Variable Annuity Fees You Don’t Know You are Paying
Posted March 18, 2011on:
Recently, a client of mine brought me the variable annuity he bought a few years ago.
Prominently displayed on the first page are the benefits of the annuity:
Death Benefit: Enhanced Guaranteed Minimum Death Benefit
Living Benefit: Lincoln Lifetime Income Advantage
as well as the fact that the money will earn an fixed annualized rate of 5.75%. Under the bold ACCOUNT FEE subtitle, it states: Account fee is $35 per contract year.
Up to this point, what impressions do you get? If you are like me, you would think it is a phenomenally low cost product that gives great returns with many extra benefits. Aha, guess who wants you to think that way? the insurance company and the agent who sell you this product. If only you just read on, you will find the skeleton, in fact many skeletons, in the closet:
1. The fixed interest rate of 5.75% only applies for the first month, after that, it will be 1.75% .
2. Mortality and Expense (M&E) charges are between 1.4% and 2.4%
3. The death benefit charge is 1.9%.
4. The rider charge is between 0.75% and 1.5%.
5. The living benefit costs 0.75% initially, but there is no cap on how high it can go.
6. The underlying fund expense is between 0.3% and 1.75%.
7. The surrender charge is 8% for the first three years.
In his wildest nightmare, my client did not imagine the total cost would be more than 2%. In actuality, it is 6% and up. These charges are not disclosed in one places, they are scattered in different pages of the contract. No wonder my client did not find them.
Most people hate to read insurance contracts: there is a confusing array of terminology and legal jargons that would make a lawyer blush. Also they think the government is watching anyway, so why bother. What they don’t know is: annuity and life insurance products are not under the purview of the SEC. They are private contracts between you and the insurance companies. Since insurance companies write the contracts you don’t read, guess who will come out ahead?
My advice: read before you sign. If you’d rather read Sports Illustrated, at least hire a fee-only financial advisor to read it for you. Why fee-only? They are not taking money from the insurance companies; chances are they will give unbiased advice.
If you have already purchased an annuity or life insurance contract, it still behooves you to understand the true costs and benefits of the contract. My 2nd Opinion Financial Review service will help you do that.