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 - Types of Annuities

 - The Different Phases of an

 - Fees, Expenses and Bonuses
to Watch For

 - Sub Accounts

 - 1035 Exchanges



Fees, Expenses and Bonuses to Watch For

Realize that annuities are offered by insurance companies, which are there to make a profit. Usually, fixed annuities have no upfront sales charges; your complete investment goes to work for you from day one. Variable annuities, however, may have upfront expenses or commissions, depending on the company and your investment choices. A nice plus is that some companies allow you to withdraw interest without penalties, up to a certain limit. Usually, however, there are substantial early withdrawal penalties and other fees that should be noted:

  • Surrender Charges – Penalties for withdrawals exceeding a certain agreed upon percentage, say 10%. These back-end fees are normally in the 7% to 8% range. The surrender charge penalty is usually reduced 1% each year from date of purchase. Annuity holders need to be very careful. Some companies have substantially higher fees, especially for first year contract withdrawals. These deferred sales charges can get complicated; sometimes when guaranteed interest rates change, the surrender charge schedule resets. Read the fine print on these contracts.
  • Market Value Adjustment (“MVA”) –The annuitant may also be charged an MVA in addition to the surrender charges for early withdrawals. The MVA is the interest rate differential between the original contract’s interest rate and the going rate at the time of the early withdrawal. If interest rates have gone up from your deposit date, you will have lost money. If interest rates have declined, you will have made money on this clause, and it will reduce some of the back-load surrender charges.
  • Bonus – Some insurance companies offer attractive upfront bonuses that are added to your contract’s value. Bonuses normally range from 1% to 5%. For example, if one’s deposit is for $100,000, given a 2% bonus structure, the contract’s value would be $102,000. If bonuses are given, you need to watch out for higher surrender charges, longer surrender periods, increased mortality expenses, etc. Just be careful; the added expenses can be more than the extra bonus.
  • Mortality and Other Expenses (“M&E”) – The fees the insurance company charges to provide the annuitant with a steady cash flow stream. These costs cover the expenses of providing a lifetime income stream, death benefits, long-term care insurance, commissions paid to the broker, etc. The mortality charge is a certain percentage of your account, usually 1% plus. There are also maintenance fees, rider charges, indirect fees paid by the mutual funds, and so forth.

Review the following topics for more information on annuities:
Types of Annuities
The Different Phases of an Annuity
Sub Accounts

1035 Exchanges


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