Investors will pay several charges when they invest in a variable annuity. These charges usually reduce the value of the account and the return on the original investment.
Often, they will include the following costs:
- Surrender Charge: If the investor withdraws money from a variable annuity within a certain period after a purchase payment (typically within six to eight years, but sometimes as long as 10 years), the insurance company usually will assess a type of sales charge known as a "surrender" charge. This charge is used to pay the investment representative's commission for selling the variable annuity. Generally, the surrender charge is a percentage of the amount withdrawn and declines gradually over a period of several years, known as the "surrender period".
For example, a 7% charge might apply in the first year after a purchase payment, 6% in the second year, 5% in the third year, and so on until the eighth year, when the surrender charge no longer applies. Often, contracts will allow the annuitant to withdraw part of the account value each year - 10% or 15% of the account value, for example - without paying a surrender charge.
- Mortality and Expense Risk Charge: This charge is equal to a certain percentage of the account value, typically in the range of 1-1.25% per year. This charge compensates the insurance company for insurance risks it assumes under the annuity contract. Profit from the mortality and expense risk charge is sometimes used to pay the insurer's costs of selling the variable annuity, such as a commission paid to the investment representative for selling the variable annuity.
- Administrative Fees: The insurer may charge fees to cover record-keeping and other administrative expenses. This may be charged as a flat account maintenance fee (perhaps $25 or $30 per year) or as a percentage of the account value (typically in the range of 0.15% per year).
- Underlying Fund Expenses: These are fees and expenses imposed by the separate accounts that are the underlying investment options in the variable annuity.
Tax-Free "1035" Exchanges
Section 1035 of the
The annuitant may, however, be required to pay surrender charges on the old annuity if he or she is still in the surrender charge period. In addition, a new surrender charge period generally begins when the client switches into the new annuity. This means that, for a significant number of years (as many as 10 years), the client typically will have to pay a surrender charge (which can be as high as 9% of purchase payments) if he or she withdraws funds from the new annuity. Furthermore, the new annuity may have higher annual fees and charges than the old annuity, which will reduce the annuity's returns.
Variable Life Insurance
RetirementAn in-depth guide to everything you need to know and watch out for with variable annuities.
MarketsIf this investment product has caused you sleepless nights, it's time to consider alternatives.
MarketsThanks to a special tax code clause, you can surrender a variable annuity without paying income tax.
Financial AdvisorThe key to not paying excessive fees for annuities is understanding how they work. Here's what you need to know.
TradingVariable annuities are another way to save money tax-deferred - but don't jump in blindly!
RetirementAnnuities give retirees guaranteed income but they aren't all created equal.
RetirementUnderstand how annuities provide several unique benefits, but many drawbacks as well, and identify the situations where they are not the best investment.
RetirementBefore investing in a variable annuity, discuss your personal financial picture with a knowledgeable financial advisor.
InvestingAnnuities suffer from a few perception problems. This primer that covers the good, the bad and the ugly of annuities.
RetirementAnnuities guarantee some degree of fixed income in retirement. But is the security worth the fees and less favorable tax treatment? How to decide.