How to Read a Variable Annuities' Contract

Variable annuities are typically contracts with an insurance company. Under this contract the company agrees to periodically pay the customer in the future. A variable annuity contract is purchased by paying for at least a single purchase or more. Before making a variable annuity contract you should get to know the basics of the annuity that you are considering. It is important that you comprehend the cost and expenses regarding the investment. Read the directions below to understand the variable annuity contract and its associated costs.

Understanding the Mortality and Expense Risk Charge

The first thing you need to know is what is mortality and expense risk charge. The expense is paying the insurance company for the risk they take to provide the annuity contract to you. For example you invest $10,000 in variable annuity; the poor performance of the market knocks the value down to $7,000. On your passing away, the insurance company will be paying your beneficiary $ 10,000 even when the value is now $7,000. Also, a part of the mortality and expense risk charge compensates the agent who helped you to purchase the product.

The Administrative Fees

This fee basically compensates for proper maintenance of records and for the services of your contract. It is quite less than the mortality and expense risk charge. Sometimes it is charged as a percentage of your total invested value e.g. 15%, and sometimes it is charged as a flat dollar fee, for example $50 annually. If your contract surpasses a certain dollar value, the administrative fees may be waived.

Subaccount Fund Expenses

The subaccount fund expenses are a percentage charge for the investment options available in a contract. They may range from 25% to 2% per year. The mutual fund manager managing the investments in the subaccount is compensated by these expenses. There are at least 20 investment subaccount options offered by the variable annuity contracts. Out of these you can choose an option and the cost will vary accordingly. Against the value of each fund that you own in a contract, this expense is charged separately.

Surrender Expenses

These are another of the variable annuity expenses. These charges refer to the cost you incur in case you liquidate your annuity contract early. If you liquidate your contract before age 59.5, you may have to pay additional taxes and an early withdrawal penalty to the Internal Revenue Service. You should know that a number of variable annuity contracts allow you to withdraw the "amount free of surrender" i.e. 10% of the contract value without this expense. Within the surrender charge period, if you transfer your annuity contract to another insurance company you will pay for the surrender expenses. The surrender periods usually last between 5 and 10 years.

Rider Fees

These are the expenses for riders added to an annuity contract. Examples include income enhancements and death benefit enhancements.

Other Precautions

Before purchasing a variable annuity consider the risks, expenses, charges and investments objects carefully. For a detailed examination you should contact a financial professional and read the prospectus carefully before any payment or investment.

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