Annuities fall into two different categories, variable annuities are sold by stockbrokers, and fixed rate annuities are sold by insurance agents.
Variable annuities are not insurance products, they are actually securities. Money invested in variable annuities is subject to market risks as well as fees and expenses. If you decide to invest in a variable annuity, it is important to know and understand the fees you will be charged.
Let’s begin with the basic expense for the annuity itself. The expense is known as the mortality and expense fee. (M%E) This fee helps offset underwriting and policy costs. The percentage can change depending on which contract you select, but the industry average is 1.25%. That is 1.25% of the value of your variable annuity. The 1.25% is charged each year you own the annuity.
The next basic fee is called the administration or expense fee, industry average is .25% of your entire account value. This fee is also charged annually and is designed to cover costs associated with maintaining and servicing your annuity.
So the basic fee for variable annuities in our example is 1.40% of your annuity value.
Think of this as the annuity wrapper, a wrapper where your funds will be invested within it and where any selected riders will ride on top of it.
To that come then add on fees, fees for the actual management of the funds held within the variable annuity. Fees for any additional riders you may have chosen to add to your variable annuity, riders can include an enhanced death benefit, an income benefit and occasionally a long term care rider.
Let’s start with the fees associated with the management of your money. Variable annuities generally have many investment options within the annuity wrapper.
Investment options are actually a type of mutual fund called “separate accounts”. The categories can be stocks, bonds, US Treasuries, foreign assets, real estate trusts, almost anything that can be managed as an investment. Many owners of variable annuities select several separate accounts to add diversification to their investment choices. Each choice will have their own fees associated with the individual separate account. These fees can range from a low of .25% to a high of 3.00%. It all depends on which separate account selected. The important thing to remember is that fees to manage your separate accounts are charged each year on your account value.
Most variable annuities will average 1.35% for invested assets but actual expense fees can be higher or lower.
If any riders are selected, additional fees are added to the basic fee and the investment fees. A normal expectation for an income rider fee should average approximately 1.00% in fees.
Consider the total fees that can be charged to you if you own a variable annuity. Fees can always be different based on the actual variable annuity you select but this snapshot example about what to expect when you invest in a variable annuity.
- Mortality and Expense fee (the wrapper) 1.40%
- Investment fees for separate accounts 1.35%
- Rider fee example 1.00%
Total estimated fees per annum 3.75%
A variable annuity with an account value of $100,000 would be exposed to a financial fee of $3,750 before any returns are added to your account.
Always ask your broker about any fee associated with the variable annuity and ask the broker to fully explain how the product works. Brokers are required to provide you with a prospectus fully detailing all aspects of the security. If you have any difficulty reading or understanding the prospectus, ask your broker or the variable annuity company for help.
One last point, in an increasing market a variable annuity can increase in value (after fees are paid), but is a level or down market, variable annuities can lose money, they are exposed to risk and contain no guarantees, plus even in a down market, fees are still subtracted from your account value.
A good source of information is the industry itself: http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/AnnuitiesAndInsurance/p005976