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Variable Annuities: Fees and Charges

By Compuquotes Team on October 20th, 2008
Annuity

Investing in a variable annuity will incur certain charges. Understanding these is important, because each of them will reduce the value of your annuity account.

To find out exact details about the types of fees and charges you'll incur as the owner of a variable annuity, you can check the prospectus for any annuity you're interested in. Depending on your specific annuity the charges might include the following:

Surrender Charges

A surrender charge applies in situations where you withdraw money within a certain period of time after making a purchase payment. The time period usually ranges from six to ten years, depending on the company you purchase your annuity from.

The surrender charge is essentially a sales charge, and is used to pay a commission to your financial agent for selling you the annuity. The charge is usually a percentage of the amount you withdraw from the account. The amount you pay decreases each year following the purchase payment. For example, you might pay a 6% charge in the first year, 5% in the second, or 4% in the third year following the withdrawal, with the amount of the charge decreasing each year until you reach the end of the surrender charge period.

Most variable annuity contracts will allow you withdraw a certain amount from your account (usually a fixed percentage of the value) each year without being subject to a surrender charge. For example, you might be able to withdraw 10% of the account's value free of charge each year. In this case, if you withdraw $5,000 from an account worth $10,000, the first $1,000 would be free of charge, and you would pay fees for withdrawing the additional $4,000.

Mortality and Expense Risk

Your insurer will take a mortality and expense risk charge each year-usually around 1.25% of your account's value-as compensation for the risk it assumes by providing you with an annuity. The fee is usually calculated on the basis of your account's average value over the year, and may be used to pay your insurer's costs, including any commission paid to your agent. On a $10,000 value account, for example, you'd pay $125 in mortality and expense risk fees if the charge was 1.25% per annum.

Administrative Fees

These fees are deducted by your insurer to cover the costs of record-keeping and other administrative tasks. You may pay administrative fees either as a flat maintenance fee or as a percentage of the value of your account.

Underlying Fund Expenses

These are fees and expenses that are incurred by administration of the mutual funds that comprise your annuity account investment options.

Miscellaneous Fees and Charges

Optional extra account features such as an increased death benefit or a guaranteed minimum income benefit will usually incur extra fees that reduce the value of your account.

In addition, other types of charges, such as fees for transferring account funds between different investment options, might apply depending on the terms of your annuity contract.

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