Annuities From Insurance Companies

Written by Jacey Harmon
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Insurance companies provide a wide selection of different types of annuities. Even with the many different types of annuities, there are basically two styles, variable and fixed. Annuities are used as savings vehicles that are later converted into a guaranteed payment stream. Each annuity has a certain amount of fees involved that can hurt the return of the portfolio compared to other investment vehicles.

A variable annuity is an annuity that gets invested into the bond and stock markets. These annuities are broken into sub-accounts, which are basically operated like mutual funds. Each sub-account has a different style of investment. For example, a sub-account may be a small cap stock fund or it may be a government bond fund. Variable annuities allow for diversification of your portfolio in a single account. If you are funding your annuity with periodic payments, each payment is broken down into each sub-account. The returns for variable annuities are directly tied to the performance of the stock and bond markets.

A fixed annuity is not tied to the stock or bond markets; instead, it receives a specified annual interest rate. Fixed annuities are usually used by those that have a low risk tolerance and do not mind missing out on large gains offered by the markets. Fixed annuities offer a guaranteed minimum interest rate that is an attractive benefit in falling interest rate environments.

Fees Involved with Annuities

There are a whole host of different fees that are involved with annuities. For starters, annuities are qualified investment plans that offer tax deferred growth. In exchange for the tax benefits, the IRS requires that the money stay invested into the account for until retirement age, age 59 1/2. If funds are withdrawn before retirement age, the IRS will deduct a 10 percent early withdrawal penalty tax.

Variable annuities are loaded with fees that investors should be aware of. Each sub-account will carry its own management fee similar to mutual funds. These fees are applied to the value of the sub-account on an annual basis and can range from one half to two percent. Variable annuities also offer a death benefit guarantee, which ensures that if the account owner dies, the beneficiary will be paid the highest anniversary account balance. For example, if the account was opened on January 1st and the highest balance on the anniversary date was $50,000 while the balance at death was $30,000, the higher number would be paid. For this benefit, the insurance company charges an insurance fee that can vary from one to four percent.

With any annuity, the insurance company will assess a withdrawal penalty if the money is withdrawn from the account. This fee may be a sliding fee that declines with every year the money remains in the account. For example, a withdrawal fee of eight percent may apply the first year but slide down to zero after the money has been in the account for eight years. Not all annuities offer sliding withdrawal penalties and they can be as high as 15 percent in some instances.

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