Variable annuities have features and benefits that are not available in any other investments. Of course, nothing in the investment world is free. There is a cost for the unique features of variable annuities that are reflected in fee and expense charges.
Here’s how to make sense of variable annuity share class "alphabet soup."
Contact a local independent insurance agent. They can help you decide if a variable annuity is right for you.
What Are Variable Annuity Share Classes?
Insurance companies use variable annuity share classes to slice up fees and expenses. Each share class is a combination of fees and expenses designed to suit the needs of different investors.
Variable Annuity Fee and Expense Charges
Variable annuity fees and expenses come in four flavors: Premium-based charges are a percentage of contributions. Asset-based charges are a percentage of the account value. Surrender-based charges are a percentage of money withdrawn. Flat fees are usually transaction or administrative charges.
Here’s a summary of common variable annuity fees and expenses
|Mortality & Expense||Asset-based||Cost of providing insurance|
|Mortality & Expense||Premium-based||Cost of providing insurance. Charge declines over a period of years.|
|Management Fees||Asset-based||Fees paid to subaccount investment managers|
|Administrative Fees||Flat fee||Cost of record-keeping and other expenses|
|Surrender Charges||Withdrawal- based||Charge declines over a period of years. Withdrawals up to 10% of the account value are usually free of surrender charges.|
|Optional Benefit Fees||Asset-based||Charges for income riders, enhanced death benefits and other optional features|
|Premium Tax||Premium-based||8 states charge a premium tax: California, Florida, Maine, Nevada, Puerto Rico, South Dakota, West Virginia, and Wyoming|
Variable Annuity Share Class Features
The common share classes for variable annuities are B shares, L shares, I shares, C shares and O shares. A shares, once popular are rarely offered. Let’s take a look at the differences and benefits.
|Share Class||Surrender Period||Surrender Charges||Mortality & Expense |
|Mortality & Expense|
|B Share||5 - 7 years||Typically starts at 7% declining to 0 in year 8||Yes, level||No||Lower cost in exchange for a longer surrender period|
|L Share||4 years||Typically starts at 7% declining to 0 in year 5||Yes, level for 4 years |
reducing in year 5
|No||Higher cost in exchange for shorter surrender period|
|C Share||None||None||Yes, level. C share M&E is higher than other share classes.||No||Higher cost in exchange for no surrender period|
|O Share||5 years||Uncollected premium charge||Yes, declining||Yes||Lower cost after surrender period|
|I Share||None||None||Lower than other shares. |
The investment advisor charges a fee paid directly
by the investor.
|No||Used for fee-based accounts|
Market Share of Variable Annuity Share Classes
More than 75% of variable annuities sold are B shares because of the lower cost in the long term. L shares are the next most popular at approximately 11%. Only 3% of variable annuities sold are fee-based, or I shares.
Why Do It Yourself?
Variable annuities can be an important part of your retirement plan. While they have many features and benefits, they are not for everyone. Contact an independent insurance agent. They can help you decide if a variable annuity is right for you.
TrustedChoice.com Article | Reviewed by Neel Lane
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Advisor’s Guide To Annuities John Olsen
Insured Retirement Institute
Limra Secure Retirement Institute