• 5-Minute Article
  • |
  • Sep 01, 2017

Understanding Variable Annuity Fees

A quick summary of the reasons – and benefits – behind variable annuity fees.

Questions this article can help you answer:
  • What are some different variable annuity fees?
  • What benefits and features do variable annuities fees cover?
  • Which fees does the variable annuity owner have influence over?

Gym membership fees. Food delivery fees. Fees for having an accountant do your taxes. Most of us are okay with paying fees for the services we receive – as long as they deliver the benefits we expect at a reasonable cost.  

While you expect that trade-off from everyday services, you may be less familiar with how variable annuity fees translate into value. There’s a reason – and often a benefit – behind each fee associated with the purchase and maintenance of a variable annuity (VA). Here’s a quick review to help you evaluate the potential costs of a variable.

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. Variable annuities are one of four main types of annuities. They provide investment options you can choose from to potentially grow your retirement savings tax-deferred, depending on how the market performs.

Two key guarantees that come with most variable annuity contracts:

1. Income – In exchange for investing a portion of the annuity owner’s retirement assets, the insurance company promises it will pay that person a stream of income, which, for an additional fee, can be guaranteed to last as long as you live.

2. Death Benefit – The insurance company will also typically pay a death benefit to the annuity’s beneficiaries.

Some of a variable annuity’s fees are related to these primary guarantees. They are included as part of what’s called mortality and expense charge and administration fees. You can see full details about them in a product’s prospectus, but here’s a high level look at them:

Mortality and Expense Risk Charge – Typically around 1.25% of the account value each year.1
What it covers: The insurance company’s cost for absorbing the risks that come with guaranteeing lifetime income or a death benefit.

Administrative Fees – Usually about 0.15% of the account value each year.1
What it covers: Administrative tasks such as establishing and maintaining the annuity contract, processing payments, maintaining records, and sending out required notices.

When they’re 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 what’s called 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  Often listed as “average fees” in the prospectus to give you a general idea of the investment management costs. But, depending on the underlying investments selected, the actual costs can vary widely. For instance, the fees may be higher for more complex funds such as a global stock fund, and lower for funds such as a money market fund. They typically range from 0.6 to 3.0% annually.2
What they cover: 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
  • Other expenses related to the variable annuity’s underlying investments

When they’re charged: Similar to the mortality and expense risk charge and administration fees, the investment management fees are deducted daily from the variable annuity’s portfolio assets, and reflected in the share values.

The Cost of Annuity Riders

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 through the purchase of riders.

Riders are amendments to the basic contract for an additional charge. They are designed to address specific needs such as protecting principal, providing a guaranteed level of income for life, or offering a more robust death benefit. Popular VA riders include:

Guaranteed Withdrawal Benefits (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 typically is less than 1% of the total guaranteed withdrawal amount.3

Guaranteed Lifetime Withdrawal Benefit (GLWB) – 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 is equal to the original investment amount at time of purchase.3

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 specific actions.

Surrender/Withdrawal Charges – If an annuity owner withdraws money from the contract in its early years (usually about 6-8 years after purchase), the insurance company will impose a surrender charge on any amount that exceeds the annual free withdrawal amount, which is typically about 10%.1

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.

When it’s charged: This fee is charged at the time of withdrawal, and deducted from the annuity account’s 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, but only when the number of transactions exceeds the providing company’s allowable threshold. The fee can typically 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 a 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 if the balance is low. 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 detailed list and description of fees and charges that apply to a specific variable annuity product, refer to the prospectus.

Your financial professional can also answer questions about costs associated with a particular annuity product.