How much does a Variable Annuity cost?
You will pay several charges when you invest in a Variable
Annuity (“VA”).
Often, they will include the following:
·
Surrender charges – If you withdraw money from a VA within a certain period after a
purchase payment (typically within six to eight years, but sometimes as long as
ten years), the insurance company will usually assess a surrender charge, which
is a type of “sales charge”. This charge
is used to pay your financial professional a commission for selling the VA to
you. 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a percentage of the amount withdrawn, and declines gradually over a period of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 you
to withdraw part of your account value each year – 10% or 15% of your account
value, for example – without paying a surrender charge.
For
example: You
purchase a VA contract with a $10,000 purchase payment. The contract has a
schedule of surrender charges, beginning with a 7% charge in the first year,
and declining by 1% each year. In
addition, you are allowed to withdraw 10% of your contract value each year free
of surrender charges. In the first year, you decide to withdraw $5,000, or
one-half of your contract value of $10,000 (assuming that your contract value
has not increased or decreased because of investment performance). In this case, you could withdraw $1,000 (10%
of contract value) free of surrender charges, but you would pay a surrender
charge of 7%, or $280, on the other $4,000 withdrawn.
·
Mortality and expense risk charge – This charge is equal to a certain percentage of your
account value, typically in the range of 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 VA, such as
a commission paid to your financial professional for selling the VA to you.
For
example: Your VA
has a mortality and expense risk charge at an annual rate of 1.25% of account
value. Your average account value during
the year is $20,000, so you will pay $250 in mortality and expense risk charges
that year.
·
Administrative fees – The insurer may deduct charges 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 your account value (typically in the range of 0.15% per year).
For
example: Your VA
charges administrative fees at an annual rate of 0.15% of account value. Your average account value during the year is
$50,000. You will pay $75 in administrative fees.
·
Underlying Fund Expenses – You will also indirectly pay the fees and expenses
imposed by the mutual funds that are the underlying investment options for your
VA.
·
Fees and Charges for Other Features – Special features offered by some variable
annuities, such as a stepped-up death
benefit, a guaranteed
minimum income benefit, or long-term care
insurance, often carry additional fees and charges.
Other charges, such as initial sales loads, or fees for
transferring part of your account from one investment option to another, may
also apply. You should ask your financial professional to explain to you all charges
that may apply. You can also find a description of the charges in the
prospectus for any VA that you are considering.
