Variable annuities differ fundamentally from fixed and indexed annuities because your money is actually invested in the market through sub-accounts that function like mutual funds. This means your account value fluctuates with market performance—you can gain significantly in bull markets but also lose principal in downturns.
Variable annuities typically carry higher fees than other annuity types, including:
- Mortality and expense (M&E) charges: 1-1.5% annually
- Administrative fees: 0.1-0.3% annually
- Sub-account management fees: 0.5-2% annually
- Optional rider fees: 0.5-1.5% annually
The Securities and Exchange Commission (SEC) regulates variable annuities as securities, which means they must be sold with a prospectus and by licensed securities professionals. Before purchasing a variable annuity, carefully review all fees and consider whether the tax-deferred benefits outweigh the costs compared to investing directly in mutual funds.
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