Hit on the Front EndThe front-end load is the commission you pay out of your investment contribution. It goes to cover sales costs, especially the fee paid to the salesperson who sells you the policy. For example, when you buy a variable annuity with a 4% front-end load, $4 of every $100 you put into the policy goes to the sales costs. Only $96 is actually credited to your account. That's why TheStreet.com Ratings recommends only no-load annuities where there is no upfront reduction in your principal. You do, however, pay a slightly higher cost built into the mutual fund expense or insurance expense, which comes out of your earnings over time. But since every penny you invest gets credited to your account, all your funds start working for you immediately. Good news: More than 97% of the variable annuities sold today have no front-end loads.
No SurrenderJust like the government will penalize you a 10% fee for withdrawing from your IRA before age 59½, insurance companies may attach a surrender charge representing a percentage of the contributions to the account or account value. Most surrender charges are designed to discourage you from making withdrawals during the first few years after you purchase an annuity.
Mortality and Expense RiskMortality and expense risk charges are usually a percentage of the account value around 1.2%. This charge compensates the insurance company for the risks it assumes on your behalf and expenses associated with the contract. One exception is Jefferson National Life Insurance, currently rated D-minus, which charges $20 a month regardless of your account value.
The Annual Contract FeeMost variable annuities assess an annual contract fee of $25 to $35. This flat-rate fee guarantees the issuing insurance company an annual stream of revenue regardless of the size or performance of your personal variable annuity. Unfortunately, there is very little you can do to avoid this charge. Still, it's not a factor you can ignore when comparing variable annuities with one another and with other types of investments.
Optional Feature FeeThis fee is associated with benefits that include minimum income benefits (GMIB), guaranteed minimum accumulation benefits (GMAB) and guaranteed minimum withdrawal benefits (GMWB). The industry average fee is 0.4% to 0.45% annually, according to Annuity FYI, an annuity information and education service. It definitely pays to shop around and compare variable annuities based on their costs and performance. But when comparing costs, remember that you must factor in the insurance costs and loads associated with the annuity to get the full picture. For starters you may want to compare with some of the top-10 rated life and health insurance companies with the greatest volume in their separate accounts as of year-end 2006.
|Top 10 Variable Annuity Providers|
|Company||Total Assets ($ millions)||Capital Surplus ($ millions)||Separate Account ($ millions)||Financial Strength Rating|
|Pacific Life Ins Co.||86,142||3,218||48,340||A|
|Principal Life Ins||125,532||3,599||68,945||A-|
|John Hancock Life Ins||108,335||1,426||85,010||B+|
|Metropolitan Life Ins||280,557||9,198||71,533||B+|
|Hartford Life & Annuity Ins||83,086||1,668||76,318||B+|
|Nationwide Life Ins||97,060||2,682||66,962||B+|
|Hartford Life Ins||146,278||3,276||112,775||B|
|Prudential Ins Co. of America||245,817||5,973||92,445||B|
|AXA Equitable life Ins||131,780||6,498||85,750||B|
|Riversource Life Ins||74,683||3,258||46,857||B|
|Source: TheStreet.com Ratings|