San Francisco (Nov. 7, 2002) -- Investors in variable annuities may want to consider switching from higher cost to lower cost variable annuities, according to a study by the Schwab Center for Investment Research.
In some cases, it may make sense to move from a high-cost variable annuity to a lower-cost product because the Internal Revenue Code allows for the "like-kind" exchange of one annuity or life insurance contract for another, even between different carriers, without any current income tax, according to the study, "How Do You Spell Relief: T-E-N - T-H-I-R-T-Y - F-I-V-E."
For example, the study showed that an expense reduction of 125 basis points per year can have a major impact on the ultimate value of the annuity:
Hypothetical current value: $600,000
Hypothetical rate of return: 6 percent (both old and new)
Current annual (annuity/portfolio) expense: 2.75 percent
Surrender charge: 2.0 percent ($12,000)
New annual (annuity/portfolio) expense: 1.5 percent
After a holding period of five years, the savings would be $28,708, increasing to $280,585 after a 20 year holding period, according to the report.
Investors may also consider moving their annuities from one carrier to another if they're concerned about drops in the carrier's credit ratings, the report said. However, the study warned that investors considering exchanging annuities should consider "surrender charges," a fee assessed for withdrawing assets from an annuity within a defined period of time. Surrender charges typically start at 7 percent the first year and decline to zero by the seventh year, the study noted. The report is available online at www.schwab.com/scir.
-- Electronic Accountant Newswire staff
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