Variable Annuities - Byrd Financial Group Variable Annuities Services

Mortality and Expense Fee (M&E)
The asset-based M&E fee that is charged on all variable annuity contracts is designed to pay for four things:

The guaranteed death benefit
The option of a guaranteed lifetime payout
The guarantee of minimum annuity purchase rates when you annuitize.
The assurance that fixed insurance costs, including the M&E fee itself, will never exceed a specified maximum amount for the life of the contract

The cost of these insurance features typically ranges up to 1.5% of the total value of your variable annuity each year, with the 2000/2001 average at 1.158% according to VARDS. In most cases, the fee is subtracted proportionally from each of the investment portfolios into which you’ve put money.

When comparing a number of contracts, you’ll find that sometimes the M&E fee is higher than average, while administrative and maintenance fees are lower, or vice versa. Experts suggest that what you look at is the entire fee package, rather than any single component, in evaluating a contract.

Management Fees (Sub-Account Expenses)
Asset-based management fees are used to pay the investment portfolio manager as well as other expenses associated with administering variable annuities. These fees are described in the prospectus, and are sometimes broken down into an investment advisory fee and an operating expense fee. Or they’re aggregated under the management fees heading. These fees don’t appear as a separate figure on your regular statements but are reflected in your portfolio values.

According to the National Association for Variable Annuities (NAVA), management fees average about 0.77% annually, but the actual charge can vary quite dramatically, based on the size of the fund or the way the portfolio invests. For example, fees on index portfolios tend to be significantly lower than fees on international equity portfolios or those requiring extensive or ongoing research and oversight.

In a fixed account within variable annuities contracts, the expenses are paid by the account’s interest margin. This margin is the difference between the percentage being earned on investments made by the company and the percentage being credited to your account as earnings.

Variable Annuities

Variable Annuities

Annuities - Variable Annuities

Guaranteed Minimum Withdrawal Benefits (GMWBs) are designed for investors who need monthly, quarterly, or annual income from their investment, and want a guarantee* that they will never lose their principal, regardless of market performance.

When a variable annuity is purchased with a GMWB rider, the insurance company guarantees that even if the market performs poorly, you will not lose the money that you have invested. Furthermore, over the lifetime of your contract, you can withdraw an amount equal to your total principal, usually in monthly, quarterly, or annual withdrawals. Depending on the insurance company issuing the annuity, you can typically withdraw from 5% to 10% per year.

The examples below each assume a $250,000 investment in a variable annuity with a 7% GMWB rider.

Bear Market Example
This example assumes the market performs poorly during the accumulation period of your investment. We will assume that you invested $250,000 in a variable annuity, and purchased a 7% GMWB. We will also assume that because of poor market performance your account declines each and every year. Because of poor market performance, we will assume that your account value went down to zero by the 10th year, when you wanted to begin taking withdrawals. Because of the GMWB, you will still receive $17,500 per year until you have received back your original investment of $250,000, which will take 14.2 years, regardless of the fact that the account value has declined to zero.

Bull Market Example
This example assumes the market performs very well. Some insurance companies allow you to "step-up" the guarantee from your initial principal to an amount to which it has grown. We will assume you invested $250,000 in a variable annuity, and purchased a 7% GMWB and began taking withdrawals at 7% immediately. You would receive $17,500 every year. Now suppose that because of positive market performance your account increases 20% per year. By the end of the 5th year, your account is worth $465,806 (even though you have been withdrawing $17,500 per year). At this time you can exercise the step-up provision. As a result of the step-up, your withdrawal benefit is now calculated at 7% of $465,806, which would increase your annual withdrawals to over $32,600! You also continue to have the peace of mind that if the market declines, the "locked in" value of $465,806 would now be protected. And if the market improves further, your account value may go up even more, and you could also potentially lock in these additional gains in the future.

What to look for when purchasing a Guaranteed Minimum Withdrawal Benefit rider

Maximum Withdrawal Amount: Make sure that the GMWB ’s maximum withdrawal amount is consistent with your income needs. Most GMWBs allow you to withdraw between 5% and 7% annually, although a few allow higher percentages.

Step-Up: As mentioned in the Bull Market Example above, a step-up can be an important feature of an GMWB when your account value increases. Be certain the GMWB that you purchase contains a step-up provision. Most companies provide for a step-up every three to five years, but a few allow for annual step-ups.

Step-Up Window: Check the step-up window. Some insurance companies allow you to step-up anytime after three to five years. This gives you maximum flexibility to time the step-up with market performance. Others give you a 30-day window to initiate the step-up after three to five years—a far less flexible option.

Fees: Fees for the GMWBs range from 0.25% to 1.00% annually. However, a lower fee does not always mean a better GMWB. It is more important that the GMWB's benefits fit your individual needs. In addition to the GMWB fee, also consider the step-up provision, maximum withdrawal percentage, as well as other fees associated with the annuity, such as M&E and sub-account expenses.

* Guarantees are based on the claims-paying ability of the issuing company or companies.

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