Investigating the world of annuities isn’t particularly difficult or time-consuming, but it does require a keen eye for costs and fees. As with most financial products, annuities come with various expenses that might not always be too apparent at first glance.

To make wise decisions based on the facts, you need to understand the fees involved and ask the right questions before making a purchase.

One common criticism relating to annuity fees (possibly quite unfairly) is that they are often perceived as overly expensive. While that perception may hold truth to some degree, not all annuities cost a small fortune: and either way, the question is subjective.

We believe this article will help you appreciate annuity fees for being more reasonably priced, although that is certainly not the intention of this guide. We strive purely to relay the facts pertaining to annuity fees so you conform to an unbiased view of yourself.

In short, being aware of the potential costs and inquiring about them during the purchase process can help ensure you select the right annuity for your needs without getting caught off guard.

While the general ‘nuts and bolts’ of an annuity contract are not especially complicated or confusing, we have noticed (based on common questions and inquiries our team regularly receives) that many people are unfamiliar with the basic aspects of an annuity contract.

Before going too deep into this guide, it might help those who are less familiar with annuity contracts to understand a few key elements of the product. Let’s quickly take a look at them before going into a little more detail throughout the guide.

The Various Fees and Costs Associated with Annuities

Essentially, annuity fees can vary based on the type of annuity you choose. Some common expenses include premiums, commissions, administrative fees, and surrender charges.

As a general rule, the more complex the annuity, the higher the associated costs. Complex financial products tend to have higher commissions and fees compared to simpler investments.

For instance, fixed annuity fees usually have lower costs compared to variable annuities. Fixed annuities are relatively straightforward, offering a specified rate of return as per the contract without involving complex investment portfolios or indexes such as the S&P 500.

However, the addition of riders, which are special contract provisions that allow for annuity customization, can increase the overall cost in most cases. Riders might include death benefits, minimum payouts, or long-term care insurance, among other things.

The more riders you add to your contract, the higher your expenses are likely to be. Typically, the annual charge for riders falls within the range of 0.25% to 1% per year.

On average, variable annuity fees for variable annuities may have fees amounting to 2.3% of the contract value or even higher, exceeding 3% in some cases.

Again (and without stating the obvious too much), knowing the specific costs associated with your annuity is obviously very important. You might be surprised at how frequently this is overlooked by consumers.

Here are the main expenses you might encounter in connection with your annuity:

Annuity Premium

When it comes to annuities, the first and easily most significant cost you’ll encounter is the premium, which represents the initial investment required to purchase an annuity. Depending on the type of annuity you choose, you can either pay the premium as a single lump sum or in a series of further periodic payments.

The premium amount significantly affects your annuity’s future benefits during the payout phase. A single premium annuity usually requires a minimum investment of $25,000. Opting for installments allows a lower starting amount, ranging from $2,500 to $5,000, on average. Remember, the premium plays a vital role in shaping your annuity’s future returns.

Further still, it is important to be aware of the minimum initial premium rules for different annuity contracts. Depending on the insurance company and the type of annuity, these requirements are liable to vary quite a lot. For example, some annuities have a fixed fee for the premium, while others may have a declining fee schedule based on the investment management fees.

The caveats do not end there. Certain annuities – such as fixed index annuities and deferred income annuities – could come with guaranteed minimum withdrawal benefits, which could likely impact the premium amount and investment management fees.

As with any investment, the annuity cost and fees should be taken into account during your retirement planning. While annuities can provide a reliable source of retirement income, you need to be aware of the various fees, including administrative fees and investment expense ratios, before committing.

It is wise to consult with a financial advisor who can help you navigate the different annuities and explain the potential income payments and surrender charges associated with each option. On that note, our advisors are ready to advise all aspects of annuity fees through a quick and ‘plain English’ virtual consultation.

Remember, not all annuities are the same, and as such, premiums will differ. Always keep in mind that insurance companies play a huge role in the annuity market, which, in turn, affects the premiums. To that end, staying informed about the annuity company’s reputation and financial stability is certainly worth considering, should you have the time to do so.

The Securities and Exchange Commission (SEC) also provides valuable resources to help you understand annuities better and the fees involved.

Annuity Commissions

Commissions represent a portion of the annuity cost, but they are often embedded in the overall price and not explicitly disclosed in the contract. These commissions are paid to the agent who facilitated the sale of the annuity on behalf of the issuing insurance company.

The commission percentage can vary depending on the type of Insurance agent you choose. Typically, commissions can range from 1% to 10% of the total value of your annuity contract.

The complexity of the annuity plays a role in determining the commission rate, with more complicated, structured annuities carrying higher commissions. On the other hand, simpler and more straightforward contracts usually come with lower commissions.

For instance, fixed annuities, being the least complex type, often have lower commissions compared to other annuity types, such as Fixed index annuities.

Here’s a breakdown of typical commissions on varying annuity types:

  • Fixed annuities: Commission on a 10-year fixed index annuity ranges from 6% to 8%.
  • Single premium immediate annuities: Commissions usually range from 1% to 3%.
  • Deferred income annuities (longevity annuities): Commissions charge between 2% to 4%.
  • Multi-year guaranteed annuities (MYGAs) generally have no fees, with a surrender period that can vary from three to ten years in most cases: commissions are typically in the range of 1% to 3%.

Administrative Fees

Managing and administering an annuity also incurs Administrative Annual Fees, which will probably be higher than the fees associated with an IRA or 401(k). These fees generally amount to around 0.3% of the annuity contract’s value. Alternatively, it may be a flat fee, such as $25 or $30 per year.

Surrender Charges

Annuities often have a designated surrender-fee period at the beginning, usually lasting for a set number of ‘withdraw money’ years. During this period, any withdrawal exceeding the scheduled payment amounts incurs a surrender charge.

The fee structure can vary significantly from one contract to another. In most cases, the surrender charge is around 10% of the annuity’s value in the first year and gradually decreases as the surrender period expires. Longer surrender-fee periods can lead to higher agent commissions.

Additionally, withdrawing money from an annuity before reaching the age of 59 1/2 may trigger a 10% early-withdrawal fee levied by the Internal Revenue Service.

Mortality Expenses

Mortality expenses serve as compensation to the annuity company for the risks it assumes and may be treated as a commission. This fee typically ranges from 0.5% to 1.5% of the policy’s value each year.

Investment Expense Ratio

For variable annuity, the cost of managing investments is covered by the Investment Expense Ratio. Variable annuities include investment and management fees, known as expense ratios, 12b-1 fees, or service fees. The annual fees can range from 0.6% to over 3%.


Some annuities offer additional provisions called riders, which can be added for an extra charge. Common riders include the death benefit rider, providing a payout to a beneficiary after the annuitant’s death, and the guaranteed minimum withdrawal benefit, allowing penalty-free withdrawals up to a specified amount each year.

The fees associated with riders vary depending on the annuity and the chosen provisions. Rider fees can range from 0.25% to 1.15% of the annuity’s value per year.

Spreads in Indexed Annuities

Indexed annuities may also feature “spreads,” which are percentages of gains deducted by the insurance company before distributing interest into the annuity account. For example, if an indexed annuity earns 8% interest in a year, but a 2% spread applies, the actual interest credited to the account will be 6%.

Unlike annuity fees, spreads may not be subtracted from the account’s value if the annuity earns no interest due to poor market performance – spreads do not cost anything in negative environments, while fees are charged regardless of market performance.

Various other charges may apply, such as transfer charges, third-party transfer charges, contract fees, underwriting fees, expense risk charges, and redemption fees.

Bottom Line

Understanding annuity fees is a big part of the annuity selection process. Remember, investing involves risk, so pay fees wisely to align with your financial goals and ensure an annuity product that fits your general strategy.

At Annuity Association, we understand the challenges retirees face in today’s financial landscape. With a mission to bring transparency to the annuity buying process, we provide personalized retirement plans tailored to your needs.

Take the next step towards a sound retirement by taking our 30-second annuity quiz today, and help us determine the best type of annuity product for you.

Jeremiah Konger
Jeremiah Konger
CEO at Annuity Association

Jeremiah understood his whole life the importance of community and caring for those who are a part of it. Starting his first business venture at the age of 23, he gained invaluable experience in working with others for a joint purpose.
He founded his first wireless retail business in 2011, expanding it from one store to 12 locations across the state in just three years.
Once he sold his company, Jeremiah began the journey he’s on today, using his talents and experience to work with seniors in order to help them find the best means of financing their retirement plans.

He’s found his true calling working as a proud member of the Annuity Association, assisting retirees in building their safe financial future.