Last posted at brighthousefinancial.com
Gym membership fees. Food delivery fees. Fees for having an accountant do your taxes. Most are okay with paying fees for services received — as long as they deliver expected benefits at a reasonable cost.
That’s true for variable annuity fees1, too. There’s a reason – and often a benefit- behind each fee associated with the purchase and maintenance of a variable annuity. Here’s a quick review to help evaluate the potential costs of a variable annuity.
Basic Fees for Protection and Insurance
When someone purchases an annuity contract, they are essentially buying future lifetime income from the insurance company that issues it.
In return for investing a portion of the annuity owner’s retirement assets, the company promises it will pay that person a lifetime stream of income. The insurance company will also pay a death benefit to the annuity’s beneficiaries. Some policies pay the death benefit if the owner passes away before beginning to take payments, and some pay even if the owner had already begun collecting income.
A portion of variable annuity fees are charges related to these guarantees, which are automatically included as part of the annuity’s mortality and expense charge and administration fees that appear in the product prospectus.
- The mortality and expense risk charge, which is typically in the range of 1.25% of the account value each year,¹ covers the insurance company’s cost for guaranteeing to provide lifetime income or a death benefit if the unexpected happens.
- The administrative fees, which are usually about 0.15% of the account value each year,2 cover establishing and maintaining the annuity contract, processing payments, maintaining records, and sending out required notices.
When it’s charged: Both fees are deducted daily, but that doesn’t mean the annuity owner gets a bill every 24 hours. These fees are based on the daily net asset value of the annuity’s underlying investment portfolios, which can change every day as the market shifts. The fees are reflected in the annuity’s account value.
Fees For Managing the Investments
Investment management fees are deducted from the variable annuity’s portfolio assets. Similar to the charges for managing mutual funds, these fees are imposed at the fund level and pay the investment firm for the fund manager’s expertise, investment trading costs, distribution and service, and other expenses related to the variable annuity’s underlying investments.
These charges are often listed as “average fees” in the prospectus to give annuity buyers a general idea of theinvestment management costs. However, depending on the underlying investments selected, the actual costs can vary widely. For instance, the fees are normally higher for more complex funds (can vary from 0.7% to 2% of the amount invested in a global stock fund, for example), and lower for funds such as a money market fund (typically 0.3% to 0.6%).3
When it’s charged: Similar to the mortality and expense risk charge and administrative fees, the investment management fees are deducted daily, and reflected in the share values of each investment portfolio.
The Cost of Any Benefits
Beyond the basic fees are the charges incurred each year if the annuity owner decides to add other benefits or features to the variable annuity contract.
These extra benefits are added through the purchase of riders, or amendments to the basic contract, for an additional charge. The riders are designed to meet specific needs such as protecting principal, providing a guaranteed level of income for life, or offering a more robust death benefit. For example:
- A Guaranteed Withdrawal Benefit (GWB) rider guarantees all purchase payments will be returned to the annuity owner through a series of withdrawals, regardless of market conditions. The annual cost for this rider ranges from 0.55% to 0.85% of the total guaranteed withdrawal amount.3
- Adding a Guaranteed Lifetime Withdrawal Benefit (GLWB) rider assures lifetime income payments from the variable annuity, regardless of the performance of the investments selected. Even if the account value falls to zero, the annuity owner still receives income for life. Depending on the annuity, the annual fee for this rider can range from about 0.85% to 1.25% of the benefit base, which initially equals the original investment amount.4
When it’s charged: Fees for both riders are deducted annually from the annuity’s account value. Annuity holders see the charge on their annuity statement.
For a closer look at the riders that might be available with a particular variable annuity, check with your financial professional. They can help you decide if the extra benefits available through riders are worth the additional cost.
Fees Based on Actions You Take
Variable annuity owners can incur three other types of fees based on actions that they initiate.
If an annuity owner withdraws money from the contract in its early years (usually about six to eight years after purchase), the insurance company will impose a surrender charge on any amount that exceeds the annual free withdrawal amount (which is usually about 10%).3
These surrender charges will vary by annuity, but they eventually decrease to zero over a number of years. For example, a 7% surrender charge in the first year may fall by 1% each year for seven years, reaching 1% in the seventh year of the contract and 0% for every year after that.5
When it’s charged: This fee is charged at the time of withdrawal, and deducted from the annuity’s account value. This charge also appears on the annuity statement.
Transfer/Excess Transaction Fee
Most variable annuity providers discourage annuity contract holders from making too many changes to their investments each year because the increased trading costs often negate any incremental gains and may negatively affect the long-term performance of the annuity’s underlying investment portfolios.
When it’s charged: This fee is not charged on any regular basis. The fee can be avoided by limiting fund transfers to less than a dozen per year.
Low Balance Account Fee
Just as banks impose fees for low balances, insurance companies may also charge a fee if the variable annuity account falls below a minimum maintenance threshold.
When it’s charged: This fee is charged annually and deducted from the annuity’s account value. The charge appears on the annuity statement.
The fees outlined above provide a general sense of the different charges related to the purchase and maintenance of a variable annuity. For a more specific list of the fees that apply to a specific variable annuity, refer to the product prospectus. It’s the primary document to rely on for a full description of all fees and charges.
A financial professional can also answer questions about costs associated with a particular annuity.