L Share Annuity Class

Capital Markets

What is the L Share annuity category?

The share annuity class L is a version of a variable annuity that begins to be paid earlier than most but which has relatively high administrative costs. It is designed for investors who want to be able to start withdrawing funds from an account after a relatively short period of time.

The other share classes offered by variable annuities are annuity classes A, B, C, O and X.

The basic principles of the L share annuity category

A variable annuity, in general, is a long-term investment vehicle set up by an insurance company for an investor planning for retirement. The investor pays an annual premium which is invested in any combination of assets such as stocks, bonds and money market funds.

The wealth that accumulates from these investments is tax-deferred until the money is withdrawn, and the value of the variable annuity is correlated with the performance of the underlying investments.

In addition to the premium paid, the annuitant also pays risk charges and mortality expenses (M&E) to compensate the insurance company for the risk that the annuitant survives his life expectancy.

The insurance company pays guaranteed annuity periodic payments to the annuity investor.

Variable annuities are regulated by state insurance regulators, the Securities Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).

Key points to remember

  • L share annuities are a class of variable annuities that allow shorter redemption periods, usually 3 to 4 years.
  • Other variable annuity classes generally have buy-back periods of up to 10 years or more.
  • The advantage of being able to withdraw funds from the annuity earlier without penalty comes with administrative costs, M&E and other higher charges, however.

Benefits of the L Share Annuity Class

There are different share classes available in variable annuities, one of which is the L share class. The L share class differs from other annuity classes in terms of redemption fees, administrative fees and expenses and the M&E fee schedule.

The redemption period is the period during which an annuitant cannot withdraw funds from the account. Otherwise, redemption fees or penalties will apply.

Share class L has a redemption period of three to four years, indicating that the owner can start withdrawing money after three or four years depending on the financial institution’s contractual agreement.

The average buyback period for a variable annuity is six to eight years, which makes the L share annuity an advantageous option.

Another advantage of the L share class is that it does not have an initial sales charge like the A and O share classes. The initial acquisition costs associated with the A shares are fees paid when the ‘purchase of shares and are deducted from the investment amount of the portfolio. O share classes charge sales charges based on premiums corresponding to a fixed percentage of the invested amount of an account.

Risks related to L Share annuity shares

The L share annuity classes offer a relatively higher cost of risk and expense (M&E) than the other variable annuity classes. M&E fees represent a percentage of the annuitant’s account value and are an ongoing cost that continues even after the buy-back period.

The higher the percentage, the lower the value of the investments. M&E fees for variable annuities generally range from 0.9% to 1.95%, with L share class fees in the upper end of this range.

Administrative and distribution fees are the service and distribution fees for annuity payments. Some of these charges relate to the cost of transferring funds between accounts and the cost of preparing monthly statements and confirmation reports.

Variable annuity administrative fees range from 0.0% to 0.6% per year, with L shares offering the highest percentage of the account value. Some financial institutions combine M&E and administrative costs into one and classify the combination as MEA costs, that is, annual mortality and expense costs and administrative costs.

Other fees that may be charged under the L share annuity category include annual service fees and fees for special features such as long term care insurance and an enhanced death benefit.

It is important that investors carefully read the contractual agreements to know and understand the costs that will be associated with their annuity accounts.

L Share annuity class: who buys them

The L share is most valuable for investors who want to access their investment funds after only four years without being penalized. Take the following example. A standard variable annuity with an initial investment of $ 100,000 offers a growth rate of 10% over five years.

The buy-back period is eight years under the standard contract with MEA annual fees of 1.1%. After five years, the investment increases to $ 153,157.90, but the annuitant cannot access the funds without being penalized for another three years.

An annuitant with an L share annuity class with a redemption period of four years and an MEA annual fee of 1.90% will find that the investment value after five years is $ 147,614.30, less than standard annuity contract above. However, the annuitant can withdraw part of these funds during this period, which would not be possible in another annuity category. The annuitant will therefore pay higher administrative costs but will have faster access to income.

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