Annuity costs depend on the type you buy and who sells it to you
An annuity's cost is not a single number. You might pay a lump sum of $50,000 to $500,000 or more upfront, or you might pay through monthly contributions over time. The insurance company also takes fees from your account — typically 0.5% to 3% per year, depending on what kind of annuity you own and what services come with it. Some annuities have surrender charges if you withdraw money early, and some have commissions built into the price that you never see as a separate line item.
The real cost depends on three things: how much money you put in, what annual fees the annuity charges, and whether you need to pay to get out of it later. This section covers what each of those actually means in dollars.
Key Takeaways
- Initial cost ranges from a few thousand dollars to several hundred thousand, depending on how much may provide income you want and for how long.
- Annual fees typically run 0.5% to 3% of your account balance each year, taken automatically by the insurance company.
- Surrender charges can be 5% to 10% of your withdrawal amount if you take money out in the first 5 to 10 years, though some annuities have no surrender period.
- Commissions paid to the person who sold you the annuity are usually built into the price you pay, not shown separately.
- Fixed annuities generally cost less in annual fees than variable annuities, which invest in stock and bond funds.
How much you pay upfront
The upfront cost is called the premium. You can pay it all at once (a single premium) or over several years (flexible premiums). There is no standard price — it depends entirely on what you want the annuity to do.
If you want a straightforward fixed annuity that pays you a set amount each month for life, you might pay $100,000 to $300,000 upfront, depending on your age and how much monthly income you want. If you want a variable annuity with investment options and living benefits (like a may provide withdrawal amount), the premium is often higher because those features cost more to provide.
Some people pay $10,000 to $20,000 to start, then add money monthly or yearly. Others write a check for $500,000 all at once. The insurance company will quote you a specific premium based on your age, the monthly payment you want, and how long you want payments to last.
Annual fees that come out of your account each year
Once you own the annuity, the insurance company charges you a yearly fee, usually expressed as a percentage of your account balance. This is called the mortality and expense fee, or M&E fee, and it typically ranges from 0.5% to 1.5% per year on a fixed annuity.
If you own a variable annuity (one that invests in mutual funds), you pay the M&E fee plus the cost of the funds themselves. Those fund fees can add another 0.5% to 2% per year. So a variable annuity might cost you 1.5% to 3% or more annually, all taken from your account balance automatically.
Some annuities also charge a rider fee if you add optional features like a may provide income rider or a long-term care rider. These typically cost 0.25% to 1% per year on top of the base fee. A rider that guarantees you can withdraw 5% of your account balance each year, no matter what the market does, might cost 0.75% annually.
These fees compound over time. On a $200,000 account with a 1.5% annual fee, you pay $3,000 in year one. If your account grows to $250,000, you pay $3,750 in year two. The fee grows with your balance.
Surrender charges if you withdraw early
Most annuities have a surrender period — a window of time (usually 5 to 10 years) during which you cannot withdraw your money without paying a penalty. The penalty is called a surrender charge, and it is a percentage of the amount you withdraw.
Surrender charges typically start at 5% to 10% in year one and decrease by 1% each year. So if you surrender (withdraw) $50,000 in year two of a 10-year surrender period with a 7% starting charge, you might pay $3,500 in surrender charges (7% minus 1 year = 6% of $50,000). By year seven, the charge might be 1% or zero.
Not all annuities have surrender charges. Some fixed annuities and when ready annuities have no surrender period at all, or a very short one. When you get a quote, ask whether the annuity has a surrender period and what the charges are in each year.
Surrender charges are separate from annual fees. You pay both: the annual fee comes out every year, and the surrender charge applies only if you withdraw more than a small amount (usually $10,000 to $25,000 per year) during the surrender period.
Commissions built into the price
The person who sold you the annuity received a commission from the insurance company. That commission is usually 5% to 10% of your premium, and it is built into the price you pay. You do not write a separate check for it — the insurance company deducts it from your money before investing it.
If you pay a $100,000 premium and the commission is 7%, the insurance company keeps $7,000 and invests $93,000 for you. This happens automatically and is not always clearly explained at the time of purchase.
Some annuities sold by brokers or financial advisors have higher commissions (up to 10% or more), while annuities sold directly by insurance companies sometimes have lower commissions. The commission structure is part of the contract, and you can ask to see it before you buy.
How different annuity types compare in cost
| Annuity Type | Typical Annual Fees | Surrender Charges | Best For |
|---|---|---|---|
| Fixed annuity | 0.5% to 1.5% | Usually 5% to 7%, declining | People who want predictable income and lower fees |
| Variable annuity | 1.5% to 3% or higher | Usually 5% to 10%, declining | People willing to invest in stock and bond funds for growth |
| when ready annuity | 0.5% to 1% | None or very short | People who want income to start right away |
| Deferred income annuity | 0.5% to 1.5% | Varies; often minimal | People saving for income later in retirement |
What to ask before you buy
When you are looking at annuities, request a written summary that shows: the total premium you will pay, the annual fees as a percentage and in dollars, the surrender charge schedule for each year, any rider fees, and the commission the seller will receive. Do not rely on verbal explanations — get it in writing.
Ask specifically whether the annuity has a surrender period and what happens if you need to withdraw money for a medical emergency. Some annuities allow you to withdraw a small percentage (often 10% per year) without a surrender charge. Ask whether that applies to you.
Compare at least two or three annuities from different companies. The same monthly income might cost $150,000 from one company and $180,000 from another, depending on their fee structure and the commissions involved. Shopping around can save you tens of thousands of dollars.
Frequently Asked Questions
Can I get my money back if I change my mind?
Most states have a "free look" period of 10 to 30 days after you buy an annuity. During this time, you can return it and get your money back with no surrender charge. After the free look period ends, you are subject to the surrender charges in your contract. Read the contract carefully to see when your free look period ends.
Do I pay taxes on the fees?
No. Annual fees and surrender charges are deducted from your account before taxes are calculated. However, if you withdraw money from a non-may have access to annuity (one you bought with after-tax money), you may owe income tax on the gains, separate from any surrender charges. Consult a tax professional about your specific situation.
What if the insurance company goes out of business?
Each state has a guaranty fund that protects annuity owners if an insurance company fails. The protection limit varies by state but is typically $100,000 to $250,000 per person per company. This covers the value of your annuity, not the fees you paid. Check your state's insurance commissioner's website for the exact limit in your state.
Are there annuities with no surrender charges?
Yes. when ready annuities and some fixed annuities have no surrender period because you cannot change your mind once payments begin. Some companies also offer annuities with very short surrender periods (2 to 3 years) or no surrender charges at all, though these may have higher annual fees to compensate.
How do I know if an annuity is worth the cost?
That depends on your age, how much may provide income you need, and how long you expect to live. A financial advisor or tax professional can help you compare the cost of an annuity to other ways of creating retirement income. Request a detailed cost breakdown from the insurance company and compare it to at least one other option before deciding.