What does an annuity cost?

As with many financial products, there are costs when you buy an annuity. Commissions are often 1% or more of the total amount you pay. That's $1,000 on a $100,000 annuity.

If you are buying from a financial institution that already has your investments, you may be able to get a better deal. However, you will not see the actual charges, because they?re factored into the income you get.

How are annuities priced?

The financial institution looks at a number of things, including:

• How much you want to spend. This is called your premium. The bigger your premium, the higher your income will be each month.
• How many payments they will have to make over the years. With a term-certain annuity, they know the exact number. With a life annuity, they have to estimate based on your gender, marital status, and state of health. Then they use insurance tables to project how long they will likely have to pay you.
• The costs of paying you the annuity over the years. This includes sales commissions and administrative costs. Also, every time you add an extra option, the costs of your annuity increase, and your monthly annuity payment decreases.
• What they may earn by investing your premium over the years. This is how the financial firm will fund your payments.

Once they understand all these things, they can determine the size of your monthly payment.

How do options affect what my annuity pays?

This chart is based on an initial investment of $100,000 in a single straight life annuity. It shows how your income may drop as you add extra options.

Type of annuity	What it's designed to do	Sample monthly annuity income
Straight life	Provides you with income for life	$650
Life plus five-year guarantee	Provides you with income for life. Guarantees 60 payments to your estate in case you die within the first five years of your contract	$640
Life plus 10-year guarantee	Provides you with income for life. Guarantees 120 payments to your estate in case you die within the first 10 years of your contract	$620
Life plus joint-and-last-survivor	Provides income for life for you and your spouse. Payments stop when both of you have died	$500
Indexed life annuity	Provides income for life. Payments increase with inflation to maintain your buying power	$400 to start (goes up when prices rise)