8 Questions To Ask About Your Annuity
Understanding the fine print
Are There Any Surrender Charges on My Variable Annuity?
Most variable annuities charge a fee called a surrender charge which you incur if you cancel the contract before a specified amount of time has passed. I do not advise canceling a variable annuity contract if you will have to pay a surrender charge - unless the internal fees on your variable annuity are higher than the remaining surrender charge.
If your variable annuity has a surrender charge, ask when the surrender charges will no longer apply.
What Is the Mortality and Expense Charge on My Variable Annuity?
All variable annuities have a mortality and expense charge. Typically it will range from a low of .40% per year on a no-load annuity, to a high of 1.35% on broker-sold annuities.
Is There an Additional Administration Fee? If So, How Much Is It?
Some variable annuities have an administration fee in addition to the mortality and expense charge. It can range from .15% to .35% per year.
Does my variable annuity have any optional riders?
Optional riders may have been added to your variable annuity policy when you purchased it. They could be death benefit riders, which provide guarantees as to what would be paid to a beneficiary upon your death, or living benefit riders, which provide guarantees as to how much income you could receive from the annuity at a later date.
How Does Each Rider Work, and What Is the Cost?
Optional riders have costs that can range from about .25% to .75% a year. The riders can be complicated, so ask the customer service representative to explain them to you in a way you can understand. Ask if the rider applies while you are alive, or only if you die.
If it is a living benefit, ask what conditions would have to be in place for this rider to be of benefit to you. If you don’t understand the answers you get, ask again. It’s your money. If you are paying for an additional rider, you have the right to know what type of benefit you are paying for.
Can the Rider Be Dropped?
Sometimes additional riders can be dropped, reducing the fees inside of your variable annuity. If you decide the rider does not provide a valued benefit, ask if the rider can be dropped.
What Are the Average Internal Expenses in the Sub-Accounts?
Inside of the variable annuity, the investment fund options are called sub-accounts. Each sub-account will have a management fee or internal expense. These expenses can range from .45% to 2.00% a year, depending on the sub-account.
What Is the Current Death Benefit on My Variable Annuity?
If the investments have gone down in value, the death benefit on your variable annuity may be higher than the current investment value. It means if something happened to you, your beneficiary would benefit by receiving the higher amount. If this is the case, think twice before canceling your annuity.
Once you've asked questions about your annuity, depending on the answers you get, you may want to consider exchanging your variable annuity for alternative investments with lower costs.
For an example, see how one variable annuity held up when compared to index funds in Variable Annuity Comparison.