True Variable Annuity Expense is Greater than You Think

After 20 Years, Expense Can Exceed Investment Value

A prospectus accompanies annuity sales. It explains all contract terms, sometimes in hundreds of pages. When annuity buyers sign annuity contract applications, they affirm understanding of all prospectus terms. Despite signing contracts, annuity buyers apparently do not fully understand prospectus terms, based on our experience at

Expense can be an especially confusing part of an annuity. The prospectus expresses expense in percentages, not dollars and cents the way we usually think about expense. Also, several distinct expense categories contribute to total annuity expense. Even if an annuity buyer figures out the total expense percentage, the stated percentage almost always understates the true value of the expense. Before explaining why prospectuses understate expense and what to do about it, it is useful to distinguish non-investment expenses from annuity expense.[i]

When consumers buy goods and services (not investments), they exchange money for a benefit. The value of the money equals its cash value – its stated value. This idea is self-evident. However, a lot of people think this same valuation applies to annuity expense. It does not!

Annuity expense is money that otherwise would have been invested.[ii] If annuity expense had otherwise been invested, its value would have grown at the rate the investments grew. Therefore, the value of annuity expense does not equal its stated value. Rather, annuity expense equals what it would have been worth if it had been invested.

Dale and Ryan broadcast a show last year titled, “Make the Call.”[iii] They illustrated how current and prospective annuity owners can use to discover annuity terms. Listeners to the broadcast heard Ryan and an annuity owner call the annuity issuer, an insurance company representative. It was a three-way phone call. Ryan asked all of the questions. The call revealed important facts about the annuity, including expense. In this call, the stated annuity expense equaled 3.55%.

Annuity expense percentages describe expense per hundred dollars per year. Thus, the stated expense rate equaled $3.55 per year on a $100 investment. However, this stated rate understates the true rate. Investors cannot know the exact true expense rate because they don’t know the future investment growth rate. However, they can make reasonable estimates using expected pre-expense investment returns. The following table illustrates true expense rates assuming a modest 5% pre-expense investment return and the stated 3.55% expense rate.

This table assumes a $10,000 initial investment. Using investment time horizons equal to 10, 20, and 30 years, the table reports total annuity expense in dollars, ending investment value, and the true annuity expense rate. Compare values in the “True Mean Annual Expense” column with the stated annuity expense rate, 3.55%.

The true expense rate increases the longer the investor owns the annuity. Also, notice how “Total Expense in Dollars” values compare to “Investment Ending Value After Expense.” You’re reading this table correctly: After 20 years, investment value and expense are nearly equal; after 30 years the insurance company has taken 84% more than the investment is worth! helps investors discover contract terms lost in the pages of a prospectus. In a 20 or 30-minute call, Ryan can ask the insurance representative questions that lead to simple and surprising facts about an annuity. The service is complimentary.


[i]The same principles apply to all investment expenses.

[ii]Annuity advocates argue that expenses fund valuable insurance benefits. These benefits are not available in investments outside of an annuity. Therefore, expense adds value.

[iii]“Make the Call” broadcast on 27 January 2018. 

[iv]Different assumptions would create different results. This hypothetical illustration should not be used to make investment decisions because individual circumstances, expenses, annuities, and investment returns are different.

The opinions, news, research, analyses, prices, or other information contained in this article are provided as general market commentary and do not constitute investment advice. Financial Fortitude and its affiliates are not liable for any loss or damage which may arise directly or indirectly from use of or reliance on such information. Financial Fortitude has taken reasonable measures to ensure the accuracy of the information.

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