Annuity - Understanding Annuities

What is an annuity?

An annuity is a contract with an insurance company. With an annuity, the insurance company promises to pay you income on a regular basis for a period of time you choose—including the rest of your life. Some annuities begin paying income to you soon after you buy it – this is called an immediate annuity. Others begin at some later date that you choose – this is called a deferred annuity.

Who needs an annuity? Why should I buy it?

Most people buy annuities for retirement purposes. Before you buy, make sure it fits your needs.

Who sells annuities?

Only buy insurance from a licensed agent or an authorized company. Use our Licensee Search feature to find a licensed agent or authorized company.

How much do annuities cost?

The fees associated with annuities will vary depending on the type of policy. Below are some of the common fees associated with annuity contracts, but this list is not exhaustive. Make sure to read your policy to understand exactly what fees apply to you and how the fees are used by the company.

  • Mortality and Expense Fees. 
    These fees are commonly known as M&E fees and cover the expenses associated with the sale of policies (e.g., commissions) and the death benefits that may be standard under that policy type.
  • Administrative Fees
    Most companies charge an annual fee for the administrative expenses associated with the contract. This fee is sometimes waived if the contract value is over a certain threshold.
  • Surrender charges.
    Most insurance companies limit the amount that can be withdrawn during the initial years of a contract (contract term) and assess a surrender charge on any withdrawals above a preset limit (e.g., 10% per contract year). Annuities are generally long-term investments, so make sure you understand what the surrender charge schedule is for your policy, as surrender charges can be significant and can be imposed for an extended time period.
  • Investment Management Fees.
    If you are purchasing a variable annuity, the subaccounts in which you invest your money within the policy are similar to mutual funds. Like mutual funds, there are often management fees associated with these subaccounts. Check the annuity prospectus for any underlying funds to learn how much you might pay for investment management fees.
  • Rider Charges
    When you apply for an annuity, you may be able to elect additional enhanced guaranteed benefits above and beyond what is standard for the policy. Riders allow you to elect these enhanced benefits but will likely come at an increased cost. Make sure you understand the riders you are purchasing; if you are going to be paying for a benefit, it should be something you anticipate using.

What to do when changing annuity policies.

Before you decide to cancel your annuity, make sure you understand the surrender charge and any tax consequences.