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Variable Annuity Fees Explained

A variable annuity is a type of insurance contract that combines investment and retirement savings features, offering potential tax benefits and guaranteed income in retirement. However, to access these features, policyholders typically pay fees associated with the contract. Understanding what these fees cover can help you make informed decisions about investing in a variable annuity.

Types of Fees Associated with Variable Annuities​

Annual Contract Fee​

The annual contract fee is one of the main costs incurred by variable annuity holders. This fee covers administrative expenses, underwriting, and servicing costs. It's usually charged as a percentage of the total assets within the account and may vary based on the insurance company or provider.

Management Fees for Investment Options​

Variable annuities often offer various investment options (such as mutual funds) that grow tax-deferred. A management fee is typically applied to these investments, reflecting the cost associated with managing the fund's assets. This fee varies among different investment options and may be higher or lower depending on the specific portfolio.

Census Fees for Tax-Efficient Withdrawals​

Some variable annuity contracts offer tax-efficient withdrawal strategies (such as tax-loss harvesting). Census fees are charged in exchange for these services, helping to minimize taxes owed on withdrawals. These fees can fluctuate based on market conditions and might not always be clearly disclosed.

Administrative Fees for Insurance Features​

Insurance features within a variable annuity, such as guaranteed minimum income benefits or long-term care riders, may incur separate administrative costs. These fees are usually tied directly to the insurance component of the contract rather than investment performance.

Other Costs to Consider​

  • Mortality and Expense Risk Charge: This fee compensates insurance companies for taking on mortality risk (the likelihood that you will live longer than expected) and expense risks associated with providing life insurance or annuity benefits.
  • Surrender Charges: These penalties are levied when withdrawing a portion of the investment before the term specified in your contract is complete. The aim is to discourage early withdrawal, which could impact policyholders' ability to achieve their long-term financial goals.

Comparing Variable Annuity Providers and Their Fees​

Policyholders must carefully examine various annuity providers, comparing their fee structures against market averages. Since these charges can significantly impact your investment returns over time, ensuring you're getting the most favorable terms is crucial for maximizing your variable annuity's potential benefits.