DEFINITION of 'L Share Annuity Class'

A common share class offered by a variable annuity that has a short surrender period but with higher administrative costs. The L share annuity class is ideal for investors who want to be able to withdraw funds from the account after a short period of time. Other share classes offered by variable annuities are A share, B share, C share, O share, and X share annuity classes.

BREAKING DOWN 'L Share Annuity Class'

A variable annuity is a long-term investment vehicle set up for retirement planners by an insurance company. The investor or retirement planner pays an annual premium fee which is invested in a combination of portfolios like equities, fixed income, and money markets. The wealth built from these investments are tax-deferred and the value of the variable annuity is correlated with the performance of the underlying investments. In addition to the premium paid, the annuitant also pays a mortality risk and expense (M&E) fee to compensate the insurance company for the risk it assumes under the annuity contract, e.g. the risk that an annuitant lives longer than his life expectancy. The insurance company makes guaranteed annuitized periodic payments to the annuity investor, that could be immediate or occur after a number of years. Variable annuities are regulated by state insurance regulators, the Securities Exchange Commission (SEC), and the Financial Industry Regulatory Authority (FINRA).

There are various share classes available in variable annuities, one of which is the L share class. The L share class differs from other annuity classes in terms of surrender charges, administrative and expense fees, and the M&E fee schedule. The surrender period is the period of time during which an annuitant may not withdraw funds from the account, otherwise, a surrender charge or penalty will be applied. The L share class has a surrender period of 3 to 4 years which indicates that the owner may start withdrawing money after 3 or 4 years depending on the financial institution’s contractual agreement. The average surrender period for a variable annuity is 6 to 8 years which makes the L share annuity an advantageous option as an annuitant can access funds in less than the average time.

Another advantage of the L share class is that it does not have an upfront sales charge like the A and O share classes. The front-end sales charge associated with A shares is a fee paid when share purchases are made, and is deducted from the investment amount of the portfolio. O share classes charge a premium-based sales charge equal to a fixed percentage of the invested amount of an account.

L share annuity classes offer a relatively higher mortality risk and expense (M&E) charge compared to other variable annuity classes. The M&E charge is a percentage of the annuitant’s account value and is an ongoing cost which continues even past the surrender period. The higher the percentage, the smaller the value of the investments. M&E charges for variable annuities typically range from 0.9 to 1.95%, with L share class fees in the higher spectrum of that range.

The administrative and distributive fees are the charges for servicing and distributing annuity payments. Some of these charges relate to the cost of transferring funds between accounts and the cost for preparing monthly statements and confirmation reports. Variable annuity administrative fees range from 0 to 0.6% annually with L shares offering the higher percentage of the account value. Some financial institutions combine the M&E and admin fee into one and classify the combination as an MEA fee, meaning annual mortality and expense fee and administrative charge.

Other fees that may be charged under the L share annuity class include an annual service charge and fees for special features such as long-term care insurance and a stepped-up death benefit. It is important that all investors read the contractual agreements rigorously to know and understand what costs will be associated with their annuity accounts.

The L share is most valuable to investors who want access to their investment funds after four years without being penalized. Consider the following example. A standard variable annuity with $100,000 initial investment offers a growth rate of 10% over 5 years. The surrender period is 8 years under the standard contract with annual MEA fees of 1.1%. After 5 years, the investment grows to $153,157.90 but the annuitant cannot access the funds without being penalized for another three years. An annuitant with an L share annuity class with a 4-year surrender period and annual MEA fees of 1.90% will see that his investment value after 5 years is $147,614.30, lower than the standard annuity contract above. But he can withdraw some of these funds during this time which he wouldn’t be able to do under another annuity class. So even though the annuitant is paying higher administrative fees, he has early access to his investment funds.

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