Annuities provide the advantages of traditional fixed annuities
with the potential returns that are available by investing your money in
the stock market. The investment options that you may chose from in a variable annuity are referred to as "sub accounts". These sub accounts are structured as either
"mutual funds" or as segregated "investment portfolios" that are
managed by professional investment managers.
Family of Funds
Many variable annuities offer more than one family of funds
to chose from and within each family of funds you many chose from a
variety of funds with different investment objectives. This allows you to
diversify your investment portfolio to minimize risk and maximize your
potential investment return. Unlike fixed annuities with guaranteed
protection against loss of principal, your principal is at risk and
subject to loss in value.
Loading and Management
Advantages of Variable
Administrative Fees: The issuing insurance
company usually charges an Administrative Fee and a Mortality Risk Fee
totaling 1.0% to 2.0% of assets - the typical fee usually is about 1.25%
Contract Fee: Many companies charge a flat dollar
amount varying from $20.00 to $40.00 per year.
Sub-Account Fees: The charge for the operation
management of the sub-account which range from .15% to 1.50% of assets.
Stepped-Up Death Benefit: In event of death
during the accumulation period of a variable annuity many companies have
this provision. The death benefit paid to the beneficiary is the greater
The Contract Value at the time of death
The Total Premiums paid into the contract
The Contract Value on the prior (ie, 5th, 6th, 7th)
Anniversary Date of the contract
Withdrawal Provision: Most if not all contracts
that have Surrender Fees have a Withdrawal Provision. This provision
typically allows one to withdraw up to 10% of the account value after the first year without incurring a surrender fee.
Surrender Fees: Deposits to the contract are not
subject to a "load" or "front end fee" however withdrawals may be subject
to a contingent deferred sales charge (CDSC) such as:
Charges are either based on "date of deposit" or "date of
contract in this example that uses a "date of contract" method would have no charges imposed after seven years - even for new deposits.
The major advantage of a variable annuity is the tax advantage of
deferred taxes on dividends, interest and capital gains that are credited
to the sub-accounts in which they are earned - until withdrawn. One must
be aware that withdrawals prior to age 59 1/2 are subject to a 10%
penalty imposed by the IRS and the amount withdrawn is subject to
ordinary income tax - check with your tax advisor for details. Secondly
with a variable annuity your money is invested in mutual funds which
allow for the opportunity of growth which is available in the