How do annuities make money

There are surrender charges because they're making up for the commissions they pay to the annuity agent and they're making up for administrative costs and some of the guarantees they had to lay into that policy. These surrender charges primarily come from if you back out during the middle of that surrender charge period. So, once again, how annuity companies make money is not a profit center for them; that stems from getting some of their money back. There's a lot of costs that go into, say, a year product.

Sometimes the annuity companies break-even point might be at year four, or year five, and the surrender charges are in there to make up for that.

So the point of the matter is, annuity companies are innovative. These companies are more regulated than banks. They buy fixed instruments that you and I can't buy and when you're buying a lifetime income product, they're keeping the money. They invest the money in those fixed instruments that are investment-grade bonds which are more innovative when they're giving back the money to you over your life expectancy, which, in my opinion, is a good move.

Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators , get all six of my books for free , and most importantly book a call with me so we can discuss what works best for your specific situation. Licensed in All 50 States. Will Do. Not Might Do. Book a Call. Use The Calculators. Get The Books. See Live Rates. How Annuity Companies Make Money. Tweet This! Annuity companies aren't better than banks, but they're, in my opinion, more regulated.

First Name:. These guarantees can add some certainty to how much money you need to save to retire comfortably. But individual states have a life and health insurance guaranty association that could help you get some relief if the insurer goes under. And while annuities may sound like an easy solution to providing income in retirement, that income can cost. Annuities come with a variety of fees that can add up quickly, which can include surrender charges, insurance charges, investment-management fees, rider fees and contract fees just to name a few.

On top of the fee issue, an annuity may not provide the same returns you might be able to achieve investing elsewhere. This could leave you with a smaller income in retirement than you could have generated by investing elsewhere, like in an a retirement account. You may have to pay a surrender charge — which can be expensive — if you want to sell or withdraw money from an annuity too soon after purchasing it.

Check the contract to find out specifics for your annuity. If you do decide to get an annuity, make sure you understand the annuity you buy beforehand. This includes understanding the fine print and asking for help from a qualified professional if you need it. Image: Older man looking through coffee shop window, wondering. In a Nutshell Annuities are essentially insurance contracts. You pay a set amount of money today, or over time, in exchange for a lump-sum payment or stream of income in the future.

Advertiser Disclosure We think it's important for you to understand how we make money. Show Hide. About the author: Lance Cothern is a freelance writer specializing in personal finance. The first thing you need to know is that there are two main types of annuities you can choose from: fixed and variable. Putting an annuity together is a lot like ordering a burrito at Chipotle, just not as tasty.

You can create an annuity based on your preferences and your own personal situation, minus the chips and guac. Here are the different ways you can put an annuity together. If you have a large pile of money—maybe through years of saving or an inheritance—you can pay for an annuity in one big payment.

Or you can pay for the annuity with a series of payments over many years. You can choose whether or not your annuity pays you right away immediate annuity or at some point in the future deferred annuity. One of your options is a lifetime annuity that will pay you a certain amount for the rest of your life. Or you could go with a fixed period annuity that will send you payments for a set amount of time—anywhere from 5 to 25 years. There are some benefits to having a variable annuity. For starters, you can leave a beneficiary on the annuity so that the payments you were getting can go to a loved one when you die.

Some variable annuities even offer a guarantee on your principal investment. A lot of this sounds pretty appealing at first, but we want you to pump the brakes for a minute. Annuities are bogged down by a lot of fees that cut into the return on your investment and keep your money tied up. This is why we don't recommend annuities. And that comes at a steep price.