Buying a Variable Annuity can cost more than you think – Know the basics before you buy.

Have you ever wondered why annuities have gotten a bad rap over the years? Check out the six associated costs with Variable Annuities! Brokers may lure you in with the aspirations of high gains, but what many buyers of variable annuities don’t realize is that their principle is not protected from market downturn like they are with other annuity products such as Fixed Indexed Annuities, Multi-year Guaranteed Annuities.  Not only is the buyer’s principle not protected, but the annuity is also loaded with fees.  Let’s take a closer look at some of these fees. 

Six costs associated with Variable annuities:

1. Contract Maintenance Charges- Contract maintenance usually runs around $30.00-$150.00 per contract. It can, however, be waived depending on the amount invested.  Generally, $25,000 – $100,000 will get this waived with most companies.
2. Administrative Service Charge – This charge usually ranges from .10% – .30% of the contract value annually. In other words, if you invested $500,000, the service charge is .15%, and the cost would be $750.00 annually. 
3. Mortality and Expense (M&E) Charge – This is typically the second-highest charge with a variable annuity.  This charge will pay for the death benefit if the current contract value is less than the guaranteed death benefit. The expense portion is a layer of safety for the insurer. This is usually combined; they are generally around 1.25% annually for a variable annuity. In our $500,000 annuity example, this would be $6250.00.
4. Sub-Account Management Fees – These are separate account expenses.  This pays for money management or the funds that are invested. The fee is roughly 1.1% per year on average; however, they can run up to 1.30% each year depending on the insurer and product. For our example of $500,000, let’s just go on the low side of 1.1%. This would be $5500.00
5. Charges for Riders  – These are living benefit fees such as lifetime income.  For variable annuities, they are typically around 1.5%. In Our example, this will add another $7500.00.
6. A contingent sales charge or surrender charges – Most annuities have back-end loads charged on the liquidation of a variable annuity. As with most annuities, investors can usually take out up to 10% each year without penalty during the contract period. If an investor takes anything beyond the 10% withdrawal, it will generally generate fees starting around 9% and decreasing each contract year period until it is 0% at the end of the surrender penalty period. 

How fees can Impact your returns

Realize that all ongoing fees, except those fees associated with surrender charges and contract maintenance charges, are expressed as annual charges, such charges are computed and deducted daily.  Take these charges and calculate them by your investment amount.  You will be shocked to see the amount of return you need to make in order to break even.

Fees and Broker Compensation

Clients, in many cases, do not realize they paying fees because they are like Mutual Funds on quarterly statements.  The fees aren’t “hidden” like a lot of people say; you just have to know where to look in the contract.  Be sure to ask your agent or broker about the fees.  They won’t volunteer the information freely for fear of you changing your mind or running like the wind! With a commission of up to 15%, they have a lot to lose, but not as much as the purchaser if they are informed. The only time a variable annuity contract owner escapes paying most types of expenses is on assets invested in a fixed rate option.