The L share annuity class is a type of variable annuity that starts paying out earlier than most but incurs relatively high administrative costs. It caters to investors desiring early access to their funds within a shorter timeframe. Other share classes offered by variable annuities include A share, B share, C share, O share, and X share annuity classes.
Key Takeaways
- L share annuities enable shorter surrender periods, typically spanning 3-4 years.
- Other variable annuity classes can have surrender periods extending up to a decade or more.
- Accessing funds earlier without penalties means higher associated administrative charges.
How the L Share Annuity Class Works
Variable annuities represent long-term investment mechanisms structured by insurance companies for individuals planning retirement savings. Investors pay an annual premium fee, contributing to investments in a mix of assets such as stocks, bonds, and money market funds.
The accrued wealth from these investments remains tax-deferred until withdrawal, reflecting the performance of the underlying assets. Besides the annual premium, annuitants—or annuity purchasers—also pay a Mortality Risk and Expense (M&E) fee, which compensates the insurance company for the risk of outliving life expectancy. In return, the insurance company guarantees periodic annuity payments to the investor.
Variable annuities are subject to state insurance regulations and oversight by bodies such as the Securities Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).
Special Considerations
The L share is tailored for investors wanting fund access after only four years sans penalties. For instance, a standard variable annuity with a $100,000 initial investment might offer a 10% growth rate over five years.
Comparatively, a standard annuity may have an eight-year surrender period and 1.1% annual MEA fees. After five years, this investment could grow to $153,157.90. However, accessing these funds without penalties isn’t possible for another three years.
Conversely, an L share annuity within a four-year surrender period with 1.90% annual MEA fees could see an investment value of $147,614.30 after five years. Though slightly less than the standard contract, the annuitant can withdraw some amounts within this period, gaining early accessibility in exchange for higher administrative fees.
Advantages and Disadvantages of L Share Annuity Class
The L share annuity class presents both pros and cons, including early fund access without a sales charge.
Advantages
Different share classes in variable annuities, such as the L share, vary by surrender charges, administrative fees, and M&E schedules. The surrender period signifies the duration an annuitant must wait to withdraw funds without attracting penalties.
L share classes feature surrender periods of three to four years, in contrast to an average six to eight-year period for other annuities, making them an attractive option for early liquidity.
Additionally, the L share lacks an upfront sales charge inherent in A and O share classes. A shares levy a front-end fee on purchase, and O shares apply a premium-based charge on the invested sum.
Disadvantages
However, L share annuity classes encompass higher M&E charges compared to other annuities. These charges, ongoing beyond the surrender period, represent a percentage of the annuitant’s account value, impacting investment growth.
M&E fees for variable annuities range from 0.9% to 1.95%, with L shares skewing towards the higher end of this spectrum. Administrative and distributive fees cover costs of servicing and distributing annuity payments, including account transfers and preparation of statements.
While administrative fees for variable annuities span 0.0% to 0.6% annually, L shares exhibit higher percentages. Some institutions integrate M&E and administrative fees as a singular MEA fee covering mortality, expense, and administrative charges.
Additional charges in L share annuity classes may include annual service fees and costs for extra features like long-term care insurance or stepped-up death benefits.
Investors must meticulously read contracts to fully understand the cost structure associated with their annuity accounts.
By grasping the broader ambit of the L share annuity class’s benefits and limitations, investors can make informed decisions aligning with their financial goals.
Related Terms: Variable Annuity, Administrative Costs, Surrender Period, Mortality Risk and Expense, SEC, FINRA.
