the mortality and expense risk charge, which typically runs between 1% and 1.5% of your account value every year.
It's charged annually, whether your investments go up or down.
Then there's the administrative fee, usually a flat $25 to $50 per year, which sounds harmless until you stack it next to everything else.
If you buy a variable annuity, you'll also pay fees on the underlying mutual funds inside it, often another 0.5% to 1%.
Add it up and you can easily cross 2% to 3% per year.
On a $100,000 account, that's $2,000 to $3,000 leaving your balance annually, before any market losses.
Riders are where things get expensive fast.
A guaranteed lifetime withdrawal benefit, or GLWB, sounds like the whole point of buying an annuity, and for many people it is.
But that rider can add 0.5% to 1.5% per year on top of everything else.
Income riders, death benefit riders, long-term care riders — each one has its own annual charge.
A single annuity contract can carry five or six separate fee lines.
They're not annual, but they can be brutal if you need your money early.
A typical schedule starts at 7% in year one and steps down to zero by year seven or eight.
Withdraw more than the allowed amount during that window and you'll pay a percentage of what you take out.
Some contracts also charge a market value adjustment if you surrender during a period of rising interest rates.
Fixed annuities and multi-year guaranteed annuities are simpler.
They typically don't carry explicit annual fees.
Instead, the insurance company builds its costs and profit into the interest rate it offers you.
If a MYGA pays 4.5% while a comparable Treasury pays 5%, that gap is effectively the fee.
You hand over a lump sum, you get a monthly check, and the payout rate already reflects the insurer's costs.
There's no line-item fee statement because the fee is baked into the math.
Ask for the fee table in writing before you sign anything, and ask for it in dollars, not percentages.
Ask what the total annual cost is on the exact amount you're investing.
Ask what happens if you want out in year three.
And compare that total cost against a simple alternative, like a low-cost index fund or a Treasury ladder, to see whether the guarantees are worth the price for your situation.
Annuities aren't scams, and for some people — especially those who want a guaranteed income floor in retirement — they can make sense.
But the fees are real, they compound against you, and they're the reason so many annuities underperform simpler options over long periods.
Our take: before buying any annuity, get every fee quoted as an annual dollar amount on your actual investment.
If a salesperson can't or won't put that number on paper, that's your answer.
Final Thoughts
The product might still be right for you, but you deserve to know what you're paying for it.