How Much Does an Annuity Cost?
Written by
Marc Guberti
Edited by
Levi Leidy
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Annuities can provide guaranteed income for life, making them an attractive option for retirees and long-term investors. However, before committing to one, it’s essential to understand the costs involved.
So, how much does an annuity cost? The price depends on several factors, including annuity type, fees, commissions and additional riders. In this guide, we’ll break down annuity costs, explain how they compare to other investments and offer tips to minimize fees.
What Is an Annuity?
An annuity is a contract between an insurance company and an individual. The individual pays the insurance company a sum of money, either all at once or in periodic payments, and the insurance company promises to provide a series of payments to the individual, often for the rest of their life.
Annuities are often marketed as retirement savings vehicles, and they can be useful. But they can also be expensive compared to other options, so it’s important to understand all the costs associated with this type of investment.
How Much Does an Annuity Cost?
The cost of an annuity varies based on the type of annuity you purchase, contract terms and optional features. Here are the main factors that influence pricing:
1. Annuity Premiums: The Upfront Cost
- Single Premium: A lump-sum payment used to purchase the annuity
- Flexible Premium: Multiple payments made over time
2. Type of Annuity
- Fixed Annuities: Offer guaranteed returns, typically with lower fees
- Variable Annuities: Invest in the market, leading to higher fees and potential risk
- Indexed Annuities: Linked to a stock market index but with limited growth potential
3. Annuity Contract Length and Payout Options
- Lifetime payouts may have higher costs than fixed-period payouts.
- Inflation-protected annuities can be more expensive.
For a more detailed breakdown of your annuity’s value over time, here’s a comprehensive calculator from Schwab.
Common Fees Associated With Annuities
Beyond the initial cost, annuities come with various fees. Let’s examine the most common ones:
1. Mortality and Expense (M&E) Risk Charges
- Covers insurance costs and administrative expenses.
- Typically 0.5%-1.5% per year of the annuity’s value.
2. Administrative Fees
- Charged for recordkeeping, customer service and general account management.
- Usually $30-$50 per year or 0.1% to 0.3% of account value.
3. Investment Management Fees (for Variable Annuities)
- If your annuity invests in mutual funds, you’ll pay expense ratios.
- Fees range from 0.25% to 2% annually.
4. Surrender Charges (Early Withdrawal Penalties)
- If you withdraw before a set period (often five to 10 years), you’ll pay a penalty of 5% to 10%.
- Fees decline over time, eventually reaching zero.
| Year Held | Surrender Charge (%) |
|---|---|
| Year 1 | 7% |
| Year 2 | 6% |
| Year 3 | 5% |
| Year 4 | 4% |
| Year 5 | 3% |
| Year 6+ | 0% |
5. Optional Rider Fees
Many annuities offer add-ons (riders) that provide extra benefits. Here’s what they may cost:
| Rider Type | Description | Cost (% of contract value per year) |
|---|---|---|
| Guaranteed Lifetime Income | Ensures income even if the account balance reaches zero | 0.5% to 1.5% |
| Death Benefit Rider | Passes remaining funds to beneficiaries | 0.3% to 1.2% |
| Inflation Protection | Adjusts income for inflation | 0.25% to 1% |
What Is the Commission Paid on a $1 Million Annuity?
Annuities are often sold by insurance agents and financial advisors, who earn commissions. Commissions vary based on the type of annuity and contract terms.
| Annuity Type | Commission (% of Premium Paid) | Estimated Commission on a $1M Annuity |
|---|---|---|
| Fixed Annuity | 1%-4% | $10,000-$40,000 |
| Variable Annuity | 3%-7% | $30,000-$70,000 |
| Indexed Annuity | 5%-10% | $50,000-$100,000 |
If you purchase a $1 million annuity, the commission could range from $10,000 to $100,000, depending on the annuity type. This commission is built into the cost, meaning you don’t pay it separately.
Comparing Annuity Costs to Other Investments
How do annuity costs compare to mutual funds, life insurance and other financial products?
Here’s a side-by-side comparison:
| Investment | Fees & Costs | Risk Level | Liquidity |
|---|---|---|---|
| Fixed Annuities | Low fees, 0.5% to 1.5% annually | Low | Low |
| Variable Annuities | High fees, 1.5% to 3%+ annually | High | Low |
| Mutual Funds | Expense ratios, 0.25% to 1% | Moderate-High | High |
| ETFs | Low expense ratios, 0.1% to .5% | High | High |
| Bonds | Low fees, 0% to 0.5% | Low-Moderate | High |
Mutual funds and ETFs generally have lower costs and greater liquidity, but annuities offer guaranteed income, making them better for long-term retirement planning.
How To Minimize Annuity Costs
If you want to invest in an annuity while keeping costs low, consider these tips:
- Compare Multiple Providers: Fees vary across insurers, so shop around for the best rates.
- Avoid Unnecessary Riders: Only pay for add-ons that align with your goals.
- Choose No-Load Annuities: Some annuities skip commissions, reducing costs.
- Work With a Fiduciary Advisor: Fiduciary financial advisors must act in your best interest, ensuring you aren’t overcharged.
Final Thoughts To GO: Are Annuities Worth the Cost?
Annuities can be a smart choice for retirees or anyone looking for guaranteed income and protection from market risk. However, fees and commissions can add up, making it crucial to compare costs before committing.
Before purchasing an annuity:
- Understand the full cost structure (fees, commissions and surrender charges)
- Determine if the annuity aligns with your long-term goals
- Consider alternative investments with lower fees if liquidity is important
By doing your research and working with a trusted fiduciary financial advisor, you can ensure that your annuity purchase aligns with your retirement strategy.
FAQ About Annuity Costs
Here are the answers to some of the most frequently asked questions about annuities:- How much does an annuity cost on average?
- Annuity commissions range from 1% to 10% of the annuity's value. Then, the expense ratio and administrative fees are roughly .3% of the annuity's value.
- What is the commission rate for a financial advisor selling an annuity?
- Financial advisors can receive anywhere from a 1% commission to a 10% commission for selling an annuity.
- Are there hidden fees in annuities?
- Annuities do not have hidden fees. However, you will have to review the terms to find a list of the fees that you can expect to pay.
- Can I negotiate annuity costs with an advisor?
- Yes. You can negotiate annuity costs with an advisor. Some advisors may give you a better deal knowing that you are considering other options.
- Do annuity fees outweigh the benefits?Â
- Annuity fees don't always outweigh the benefits. They provide a stable income stream, which can make your retirement years more predictable. Annuities can also gain value over time and give you a return on your investment. Annuities aren't growth investments, but they offer a low-risk opportunity to boost your passive income.
Information is accurate as of March 31, 2025.
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- Office of the Insurance Commissioner "How much do annuities cost?"
- Nationwide Insurance "What do annuities cost?"
- Internal Revenue Service "Annuities - A brief description"
- Schwab "Income Annuity Estimator"
