Common Variable Annuity Fees and Charges

Investing in variable annuity means that you will be paying multiple charges like management fees, mortality and expense charges and surrender charges. These fees and charges can be divided as annuity contract fees and the variable insurance fund costs which are included in the annuity contract. It is best to read the fine print and understand all the fees and charges associated with the annuity plan you have chosen.

What is Variable Annuity?

A variable annuity is essentially an insurance contract. Basically, the annuity is paid by the investor and the insurance company pays a fixed periodic payment in future. The invested money grows tax-free until withdrawal time and it is funded with after-tax money. Death benefit is a specialty to variable annuities and are are affected by fluctuations in the market. The annuity purchasers can choose to invest in stocks, bonds and other funds in an effort to diversify their portfolios. There are a few common fees and charges:

Mortality & Expense Risk charge (M&E):

All variable annuity charge an annual management fee which is also called the Mortality & Expense Risk charge (M&E). This is utilized to safeguard your portfolio and your future payments. This is fixed and is subtracted from your annuity balance yearly. This is included in the administration fees. It ranges from 0.5% to 2%.

Surrender Charges:

These are levied to discourage the investor from withdrawing the money early from the annuity. Apart from the 10% federal penalty levied by the government if the investor is below the age of 59 1/2 years, the insurance company also will levy a surrender charge as described in your contract. Most annuities will phase out the withdrawal charges over time. Young investors find variable annuity not a viable option because it is mostly targeted as retirement savings. Early cashing out is not a profitable option.

Administrative Fees:

Cost of transferring funds, issuing confirmation and statements, record keeping and other customer-service charges along with keeping track of purchase payments are covered under what is collected as administrative fees.

Operating Expenses:

This is levied to fund the shareholder mailing expenses, distribution costs and other miscellaneous expenses.

Special Features Fees:

A token fee is sometimes charged by some variable annuities as upfront commission. There are some ‘No-Load’ plans. These are more advantageous and should be chosen.

Investment Transfer Fees:

Some annuities charge for inter-transferring the investment options that can be avoided by wisely choosing a variable annuity which does not levy this fee.

Contract Maintenance Fees:

This is charged at a flat rate or $25-$30 annually to keep the contract active, but waived if the value of the annuity is high.

Premium Taxes:

Many local & governments impose premium taxes against the insurance companies.

The longer the investor lives, the better will be the returns from the variable annuities with a guaranteed lifetime income, investment services and death benefit. It is best to know all the rules that govern the contract to be sure you are buying what you will need for the future.

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