May 13, 2020 by Keith Singer
One of the knocks on variable annuities has been the relatively high fees associated with them. Although in many cases they may provide attractive death benefits or guaranteed lifetime income, between rider fees, management fees and mortality and expense charges, the total cost often amounts to 3% to 4% annually. In an effort to create a more attractive product, several major insurance companies are now offering buffered annuities.
Unlike the conventional fee structure, the contracts have no management fees or expense charges but have caps and buffers instead. For instance, on a six-year product, the account holder would receive the full returns of the S&P 500 subject to a cap — depending on the product — of approximately 125% to 175%. For example, if the investor invested $100,000 and the S&P 500 went up 60% over the six-year period, the investor would receive $160,000 upon maturity without any reduction for fees. However, if the index went up 200% over six years (meaning that the index actually tripled), the investor’s initial $100,000 account value would be worth only $250,000 if there was a 150% cap.