A variable annuity is a contract between you and an insurance company. With a variable annuity, the insurance company agrees to make periodic payments to you in the future. You can purchase a variable annuity contract by making either a single purchase payment or a series of purchase payments. Please note that certain benefit options (e.g., death benefit or living benefit protection options) may limit additional purchase payments. Variable annuities offer features not generally found in other types of investment products, including:
•Tax-deferred earnings
•Tax-free transfers among a variety of investment options (or “subaccounts”)
•Death benefit protection options
•Living benefit protection options
•Lifetime income options
•Penalty free withdrawal privileges
An annuity has two phases the savings (or “accumulation”) phase and the payout (or “annuitization” or “income”) phase. During the savings phase, you make purchase payments into the contract and the earnings accumulate on a tax-deferred basis. The payout phase starts when you begin receiving regular payments from the insurance company by electing an annuity income option. Many contracts include an annuity commencement date, generally between ages 85 and 95, where annuity owners are required to select a payout option (also known as “forced annuitization”). Annuitization of annuity contracts generally requires control of the investment to be given to the insurance company and will generally terminate any living or death benefits provided in the contract. As noted above, a variable annuity lets you accumulate assets on a tax deferred basis. If you are looking to supplement other sources of retirement income such as Social Security and pension plans you may want to consider a variable annuity. When considering the purchase of a variable annuity, numerous factors should be taken into account including, but not limited to, your:
•Age
•Annual income
•Financial situation and needs
•Investment experience and investment objectives
•Intended use for the variable annuity (to leave assets to beneficiaries, to receive income for life)
•Investment time horizon
•Existing assets including investment and life insurance holdings
•Liquidity needs
•Liquid net worth
•Net worth
•Tolerance for risk
•Tax status.
Please note that variable annuities involve investment risk and a variable annuity may lose value. Therefore, you should consider your ability to sustain investment losses during periods of market downturns. Before buying any variable annuity, you should request a prospectus from your Financial Advisor and read it carefully. The prospectus contains important information about the annuity contract including fees and charges, investment options and objectives, risks, death benefits, living benefits and annuity income options. All of these should be considered carefully.
Variable Annuity Fees and Charges
There are fees and charges that are unique to variable annuity products. These fees and charges cover the cost of contract administration, portfolio (or investment) management and the insurance benefits (e.g., death and living benefit protection options, lifetime income options). Because fees and charges may be assessed on the original investment, the current account value or the benefit’s base value (or “benefit base”), you should become familiar with all types of fees and charges, and the methodology for their calculation within the particular variable annuity you are purchasing.
The most common fees and charges are:
•MORTALITY AND EXPENSE RISK CHARGE (M&E):
The M&E charge compensates the insurance company for insurance risks and other costs it assumes under the annuity contract. M&E charges are deducted from the value of the subaccounts (i.e., the investment options you select). The fees for any optional death and/or living benefit you may select are described below and are not included in the M&E charge. M&E charges are assessed daily and typically range from 1.15% to 1.85% annually.
•ADMINISTRATIVE AND DISTRIBUTION FEES:
These fees cover the costs associated with servicing and distributing the annuity. These fees include the costs of transferring funds between subaccounts, tracking purchase payments, issuing confirmations and statements as well as ongoing customer service. Administrative and distribution fees are deducted from the value of the subaccounts. These fees are assessed daily and typically range from 0% to 0.60% annually.
•CONTRACT MAINTENANCE FEE (OR “ANNUAL FEE”):
The contract maintenance fee is an annual flat fee charged for record keeping and administrative purposes. The fee typically ranges from $30 to $50 and is deducted on the contract anniversary. This fee is typically waived for contract values over $50,000.
•UNDERLYING SUBACCOUNT FEES AND EXPENSES:
Fees and expenses are also charged on the subaccounts. These include management fees that are paid to the investment adviser responsible for making in vestment decisions affecting your subaccounts. This is similar to the investment manager’s fee in a mutual fund. Expenses include the costs of buying and selling securities as well as administering trades. These asset-based expenses will vary by subaccount and typically range from 0.70% to 2.73% annually.
•CONTINGENT DEFERRED SALES CHARGE (“CDSC” OR “SURRENDER CHARGE”):
Most variable annuities do not have an initial sales charge. This means that 100% of your funds are available for immediate investment in the available subaccounts. However, insurance companies usually assess surrender charges to an annuity owner who liquidates his or her contract (or makes a partial withdrawal in excess of a specified amount) during the surrender period (see the section titled “Share Class, Surrender Periods and Tax Deferral” for additional information). The surrender charge is generally a percentage of the amount withdrawn and declines gradually during the surrender period. A typical surrender schedule has an initial surrender charge ranging from 7% to 9% and decreases each year that the contract is in force until the surrender charge reaches zero. Generally, the longer the surrender schedule, the lower the contract fees. Most contracts will begin a new surrender period for each subsequent purchase payment, specific to that subsequent purchase payment. Share Class, Surrender Periods and Tax Deferral Variable annuities are traditionally offered with varying fee and surrender periods. These are otherwise known as “share class options.”
This information is not intended to be tax or legal advice, and it may
not be relied on for the purpose of avoiding any federal tax penalties.
You are encouraged to seek tax or legal advice from an independent
Professional advisor.
