Variable Annuity - Charges and Riders: 

Part 2

Mon Dec 11, 2023

Variable Annuity Charges

These charges will reduce the value of your account and the return on your investment

Surrender Charges:

  • If you withdraw money from a variable annuity within a certain period after a purchase payment (typically within six to eight years, but sometimes as long as ten years), the insurance company usually will assess a “surrender” charge, which is a type of sales charge. This charge is used to pay your financial professional a commission for selling the variable annuity to you. Generally, the surrender charge is a percentage of the amount withdrawn, and declines gradually over a period of several years, known as the “surrender period.” For example, a 7% charge might apply in the first year after a purchase payment, 6% in the second year, 5% in the third year, and so on until the eighth year, when the surrender charge no longer applies. Often, contracts will allow you to withdraw part of your account value each year—10% or 15% of your account value, for example—without paying a surrender charge.
    • Example: You purchase a variable annuity contract with a $10,000 purchase payment. The contract has a schedule of surrender charges, beginning with a 7% charge in the first year, and declining by 1% each year. In addition, you are allowed to withdraw 10% of your contract value each year free of surrender charges. In the first year, you decide to withdraw $5,000, or one-half of your contract value of $10,000 (assuming that your contract value has not increased or decreased because of investment performance). In this case, you could withdraw $1,000 (10% of contract value) free of surrender charges, but you would pay surrender charge of 7%, or $280, on the other $4,000 withdrawn.

Mortality and Expense charge

  • This charge is equal to a certain percentage of your account value, typically in the range of 1.25% per year. This charge compensates the insurance company for insurance risks it assumes under the annuity contract. Profit from the mortality and expense risk charge is sometimes used to pay the insurer’s costs of selling the variable annuity, such as a commission paid to your financial professional for selling the variable annuity to you.
    • Example: Your variable annuity has a mortality and expense risk charge at an annual rate of 1.25% of account value. Your average account value during the year is $20,000 so you will pay $250 in mortality and expense risk charges that year.

Administrative fees

  • The insurer may deduct charges to cover record-keeping and other administrative expenses. This may be charged as a flat account maintenance fee (perhaps $25 or $30 per year) or as a percentage of your account value (typically in the range of 0.15% per year).
    • Example: Your variable annuity charges administrative fees at an annual rate of 0.15% of account value. Your average account value during the year is $50,000. You will pay $75 in administrative fees.

Fund Management charge

  • You will also indirectly pay the fees and expenses imposed by the mutual funds that are the underlying investment options for your variable annuity.

Fees and charges for other features

  • Special features offered by some variable annuities, such as a stepped-up DB, GMIB, or LTCI, often carry additional fees and charges

Guarantees in Detail

GMDB - Guaranteed Minimum Death Benefit

  • This offers a guaranteed value on death.
  • GMDBs can be quite simple, such as offering a minimum of return of premium or · premium rolled up at a pre-set interest rate.
  • offering a minimum guarantee of the highest point the fund ever reached, or 
  • the average fund value on the last few policy anniversaries

GMAB - Guarantees Minimum Accumulation Benefit

  • offering a minimum of the premium rolled up at a pre-set interest rate

  • More complex guarantees could include the highest value ever reached, or

  • the value reached on the last policy anniversary

  • A common feature of a GMAB is a ‘ratchet‘ whereby the guarantee increases each year by the larger of a proportion of the fund’s actual return and a guaranteed minimum amount.

GMIB - Guaranteed Minimum Income Benefit.

  • this typically requires an accumulation phase and then an income phase.

  • The income levels are guaranteed, at outset, on minimum conversion rates regardless of movements in the financial and mortality markets.

  • These benefits are typically targeted at the retirement market.

GMWB - Guaranteed Minimum Withdrawal Benefit.

  • this guarantees regular income from the fund during a defined period. For example a policyholder can withdraw 7% of the guaranteed level each year for 15 years, and as the fund may be invested in equities the guaranteed level may be the initial investment with bonuses added based on fund performance.
  • Another version might be, for a policyholder aged 60, a 5% withdrawal of the guaranteed amount for life.
  • If there is a fund balance after the guarantee period then this is paid as a death or surrender benefit

Kamal Sardana
Qualified Actuary with expertise in US GAAP, Solvency II and Python.

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