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Understanding annuity expenses

Sales charges

Many annuities impose a sales charge. Normally, the sales charge is in the form of a back-end load, also known as a contingent deferred sales charge (CDSC). CDSCs are usually incurred if the owner surrenders the contract, or withdraws funds that exceed the "free withdrawal" amount (a specified amount usually equal to 10% of the contract value).

A CDSC applies for a certain number of years, and the amount of the charge normally decreases with each year. For example, a 7% CDSC may be imposed in the first year but may be reduced by 1% each year for seven years, reaching 1% in the seventh year of the contract and 0% thereafter.

A sales charge does not have to be a CDSC, though. Instead of a CDSC, an annuity may impose an initial sales charge, also known as a front-end load. Front-end loads are applied as a set percentage of each premium payment (e.g., 3%).

Mortality risk charge This charge compensates the insurance company for the risks assumed with the guaranteed minimum death benefit feature and for guaranteeing minimum annuity settlement option rates. For fixed annuities, this charge is factored into the fixed annuity rate. For variable annuities, this charge is a stated rate (usually about 1% of the accumulated value).
Expense charge This charge compensates the insurance company for administration expenses. Also included is a proportionate share of federal taxes paid by the issuer. It does not apply to fixed annuities.
Premium taxes Imposed by some states, usually about 2% of premiums.
Subaccount management fees These apply only to variable annuities and cover expenses incurred to manage variable annuity subaccounts.
Annual policy fee Some companies impose a flat annual fee on each policy.
Fees for option features If you purchase optional benefits (also known as riders), such as enhanced death benefit guarantees and guaranteed minimum income benefits, additional fees are applied.
Transaction fees May be imposed for excessive account transfers on variable annuities, withdrawals, and other transactions. This charge does not apply to fixed annuities.

Note: Variable annuities are sold by prospectus. You should consider the investment objectives, risk, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the variable annuity, can be obtained from the insurance company issuing the variable annuity or from your financial professional. You should read the prospectus carefully before you invest.