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Annuities are generally the most costly financial product, because the investor has to pay fees/expenses in order to secure the insurance guarantees offered.

Investors should take care to examine and understand all of the fees and expenses associated with annuities before purchasing.

Many annuities are sold by insurance salesmen or commission-based advisors who will receive a commission around 5% or more. These charges are not always apparent to you up front, as they do not usually come out of your actual principal according to your account balance.

Because these products are meant to be held long-term, and usually have a surrender charge that discourages you from moving the money out of the product within the first 5-10 years, the companies are able to effectively amortize the commission charges and blend them into the other fees which are present in the account.

Variable and indexed annuities are the main ones we’re referring to here. These fees may be called Mortality and Expense charges, or other names, but there are several many of them in these products.

To be honest, when it comes to investing in the markets, the fees you will pay on variable annuities, which include not only the charges of the annuity but also the charges present in the funds chosen within the annuity, are among the highest fees you can pay to invest, but this is not always the case.

For instance, if you are given a “bonus” to your account when you invest, which could be up to 6% or so added to your account right off the bat, and that additional amount gives you an edge based on the existing market conditions when you compare it to an investment account which did not receive that bonus amount, then you have made a wise choice.

Again, this is usually not the case.

But if you are paying an investment advisor 1-1.5% and the managed accounts or mutual funds he’s investing your money in have their own charge of 1%, or what have you, then you may be better off with some variable annuities. Some variable annuities are now offering flat fees based on the initial premium amount instead of the current account value.

In this situation, again, you may come out ahead with variable annuities versus managed money.

The point is that sometimes, because insurance companies are able to use some creativity to give these products features that a regular account will not have, they can add value that investors may benefit from.

Some, such as indexed annuities, will give investors a floor on their account earnings, so that maybe there’s not a chance of them losing money, and they get some market participation too. They will pay a lot of fees in indexed annuities, and will have their potential gains capped and chopped by participation rates as well, but they may have the product that they want to enter retirement with.

In a lot of ways, annuities are generally not ideal for younger people who have time to just ride indexed mutual funds, but we don’t want to make blanket statements here. If you are looking at an annuity as an option for your money, be sure to get a prospectus if it’s a variable product and to do your research to make sure you have a good grasp of what’s going on.

And don’t be overly optimistic, because if they can change the fees and lean on you during down times, that’s probably what they’re doing to do, so be aware of that. If you want the extra protections and benefits offered by the “riders” that add features that may appeal to you, be aware that they may have their own fee structures that add to your overall expenses and chip into gains.

But consider the fees you might be avoiding as well: no upfront sales charge, no fees for rebalancing or trading within your account, and possibly the fees charged by a fee-based advisor to talk about your portfolio. And if those features and bells and whistles make you a happy camper in retirement, then by all means, indulge yourself.

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