Insurance Cost - Insurance charges will always reduce the value of your account and the return on your investment.
Benefits of life insurance provide economic protection to your loved ones if you die before your financial obligations to them are met, while benefits of annuities guard against outliving your assets.
Both annuities and life insurance may be considered in your long-term financial plan. While both include death benefits, you buy life insurance in the event you die too soon and an annuity in case you live too long. Benefits are what investors should look for when buying insurance policies or variable annuities, such as a guaranteed minimum income benefit, a stepped-up death benefit, or long-term care insurance. These benefits always carry additional fees and charges.
Financial professionals who sell variable annuities have a duty to advise you as to whether the product they are trying to sell is suitable to your particular investment needs. Don’t be afraid to ask them questions. And write down their answers, so there won’t be any confusion later as to what was said.
Before purchasing a variable annuity, especially one with a bonus credit, ask yourself and the financial professional who is trying to sell you the contract whether the bonus is worth more to you than any increased charges you will pay for the bonus. This may depend on a variety of factors, including the amount of the bonus credit and the increased charges, how long you hold your annuity contract, and the return on the underlying investments. You also need to consider the other benefit features of the annuity to determine whether it is a good choice for you.
Some insurance companies may offer variable annuity contracts with “bonus credit” features. Frequently, insurers will charge you for bonus credits in one or more of the following ways:
Some agents might tell you that fixed rate annuities, or indexed annuities have no annual fees, and technically they are correct if these annuities are bought with “no extras.” However, most deferred annuities are sold with attached benefits (also called riders), which always come with an annual fee for the life of the policy. Single Premium Immediate Annuities and Longevity Annuities (aka: Deferred Income Annuities) have no annual fees, but provide little or no liquidity.
Financial professionals who sell variable annuities have a duty to advise you as to whether the product they are trying to sell is suitable to your particular investment needs. Don’t be afraid to ask them questions. And write down their answers, so there won’t be any confusion later as to what was said.
Before purchasing a variable annuity, especially one with a bonus credit, ask yourself and the financial professional who is trying to sell you the contract whether the bonus is worth more to you than any increased charges you will pay for the bonus. This may depend on a variety of factors, including the amount of the bonus credit and the increased charges, how long you hold your annuity contract, and the return on the underlying investments. You also need to consider the other benefit features of the annuity to determine whether it is a good choice for you.
Some insurance companies may offer variable annuity contracts with “bonus credit” features. Frequently, insurers will charge you for bonus credits in one or more of the following ways:
- Higher surrender charges - Surrender charges may be higher for a variable annuity that pays you a bonus credit than for a similar contract with no bonus credit.
- Longer surrender periods - Your purchase payments may be subject to surrender charges for a longer period than they would be under a similar contract with no bonus credit.
- Higher mortality and expense risk charges and other charges - Higher annual mortality and expense risk charges may be deducted for a variable annuity that pays you a bonus credit. Although the difference may seem small, over time it can add up. In addition, some contracts may impose a separate fee specifically to pay for the bonus credit.
Some agents might tell you that fixed rate annuities, or indexed annuities have no annual fees, and technically they are correct if these annuities are bought with “no extras.” However, most deferred annuities are sold with attached benefits (also called riders), which always come with an annual fee for the life of the policy. Single Premium Immediate Annuities and Longevity Annuities (aka: Deferred Income Annuities) have no annual fees, but provide little or no liquidity.
Investor Alerts on Benefit Charge and Bonus:
- You will pay for each benefit provided by your variable annuity. Be sure you understand the charges. Carefully consider whether you need the benefit. If you do, consider whether you can buy the benefit more cheaply as part of the variable annuity or separately (e.g., through a long-term care insurance policy).
- Some contracts promise to add a bonus to your contract value based on a specified percentage of purchase payments. Variable annuities with bonus credits often carry higher expenses that can outweigh the benefit of the bonus credit offered.
- If you already own a variable annuity and are thinking of exchanging it for a different annuity with a bonus feature you should be careful. Even if the surrender period on your current annuity contract has expired, a new surrender period generally will begin when you exchange that contract for a new one. This means that by exchanging your contract, you will forfeit your ability to withdraw money from your account without incurring substantial surrender charges.
An annuity is a contract between you and an insurance company in which you make a lump sum payment or series of payments and in return obtain regular disbursements beginning either immediately or at some point in the future.
Sales charges
Many annuities impose a sales charge. Normally, the sales charge is in the form of a back-end load, also known as a contingent deferred sales charge (CDSC). CDSCs are usually incurred if the owner surrenders the contract, or withdraws funds that exceed the "free withdrawal" amount (a specified amount usually equal to 10% of the contract value).
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 variable annuity, such as a commission paid to your financial professional for selling the variable annuity to you.
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).
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 variable annuity.
Many annuities impose a sales charge. Normally, the sales charge is in the form of a back-end load, also known as a contingent deferred sales charge (CDSC). CDSCs are usually incurred if the owner surrenders the contract, or withdraws funds that exceed the "free withdrawal" amount (a specified amount usually equal to 10% of the contract value).
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 variable annuity, such as a commission paid to your financial professional for selling the variable annuity to you.
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).
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 variable annuity.
Investor Alerts on Annuity Contract Fee:
- Before purchasing a variable annuity, you owe it to yourself to learn as much as possible about how they work, the benefits they provide, and the charges you will pay.
- If you are investing in the variable annuity through a retirement plan or IRA, you are not receiving any additional tax-deferral benefit from the variable annuity.
- Investor must carefully consider cost of some "good" features of an variable annuity, such as underlying investments and long-term care insurance, which can often be purchased separately with lower cost.
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Surrender and Exchange Cost (visible or hidden)
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If you have a life insurance or annuity contract, you may have been approached to exchange it for a new one with better or the latest features.
Surrender charge is a type of sales charge. If you withdraw money from a variable annuity within a certain period after a purchase payment (typically within six to eight years, but sometimes as long as ten years), the insurance company usually will assess a “surrender” charge. This charge is used to pay your financial professional a commission for selling the variable annuity 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% or15% of your account value, for example—without paying a surrender charge.
Section 1035 of the U.S. tax code allows you to exchange an existing variable annuity contract for a new annuity contract without paying any tax on the income and investment gains in your current variable annuity account. Be careful that the new annuity may have higher annual fees and charges than the old annuity, which will reduce your returns. You need to know even the new contract may sound better for you, you may be losing, not gaining, if you make the exchange.
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% or15% of your account value, for example—without paying a surrender charge.
Section 1035 of the U.S. tax code allows you to exchange an existing variable annuity contract for a new annuity contract without paying any tax on the income and investment gains in your current variable annuity account. Be careful that the new annuity may have higher annual fees and charges than the old annuity, which will reduce your returns. You need to know even the new contract may sound better for you, you may be losing, not gaining, if you make the exchange.
Investor Alerts on Surrender and Exchange Cost:
- If you are thinking about a 1035 exchange, you should compare both annuities carefully. Unless you plan to hold the new annuity for a significant amount of time, you may be better off keeping the old annuity because the new annuity typically will impose a new surrender charge period.
- Single Premium Immediate Annuities and Longevity Annuities have no liquidity and thus no surrender charges. If you are considering these two types of annuities, make sure that your money is allocated properly and you do not need to access the funds lump sum.