One key element to understand about annuities is the fees that are charged. Although the dollar amount of each fee may seem small, the cumulative effect can add up, so when comparing annuities, evaluate the fees being charged. Here are some basic things to know about fees:
IMPORTANT NOTE: Make sure your annuity investing is for the long term.
SUGGESTION: Some companies have no-load or low-load annuities, that is, annuities with no or low surrender charges. The absence of a surrender charge may be attractive, but it is only one of the costs to be considered. Consider all other costs as well as expected investment performance and the strength of the company selling the annuity.
IMPORTANT NOTE: Some annuities offer bailout provisions, letting you pull out all your money free of surrender charges if your renewal interest rate drops below a certain amount. Annuities with bailouts typically pay lower initial rates. You're probably better off without this feature. If your rate drops enough to trigger the bailout clause, you may have a hard time finding another annuity offering a better return.
At first glance, it may seem that the variable annuity is more expensive than the fixed annuity. However, this is not necessarily true. With a fixed annuity, the insurance company sets the interest rate, and so can establish the rate at a lower amount than the rate it expects to earn on its investments. This difference in rates allows the insurance company more leeway to cover administrative expenses.