Why Annuities Are Worth the Cost

Annuities are often perceived as expensive when compared to other retirement savings and investment products, but the benefits of an annuity may far outweigh the costs.

In this article we’ll break down the costs and benefits typically associated with different types of annuities to help you consider if an annuity is a suitable product for your client.

The Value of Annuities

When the benefits of an annuity are weighed against its costs, the value of an annuity becomes clear. They can play a valuable role for people approaching retirement who are concerned about having a sufficient retirement income and once advisors have a better idea of what their clients’ goals and concerns are, they can identify why an annuity can address each of those needs.

It’s true that the costs associated with most annuities can seem expensive, especially when compared with the costs of investment products, such as mutual funds, money markets, and IRAs. But market ups and downs, the current low yields and interest rates, can make generating a source of guaranteed income challenging with many of those savings and investment vehicles.

By contrast, the principal benefit of many annuities is to provide a guaranteed income payment during retirement, either for life or for a specified period. The portfolio durability associated with this type of guarantee can offer clients a degree of comfort, they otherwise might not enjoy without an annuity.

There are additional benefits to owning an annuity. Studies have also shown that retirees with some form of annuity are assured more annual income for the remainder of their lives than those who manage their own portfolios.¹

Types of Fees and Charges

Here we’ll take a look at the charges that are commonly associated with annuities and explain what they pay for. Generally, there are four main categories: insurance, surrender, management and rider.

• Insurance charges also known as (i) administrative charges and (ii) mortality and expense (M&E) charges, cover the cost to the insurance company of (a) the guarantees included in the annuity and (b)selling, setting up and maintaining the contract. These charges are standard for most annuities.
• Surrender charges may be incurred when clients withdraw sums in the early years of the contract. Charges are assessed either as a percentage of the amount withdrawn or the account value. Often there is an annual free withdrawal amount (e.g., 10%) set in their contract.
  
  

However, surrender charges do not incur if the client holds the contract for the duration of the surrender period.

• Withdrawal charges are applied if money is withdrawn prior to 59 ½ years of age, typically with a 10% withdrawal fee.
• Portfolio Management charges apply to variable annuities and are deductions from the assets of each underlying investment portfolio to cover the cost of the portfolio management.
• Rider charges apply to the optional living or death benefits that are available for an extra charge in your client’s annuity. Living or death benefit riders can be used to provide a guaranteed level of withdrawal or income benefit or to provide additional death benefits. These charges only apply if your client opts for additional benefits.
  
  
  

“Hidden” Costs of Annuities

Financial products like annuities have associated costs, and clients should receive the value and benefits associated with those costs. As an advisor, understanding annuities and the essential role they can play in a client’s comprehensive planning process can be extremely valuable when considering the purchase of an annuity product.

Here, we’ve outlined some additional potential expenses that may accompany some annuities which should also be discussed with your clients if they apply.

• Taxes may apply if your client needs to take money out before they reach the age of 59½. If this happens, the IRS will charge 10% on the withdrawal and the insurance company may pass this onto your client.
  
  

Why Annuities?

An annuity can be used to address a range of your clients’ needs for retirement and though there are costs associated with different benefits and different types of annuities, they are one of the only financial vehicles that can provide a guaranteed income stream for the life of your client.

Generating an income through other products that are exposed to the market may be difficult, but annuities can bring peace of mind and durability to their portfolios. By offering them an income for a specific period or for the rest of their lives, annuities can be one of the most cost-effective solutions to retirement planning.