Investing in a variable annuity is somewhat more complex than other retirement choices before you. Do your due diligence: Read all the material your insurance company furnishes you, and ask questions again and again until you are satisfied that you truly understand the details and impact of putting your money in this investment vehicle. Once you get past the razzle-dazzle of all the miraculous features of an annuity, you need to get to the nuts and bolts of exactly how much it is going to cost you to put your money in one. The costs are reflected in a host of fees or charges. The net result of these fees is that they reduce the value of your account and the return on your investment.

Surrender Charges

Once you open an annuity account, you will be forced to pay surrender charges if you begin to withdraw funds before a certain number of years has been reached. The charge is a percentage of the amount withdrawn and amounts to recovering the sales commission for the financial professional who sold you the annuity. Some annuities have a ten-year waiting period before any surrender charges are waived. Six to eight years, however, is more common. The closer to your initial purchase date you begin to withdraw, the higher the surrender charges you would pay, based on a descending scale. If the terms for your policy have a six-year waiting period and you began to withdraw funds after the first year, you might be charged 5 percent the first year you take out some of your funds, 4 percent the next, 3 the next, then 2, and finally 1 percent until you are released from that clause.

Mortality and Expense Risk Charge

The mortality and expense risk charge is a built-in source of earnings for the insurance company holding your annuity. It is an annual assessment based on the value of your account, often around 1.25 percent per year. The insurer collects these funds to offset their risks in carrying your policy, the commissions paid to the person who sold you the policy, and other costs of selling the policy. The mortality and risk charge will be based on the average account value for the year. For example, if your policy had an average value of $30,000 for the year and you were assessed 1.25 percent, you would pay $375 in mortality and expense risks that year. If the following year your account average value was $28,000 your charge would be $350. Other likely annuity fees and charges could include:

• Administrative fees — can be a flat fee or a small percentage to maintain the account

• Underlying fund expenses — the fees and expenses of the mutual funds where your monies are invested will be charged back to you indirectly

• Fees for stepped-up death benefits. This will lock in a higher value of the account when earnings are good.

• Fees for long-term-care insurance

• Fees for guaranteed minimum income benefit. This protects you if the value of the account falls below what would be needed to support the predictable income you seek.

In some cases, although not always, no initial loads (sales charges) are applied. You owe it to yourself to have your financial professional explain all charges and the impact they will have on your account.

You may wonder if it is possible to move your current annuity contract to a new annuity contract. The answer to that question is yes, it is possible to make such an exchange, shielding income and investment gains from taxes. You might find features you prefer in another annuity, features such as wider investment options, a bigger death benefit, or better payout choices. Just be mindful of any surrender charges you might trigger by withdrawing funds from the old annuity. The new contract will reset the surrender period back to the beginning.

Bonus Credits

A new twist in evaluating the pros and cons of an annuity is the introduction of bonus credits by some insurance companies. This incentive adds a few extra percentage points to each contribution payment you make to your account as a “bonus.” If a bonus credit of 2 percent is being offered, your $40,000 account will get $800 from the insurance company. No gift comes unburdened, however. Sometimes the bonus is restricted to the initial payment, or to payments made in the first few years only. Sometimes the fine print of the contract says the bonus is negated if funds are withdrawn in a particular time frame. Additional trade-offs for the bonus credit may come in the form of:

• Higher Longer Higher

• Higher surrender periods

• Higher mortality and expense risk charges and other charges

You will need to weigh carefully whether the higher expenses negate the incentive of the bonus credit. Don't forget — the insurance companies are in business to make money.