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Annuities
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Types of Annuities
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The Different Phases of an
Annuity
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Fees, Expenses and Bonuses
to Watch For
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Sub Accounts
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1035 Exchanges
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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:
Introduction
Types of Annuities
The Different Phases of an Annuity
Sub Accounts
1035 Exchanges
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