Variable Annuity Share Classes

Similar to C-share mutual funds, C-share VAs have no up-front or back-end fee. The investor can liquidate any or all shares at any time without cost or fee. 

 

There is no up-front sales charge with L shares, but there is usually a 3- to 4-year surrender period with fees. L shares often have M&E and admin fees higher than other share classes.

 

O shares combine features of A and B shares. O shares are designed for long-term investors. This share class is only offered by a very small number of insurers. An O share has no up-front charges (unlike A shares) but does have a deferred sales charge (just like B shares). During the surrender period, M&E expenses decline until they reach a level similar to M&E expenses for A shares (which is typically lower than M&E costs for B shares). The issue for brokers and advisors is likely to be a reduction in any commission trails.

 

X-share VAs credit the contract with an additional amount (bonus), calculated as a percentage (1–6%) of the initial premium. For example, an investor’s initial investment of $100,000 might become $103,000 when the contract is first issued. X-share contracts typically have a longer surrender period and higher ongoing costs than contracts that do not offer a bonus. From a purely math perspective, the bonus (and any resulting compounding) makes sense only if the investor assumes an overall annual net return of 6–8% per year.

 

Some of these products allow the insurer to recapture part or all of any bonus if the contract is surrendered within the first few years. There are also VA contracts that credit additional amounts to the contract if the investor adds money to the contract within the first several years. These are classified as persistency bonuses.