Unlike standard insurance products such as Fixed and Indexed Annuities… Variable Annuities are subject to regulation by the Securities and Exchange Commission (SEC). This is due to the fact that Variable Annuity funds are invested directly within securities and the investor is solely responsible for the investment risk. For this reasons all variable annuity owners are provided and advised to read the prospectus prior to investing. This gives the annuity owner flexibility in deciding the make-up of the variable annuity investment portfolio. The annuity owner can even accumulate investment funds within sub accounts each with their own investment portfolio with varying risk tolerances.
Annuity experts that sell Variable Annuities are required to pass the Series 6 and Series 7 general securities exam where as other annuities only require that the annuity expert by licensed to sell insurance products by the state in which they work. Variable annuities can have high annual fees, including:
- Annual annuity charge. This fee is based on the total value of your variable annuity, plus the cost to your broker or insurer of administering it and giving you the option of a lifetime’s worth of annuity income. When the contract with your annuity broker provides for death benefits, annual annuity charges increase. This is generally computed by adding M&E (mortality and expense risk) to administration charges.
- Maintenance fee. This is simply a yearly fee for maintaining your contract. It pays for contract administration and communication services.
- Investment fees. The broker holding your variable annuity will normally charge you annual fees for managing your investments.
- Surrender charges. If you withdraw your money within the first 3 to 10 years of the day you took out you variable annuity, you have to pay surrender charges based on a scale of declining charges from 7% to 0%.
When added up these fees can diminish investment gains, as a result many annuity experts do not sell variable annuities.