Are my annuities too expensive?

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Q. I’ve had annuities for about 10 years, and I’m only 50, so I don’t plan to take money from them soon. I’ve also heard, though, that annuities are more expensive than IRAs. Have I been making a mistake, and what should I do?
— Unsure

A. It all depends on the kind of annuities you have and what your goals are for the funds.

Let’s go through the different types and how they work.

Annuities generally fall into two categories: Immediate annuities and deferred annuities.

With an immediate annuity, funds are invested in exchange for immediate guaranteed income for a specified term or lifetime(s), said Gerard Papetti, a certified financial planner and certified public accountant with U.S. Financial Services in Fairfield.

“This type of annuity is appropriate for those who have the primary objective of maximizing current income and do not have a need for liquidity from the capital invested,” Papetti said.

Then there are deferred annuities, in which funds are invested and will grow tax-deferred until you take a withdrawal. Any gain withdrawn prior to age 59 ½ will be subject to a 10 percent penalty in addition to the ordinary income tax on the gain, Papetti said.

There are also different kinds of deferred annuities.

For those that are “fixed,” the insurance company will provide a fixed interest rate for a specified period. Upon expiration of the term, there is a guaranteed rate that is contractually provided, Papetti said.

“Indexed” annuities are different. These allow you to direct your investment into an index, typically the S&P 500, and that’s how your annual return is based.

“Indexed annuities are complex as they have a participation rate as well as a cap on how much of the index gain you can earn,” Papetti said. “They also provide a minimum rate that you will earn and may guarantee your principal from loss.”

Then you’ve got “variable” annuities, which are also deferred.

Papetti said a variable annuity allows you to direct your investment into various sub-accounts in bond, stock, real estate and alternative investment asset classes.

“Variable annuities can provide capital protection that can guarantee your principal from loss of value to you and/or your beneficiaries,” he said. “For this principal protection you will pay an additional fee which is called mortality expense.”

You can add an extremely popular rider called a Living Benefit Rider. This provides for a minimum annual accumulation rate and a minimum annual withdrawal rate based on your age at the time you take your first withdrawal, Papetti said. The accumulation rate is based on your original investment and will increase regardless of investment performance, Papetti said, but this accumulation value, also called an “income base,” is not a cash value and cannot be liquidated.

“This value is used to calculate how much income you can withdraw annually,” Papetti said. “The cost for a Living Benefit Rider can range from 1 percent to 1.8 percent annually.”

You said you’ve heard annuities are more expensive than IRAs. You need to understand that annuities can be owned within IRA accounts, in which case they are called qualified annuities. If you purchase the annuity with after-tax funds, they’d be called non-qualified annuities, Papetti said.

To your specific question, you need to determine what kinds of annuities you have and what they’re costing you.

If your annuities are deferred annuities, and they’re not immediate annuities, consider this.

“If they are fixed or indexed, there are no fees deducted from your investment value,” Papetti said. “The insurance company usually restricts your access by imposing a penalty called a surrender charge if you cash the annuity in prior to the surrender period, which typically range from seven to nine years.”

If your annuity is a variable annuity, check to see the cost of the mortality expenses, the sub-account fund expenses and any rider expenses such as the Living Benefit Rider.

These answers will tell you if the costs you’re paying are too high. But remember, you can’t really compare annuity costs to plain mutual funds because you’re paying for additional benefits. Decide first if you need the benefits, and then whether or not they’re worth the cost.

As with any investment there are advantages and disadvantages to each type of annuity. Annuities can provide valuable benefits when you retire if you understand how they work and you have the appropriate type based on your personal situation.

If you want to go more in depth with a financial professional, consider participating in a free money makeover with

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This story was first posted in November 2015. presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.