The Framing
One of the most common things annuity owners hear from their agent is: “There are no fees on this product.”
It’s technically not a lie. But it’s not the truth either.
The costs inside most annuities don’t show up as a line item on your statement. They’re built into the structure of the product itself — through caps on your gains, spreads on your returns, participation rates, and surrender schedules. You’re paying. You just can’t see it.
That doesn’t make annuities bad. Every investment has costs, especially ones that provide guarantees. But when someone tells you a product is “free” and the company behind it is posting record profits, there’s more to the story.
We sat down with Bill Aldrich, founder of AnnuityMax, to break down how annuity costs actually work — in plain English — and what you can do to find out what you’re really paying.
Q: When a client tells you “my agent said there are no fees,” how do you start that conversation?
Bill Aldrich: There are no fees you can see. That’s the key distinction.
I explain to clients that the invisible fees are built into the product through caps, spreads, surrender charges, and a few other mechanisms. The most common “no fee” annuity product is a Fixed Indexed Annuity, or FIA. The trade-off is that the product has caps on your gains.
Here’s how it works: if your cap is 10% and the market goes up 30%, the insurance company keeps 20% and you’re capped at 10%. That difference between what the market returned and what you received — that’s the cost. You just don’t see it labeled as a “fee” anywhere.
There are many different caps and spreads an insurance company can use to make sure they get their profit. Annuity companies actually saw record inflows in 2025, and many reached record profits. That money is coming from somewhere.
I’m not saying fees are a bad thing necessarily. Nearly every investment has some sort of cost, especially one that provides guarantees. But it’s something clients should be aware of. When an agent says “no fees,” there is always more to the story.
Q: Beyond caps, what are the other ways costs hide inside an annuity?
Bill: Some companies use spreads as a way to capture fees. The insurance company keeps a portion of the profits — think of it as a fixed fee off the top. If you have a 5% spread, the first 5% of any profits goes to the insurance company before you see a dime.
Another common one is participation rates. Say you’re in the S&P 500 index inside your FIA and you have a participation rate of 90%. If the market goes up 10%, your return is 90% of that gain — or 9%.
Where you need to be extra cautious is when the insurance company combines multiple levers — or uses all three.
Let me walk through an example. The S&P 500 goes up 10%. You have a 90% participation rate, so your return starts at 9%. But they add a 5% spread, so your return drops to 4%. And there’s a 3% cap, so your return drops to 3%.
The index returned 10%. You received 3%.
That’s an intentionally stacked example to show how the mechanics work. But it should be something you’re aware of when shopping for an FIA that’s being marketed as having “no fees.”
Q: Let’s talk about surrender charges. Most people know they exist but don’t fully understand how they work. Can you break those down?
Bill: Most annuities have surrender charges typically ranging from five to ten years, with seven years being the most common.
The way it usually works is this: anything you pull out beyond the 10% free annual withdrawal amount will trigger a surrender charge. Most commonly, the surrender charge starts at the length of the contract in years. So if you have a seven-year surrender period, the penalty in year one is 7%. Year two it drops to 6%. Year three, 5%. And so on down to 0% at the end of the contract.
This structure allows the insurance company to know they have those funds to invest for that period of time. If the annuity is part of your long-term plan and you keep some assets liquid elsewhere, this won’t be an issue for most people with proper planning.
But there is an opportunity cost. And there’s the potential for additional fees stacking on top. That’s something you need to be aware of before you commit.
This surrender schedule is why alignment is so critical. If you’re locked into a 7% penalty but your goals change in year two, that annuity suddenly becomes very expensive to exit.
Q: You’ve said fees aren’t necessarily bad — they’re the cost of guarantees. Where’s the line between reasonable and excessive?
Bill: Great question, and this is where being independent is such a strong factor.
When I evaluate annuity products for clients, I may look at 80 to 100 different products across dozens of different carriers. That gives me real insight into what the actual fees are across the market — not just one product or one carrier.
For certain products like fixed annuities, it’s straightforward — you’re comparing the guaranteed rate of return. It gets more involved with Fixed Indexed Annuities and when you’re shopping for income riders.
My starting point is always: let’s look at the top 20% for lowest spreads, highest participation rates, highest caps — and break it down from there.
The primary tool, though, is having access to what the marketplace is actually providing at any given time. When you can see the full landscape, it becomes pretty easy to notice when a fee, a surrender charge, or anything else is not in line with market standards.
Q: If someone reading this wants to find out what they’re actually paying inside their annuity, what should they do?
Bill: Three things.
First, look for any rider fees. Those should be right on your statement and fairly clear.
Second, look into the spreads, caps, and participation rates I mentioned earlier. You’ll need to review those in some detail to figure out what you’re actually giving up in return for the guarantees.
Third — and this is the one most people don’t think to do — call the insurance company directly and ask for a fee disclosure and an in-force illustration. This should give you the information you need to see all the costs in one place.
Just because you don’t see anything labeled as a “fee” on your actual statement, don’t be fooled into thinking the product is free.
Q: What do you want someone to take away from this?
Bill: This article is all about transparency.
I hope anyone reading this walks away with a better understanding of how costs in “free” annuities actually work. This isn’t saying all fees are bad — but if I’m investing my retirement funds into something, I want to know what it’s costing me. You should too.