Variable Annuity Fee Impact Calculator
Calculate the lifetime fee impact of a variable annuity. M&E (mortality & expense) charge averages 1.25%, subaccount expense 0.65%, GLWB rider 1.10% — total often 2.5-3.5% annually before alpha. Compare to a low-cost index portfolio (0.10-0.30% expense). 30-year fee drag commonly destroys 35-55% of the gross return.
The Variable Annuity Fee Stack
Most variable annuities (VAs) layer multiple fee tiers: (1) M&E charge (mortality + expense) — 1.00-1.50%. (2) Subaccount fund expense ratio — 0.50-1.20%. (3) Administrative fee — 0.10-0.20%. (4) GLWB (guaranteed lifetime withdrawal benefit) rider — 0.80-1.40%. (5) Death-benefit rider step-up — 0.30-0.70%. (6) Surrender charge — 5-9% in year 1, declining 1%/year. Total annual cost: 2.5-3.8% before the underlying funds generate any return.
Tax-Deferred Growth — Marginal Benefit Only
VAs are sold heavily on tax-deferred growth. But: (a) gains taxed as ordinary income upon withdrawal (vs cap gains in a taxable account). (b) 10% penalty if before 59½. (c) Step-up in basis at death — NOT available (VAs lose the §1014 basis step-up that taxable accounts get). (d) Fee drag of 2-3% wipes out tax-deferral benefit unless held 25+ years AND the alternative is high-turnover taxable funds. Bottom line: tax-deferred growth alone rarely justifies a VA — the riders must add real value.
GLWB Rider — Often Oversold
Guaranteed Lifetime Withdrawal Benefit (GLWB) — guarantees a minimum income for life, typically 4-5% of high-water-mark account value. Sold as 'safe income.' Reality: payout rates are similar to systematic 4% rule withdrawals from a low-cost index portfolio, but VA costs 2-3% in fees vs 0.20% for index. The rider only adds value in catastrophic market scenarios (consecutive deep bear markets), and even then the GLWB carrier may reduce future payouts under contract terms.
When a VA Actually Makes Sense
Narrow legitimate uses: (1) 1035 exchange to escape an even worse legacy annuity (not buying a new one). (2) Behavioral discipline — investor refuses to hold equity in taxable account but will hold inside annuity. (3) Specific creditor protection in states where annuities are protected from creditors. (4) Estate planning where ordinary-income-tax-at-death is acceptable (rare). (5) Tax-advantaged retirement plans don't have available room AND alternative is high-cost active mutual funds. The first question to ask any VA salesperson: 'What is the all-in annual cost?' If they don't give a clear answer, leave.
Sources: Morningstar Variable Annuity Research 2024, FINRA Annuity Practice Standards, NAIC Annuity Suitability Model Regulation. Last updated: May 2026. Not investment advice.
Frequently Asked Questions
What are the total fees on a variable annuity?
Typical stack: M&E (1.00-1.50%) + subaccount expense (0.50-1.20%) + admin fee (0.10-0.20%) + GLWB rider (0.80-1.40%) + death benefit rider (0.30-0.70%). Total: 2.5-3.8% per year. Surrender charge 5-9% in first 5-9 years.
Are VA tax-deferred growth benefits worth the fees?
Rarely — fees of 2.5-3.5% typically wipe out the tax-deferral benefit unless held 25+ years AND the alternative is high-turnover taxable funds. VAs also lose the §1014 step-up in basis at death — a major estate-planning negative.
What is a GLWB rider?
Guaranteed Lifetime Withdrawal Benefit — guarantees minimum income for life (typically 4-5% of high-water-mark). Sold as 'guaranteed income.' Reality: payout rates similar to systematic 4% withdrawal from a low-cost index portfolio, but with 2-3% annual fee drag vs 0.20% for index.
When does a variable annuity make sense?
Narrow uses: (1) 1035 exchange from a worse legacy VA. (2) Behavioral discipline (investor won't hold equity outside an annuity). (3) Creditor protection in states where annuities are protected. (4) After maxing 401k/IRA AND alternative is expensive active funds. New VA purchases for tax-deferral alone almost never make sense.
What is a surrender charge?
Penalty for withdrawing more than 10% of account value within the surrender period (5-9 years typically). Starts at 5-9% in year 1 and declines 1%/year. Locks you into the VA. Read the surrender schedule before signing — many investors don't realize how trapped they become.