With most loaded financial products clients can find themselves paying a multitude of tiny fees that add up to a lot.
I’m not a fan of “loaded” products, and I’m really not a fan of broker dealers. Clients can find themselves being hit with a host of fees. Taken separately, they might not seem like much on their own, but all those little percentages being taken away add up to enough.
But some of these fees can be avoided. First, let’s take a look at where your money is typically going with a loaded variable annuity (VA).
The following are the typical fees charged in a VA (not including guaranteed income rider or other rider fees):
Annual money management fees
This fee is charged by a security licensed advisor to help clients manage the assets in the VA. An average money management fee is approximately .9% per year.
Mutual fund expenses
Most VAs use mutual funds, which have fees that can range from 0.3% with index funds to 2.5%-plus with international or other exotic funds. The average mutual fund fee is approximately 1.5%.
Mortality and expense risk charge
This charge is typically 1.25% a year and is charged every year against the account value. This charge pays for commissions that are paid to agents as well as for mortality costs and to generate profits for the insurance company.
These are just what they sound like and can be $25 or $30 per year or as a percentage of the account value life of 0.15% per year.
A typical surrender charge period would be between five and 16 years. The average is around seven years, and the charge in year one is usually 7%, and then it decreases 1% a year until it’s zero in year eight.
If you add up all typical fees in a VA, they will typically be in excess of 3.65% a year.
I just found out about a new no-load VA that was released and its fees, and it has two very unique qualities to it that the average VA doesn’t.
Loads/fees in VAsNew no-load VA
2. NO surrender charges
How cool is that? Right out of the gate, if you use the no-load VA, you can save 1.25% in mortality and expense costs every year and get your money out of the VA at any time with no penalty.
1. NO mortality and expense risk charge
Example: Let’s assume a client has $250,000 to fund a VA. I’ll assume the same rate of return in the VA is 7.5%, and I’ll let the money grow for only 10 years. What’s the difference in account values at the end of the term?
Loaded VA: $364,758
No-load VA: $411,119
If you had the choice of a VA with mortality and expense charges and surrender charges, and one without, which one would they choose? To ask the question is to answer it.
Roccy DeFrancesco, JD, is author of
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The Wealth Preservation Institute and can be reached at
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