At first glance, a 3% annual cost for an annuity may not sound unreasonable.
On a $500,000 account, it is roughly $15,000 in the first year. And when that cost is wrapped in a pitch about guaranteed income, downside protection, or greater certainty in retirement, it can seem like a reasonable price to pay.
But the real cost of an annuity is not just the fee itself.
It is also the growth you give up by paying that fee year after year.
The Cost You See and the Cost You Don’t
Consider a hypothetical investor with $500,000.
Suppose the investments inside the account earn an average of 7% annually over the next 20 years.
At 7%, $500,000 would grow to approximately:
$1.93 million
Now imagine that the combination of annuity expenses, underlying investment costs, and optional riders reduces the investor’s effective return by 3 percentage points per year.
Instead of compounding at 7%, the account effectively compounds at 4%.
After 20 years, the same $500,000 would grow to approximately:
$1.10 million
The difference?
About $830,000.
That does not mean the investor wrote $830,000 worth of checks to the insurance company.
A large part of the difference comes from compounding.
Every dollar removed for expenses today is also a dollar that is no longer invested tomorrow and no longer earning returns 5, 10, or 20 years from now.
That is why the true cost of a recurring fee can become much larger than the percentage printed in a prospectus.
The Real Question Is What You’re Giving Up
A 3% annual cost may not sound outrageous when it is paired with promises of guaranteed income, downside protection, or greater certainty.
But you shouldn't evaluate those benefits in isolation.
The question is not simply:
“Are these benefits valuable?”
It is:
“Are these benefits valuable enough to justify what I may be giving up to get them?”
In our example, the difference between compounding at 7% and 4% over 20 years is roughly $830,000.
That is the tradeoff.
A lifetime-income guarantee may sound reassuring. Downside protection may sound attractive. But if obtaining those features may reduce long-term growth by hundreds of thousands of dollars, the bar for proving their value should be high.
And that is where product-based sales pitches can fall short.
They tend to focus heavily on the feature:
Guaranteed income.
Protection.
A bonus.
A death benefit.
But the real planning question is whether those features justify the economic cost.
If not, the product may be solving a problem that was never really there.
Sometimes the Solution Is a Better Plan
At Hanover, we do not start by asking which product can solve a problem.
We start by asking whether the problem can be solved through planning.
A resilient retirement income strategy does not have to come only from an insurance contract. Coordinating Social Security, portfolio withdrawals, cash reserves, taxes, and investment structure can all help create a more durable income plan.
Likewise, leaving a meaningful legacy may depend as much on beneficiary designations, estate planning, tax strategy, and account structure as it does on purchasing a costly death-benefit rider.
That does not mean insurance products never have a role.
It means they should earn that role.
Sometimes the best solution is not adding another product.
It is building a better plan.
At Hanover, our job is to look across the entire financial picture and use the tools that fit the client’s actual needs, without starting from the assumption that the answer has to be something expensive, complicated, or permanent.