Annuity Costs

How much you pay for an annuity depends on how much monthly income you want to receive, your age when you buy the annuity contract and the time when you want to start receiving income. It also depends on how you wish to make your payments -- in a single sum or in a series of payments. For a single-premium deferred annuity the smallest amount of purchase payment a company may accept can be $2,500 to $10,000. For a flexible premium retirement annuity the company may accept payments of less than $100, although it may require more in the first year. You should compare annuity contracts offered by different companies since sales charges, surrender charges, interest rates and payouts can vary.

Let's take a look at deferred annuities first. Most companies offer plans that levy no sales charge. They are called "no-load" plans. Instead, you may be required to pay a surrender charge if you decide not to keep your contract. Surrender charges typically decrease to zero after five to 10 years, from issue of the contract or from receipt of a particular premium payment. Some companies waive the surrender charge if the interest rate being credited to the contract falls below a specified level.

Some companies charge a small annual maintenance fee, perhaps in years in which no premium payment is made, under a flexible premium retirement annuity. Such fees, as well as the sales charge (if any) are deducted from the accumulated contract value. Maintenance and asset management fees are common under variable annuities.

Immediate annuity contracts cannot be surrendered, and there is no contract value as such. Accordingly, sales charges, surrender charges and maintenance fees are not applicable.

Some contracts let you borrow against your accumulated contract value. You may also be able to use the annuity as collateral for a bank loan.

With deferred annuities, insurance companies guarantee the interest that will be credited to your contract value. Every contract contains a long-term guarantee. The company, typically, credits interest at rates higher than the guarantee, as its investment results permit, and it may provide short-term guarantees at rates higher than the long-term guaranteed rate or rates.

With an immediate annuity, you will be told at the time of purchase exactly how much money you will get and when you will get it.