Annuity Fax

There are many different types of variable annuity contracts, but they are only different in appearance rather than what it can do for you. All variable annuity contracts offer tax deferral and other guarantees that only annuities can offer. What is generally different between one variable annuity contract from another one is the structure of the contract.

The most popular variable annuity contract is the “B” share annuity contract. This contract has an average M&E, mortality and expense plus administration fees, of 1.35%. That is what is called the base charge of the contract, there are additional costs for sub-account expenses and additional rider costs. The total fee for a “B” share variable annuity is about 2.7% a year.

The M&E expense generally covers the commission paid to the adviser and other general expenses from administering the variable annuity contract. In general the B share annuity has a seven year surrender schedule and other standard features. The typical commission on a “B” share variable annuity contract is 6.5% all upfront with little or no trailing commissions to the adviser. While other commission options are available on this contract they are rarely taken.

Because the annuity industry recognized that they could attract more producers by offering a product that has a decent upfront commission and paid out a generous trailing commission they developed a hybrid variable annuity contract called the “L” share. This L share variable annuity contract has a shortened surrender schedule, usually 3 to 5 years, and has a significantly higher M&E cost averaging 1.65% a year. Generally pays the adviser a 3-5% upfront commission with a .75-1% trailing commission paid out in either the 13th month or after the surrender schedule expires. This is why the M&E cost is much higher with an L share versus a B share variable annuity contract.

Because of the higher trailing commission many advisers like the L share contract, it basically builds an annuity of income for them because of the trail commission. This is reflected in the variable annuity sales data which shows the B share contract with 36% market share and the L share annuity with 29% market share. While this contract is great for the adviser it is not good for most annuity buyers. If the annuity buyer is seeking a short-term investment within a variable annuity contract than this option is OK, but since variable annuities, or any equity investment, is considered a long-term investment it makes little sense for the annuity buyer.

Since this market is an adviser driven market many consumers do not understand that they may receive a better deal if they look at the B share variable annuity contract instead of the L share. This is why you need to consider looking at a third party, unbiased review of variable annuities, like Annuity IQ.