AXA Structured Variable Annuity - Help me calculate fees/returns

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nyjetfan
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AXA Structured Variable Annuity - Help me calculate fees/returns

Post by nyjetfan »

Hi All - Just talked my parents out of one of these AXA "products" being pitched by the financial advisor they have been talking to (at this point they have cancelled the orders for all of his recommendations - AXA was in progress but they were 2 days out from giving him check so well within the 10 day free look period. Note: This is in an IRA so the "tax benefits" of the variable annuity are a moot point.

Anyway, was doing some research and actually started calculating some things and wanted to see if my numbers were right or not.

So prospectus is here:
https://prospectus.axa-equitablefunds.c ... =NA&d=1035

From within the prospectus (Page 14 of prospectus / page 16 of the electronic document) I see the following table estimating fees. Assumes $10k initial investment with 5% return each year. Does note actual costs may be higher or lower, but based upon those assumptions the costs would be (Class B shares):

So for EQ/Equity 500 index he was proposing with a -10%/45% (ie they'd cover up to 10% loss and cap the gains at 45% over the 5 year period) the total fees paid would be $1,338. This calculates out to about 2.5% per year which doesn't seem out of line for these things (Extremely high by BH standards, but "in line" with the typical annuity). Anyway if I look at some examples/hypotheticals with the above as guidance am I too far off with below (comparing to S&P 500 index fund with an expense ratio of 0.5% (that's 0.5% cumulative over the 5 years so <0.1%/yr). I ran through some examples below, but in a nutshell it seems to me the buyer is paying 13% (ie the fees over 5 years) to protect against a loss of 10% of the original principal.

I'm not going to say these are "exact" but I'd think that the general result showing the index fund is actually better than the Annuity hold true, or am I missing something here? And *IF* my numbers are correct, then how can anyone claim to be a fiduciary yet still sell one of these products (although I guess when the "financial guru" picks an S&P 500 fund with a >1% ER and then adds on his 1.4% management fee it turns out to be a wash)

So here are the scenarios I considered (basically the two extremes of the "bands" and also the zero gain scenario) - do these numbers make sense?

So if the S&P 500 is down 10% at end of the 5 year contract:
AXA "covers" the 10% "loss" but still collects about 13% in fees, which leads me to a net loss of 13%.
Index fund I "absorb" the 10% loss and pay 0.5% in fees, which leads me to net loss of 10.5%
So in this scenario I come out 2.5% ahead by using Vanguard instead of this annuity.
If losses are greater than 10% the above holds other than the losses increase as the annuity passes on any losses greater than 10% to the purchaser/owner.

if the S&P 500 is flat (0% at end of 5 years)
AXA still collects a tidy 13% in fees leaving me down 13% for the 5 year period.
Index fund collects their 0.5% leaving me down 0.5% for the period.
So in this scenario I come out 12.5% ahead in Index Fund.

If we hit the "cap" right on the nose at 45% gain (which is about 7.7% per year so definitely possible but not guaranteed)
AXA pays me 45% (woo hoo!) and then takes away 13% of that netting me 32% gain (on surface sounds good)
Index fund pays me 45% and takes away 0.5% leaving me with 44.5%
Again I'm 12.5% ahead in the index fund

If things go really well every percent above 45% is an additional percent difference (in my favor) of the index fund.

So are my numbers reasonable or am I missing something that would make this annuity actually seem like a remotely reasonable product for my parents?
PFInterest
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Re: AXA Structured Variable Annuity - Help me calculate fees/returns

Post by PFInterest »

no variable annuity is probably a remotely reasonable product.
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David Jay
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Re: AXA Structured Variable Annuity - Help me calculate fees/returns

Post by David Jay »

The annuity almost certainly uses the SP500 Index, not SP500 Total Return.

Dividends are about 2%'per year, so the "drag" is closer to 4.5% than to 2.5%. That revises your numbers as follows:
So if the S&P 500 Index is down 10% at end of the 5 year contract:
AXA "covers" the 10% "loss" but still collects about 13% in fees, which leads me to a net loss of 13%.
Index fund I "absorb" the 0% loss (after dividends) and pay 0.5% in fees, which leads me to net loss of 0.5%
So in this scenario I come out 12.5% ahead by using Vanguard instead of this annuity.
If losses are greater than 10% the above holds other than the losses increase as the annuity passes on any losses greater than 10% to the purchaser/owner.

if the S&P 500 Index is flat (0% at end of 5 years)
AXA still collects a tidy 13% in fees leaving me down 13% for the 5 year period.
Index fund gains 10% in dividends VG collects their 0.5% leaving me down up 9.5% for the period.
So in this scenario I come out 22.5% ahead in Index Fund.

If we hit the "cap" right on the nose at 45% gain (which is about 7.7% per year so definitely possible but not guaranteed)
AXA pays me 45% (woo hoo!) and then takes away 13% of that netting me 32% gain (on surface sounds good)
Index fund pays me 55% (after dividends) and takes away 0.5% leaving me with 54.5%
Again I'm 22.5% ahead in the index fund
Selling an index annuity inside an IRA is financial malpractice, almost to the point of criminality.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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ThePrune
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Re: AXA Structured Variable Annuity - Help me calculate fees/returns

Post by ThePrune »

nyjetfan wrote:From within the prospectus (Page 14 of prospectus / page 16 of the electronic document) I see the following table estimating fees. Assumes $10k initial investment with 5% return each year. Does note actual costs may be higher or lower, but based upon those assumptions the costs would be (Class B shares):

So for EQ/Equity 500 index he was proposing with a -10%/45% (ie they'd cover up to 10% loss and cap the gains at 45% over the 5 year period) the total fees paid would be $1,338. This calculates out to about 2.5% per year which doesn't seem out of line for these things (Extremely high by BH standards, but "in line" with the typical annuity). Anyway if I look at some examples/hypotheticals with the above as guidance am I too far off with below (comparing to S&P 500 index fund with an expense ratio of 0.5% (that's 0.5% cumulative over the 5 years so <0.1%/yr). I ran through some examples below, but in a nutshell it seems to me the buyer is paying 13% (ie the fees over 5 years) to protect against a loss of 10% of the original principal.
I'll first speak to your understanding of the fees. Additional posts will address Monte Carlo calculations comparing the AXA Structured Capital Strategies Variable Annuity against a simple alternative of a S&P 500 index fund and a fixed income investment using a Multiyear Guaranteed Annuity.

The annual B Series costs ("Separate Account Annual Expenses") are 1.25% of the Accumulation (Cash) Account value of the annuity. These are the only expenses involved when you use a "Standard Segment" such as the EQ/Equity 500 with a -10% Buffer / 45% Cap over a 5 year segment you cited in your posting.

However... AXA also allows you to invest in so-called "Choice Segments" that have a much higher cap but charge an approximately 1.0% per year additional fee against the Accumulation (Cash) Account value. So that would be roughly a 2.25% annual fee when investing in a "Choice Segment" within a B Series annuity contract.

The latest version of the Boglehead Excel program Monte Carlo FIA Modeler allows quantitative analysis of annuities such as the AXA Structured Capital Strategies annuity. I used this program to calculate the 10 years fees for this annuity (B series) when using a "Choice Segment" investment (2.25% annual fee) and got just about the $2,244 that AXA shows in their prospectus.

Thus I am fairly certain that the fee table in the AXA Prospectus is for "Choice Segment" investments, not "Standard Segment" investments. This is in keeping with industry practice, which is to show tables with the largest fees that might be encountered. But the EQ/Equity with a -10% Buffer / 45% cap is a Standard Segment investment. The fees would only be 1.25% annually.

You, however, were looking at the $1,338 fee at then end of 5 years. If you read the prospectus carefully, you'll notice that 5 years is not yet at the end of the Surrender Charge period for this annuity. Therefore the fees shown for 5 years in the AXA Prospectus table ALSLO INCLUDES a 3% fee on the total Accumulation (Cash) Account withdrawn. You'll find this fee in the table near the top of page 13 in the prospectus. This additional 3% fee is the reason why the 10 year fee ($2,244) is less than twice the 5 year fee ($1,338).

One thing is certain - THOSE FEES ARE SKY HIGH!

Art "ThePrune"
Last edited by ThePrune on Sun Jul 23, 2017 7:27 pm, edited 1 time in total.
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Re: AXA Structured Variable Annuity - Help me calculate fees/returns

Post by Mel Lindauer »

David Jay wrote:The annuity almost certainly uses the SP500 Index, not SP500 Total Return.

Dividends are about 2%'per year, so the "drag" is closer to 4.5% than to 2.5%. That revises your numbers as follows:
So if the S&P 500 Index is down 10% at end of the 5 year contract:
AXA "covers" the 10% "loss" but still collects about 13% in fees, which leads me to a net loss of 13%.
Index fund I "absorb" the 0% loss (after dividends) and pay 0.5% in fees, which leads me to net loss of 0.5%
So in this scenario I come out 12.5% ahead by using Vanguard instead of this annuity.
If losses are greater than 10% the above holds other than the losses increase as the annuity passes on any losses greater than 10% to the purchaser/owner.

if the S&P 500 Index is flat (0% at end of 5 years)
AXA still collects a tidy 13% in fees leaving me down 13% for the 5 year period.
Index fund gains 10% in dividends VG collects their 0.5% leaving me down up 9.5% for the period.
So in this scenario I come out 22.5% ahead in Index Fund.

If we hit the "cap" right on the nose at 45% gain (which is about 7.7% per year so definitely possible but not guaranteed)
AXA pays me 45% (woo hoo!) and then takes away 13% of that netting me 32% gain (on surface sounds good)
Index fund pays me 55% (after dividends) and takes away 0.5% leaving me with 54.5%
Again I'm 22.5% ahead in the index fund
Selling an index annuity inside an IRA is financial malpractice, almost to the point of criminality.
Agree. IMO, putting an annuity inside a tax=deferred plan should be illegal.
Best Regards - Mel | | Semper Fi
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ThePrune
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Re: AXA Structured Variable Annuity - Help me calculate fees/returns

Post by ThePrune »

Next I'd like to post just one quantitative calculation that shows just how bad an investment the AXA Structured Strategies Annuity will be.

Since you commented on the Series B, Standard Segment investment over a 5 year period, I chose to model that combination using the Monte Carlo FIA Modeler that has been recently updated to handle Buffer-Design Variable Annuities such as the one you are interested in.

Overall:
$10,000 initial investment
10 year time period

For the AXA Annuity I used:
1.25% annual Separate Account Charge
5 Year, point-to-point interest crediting
-10% loss buffer over 5 years
+45% cap on 5 year gains

Alternative Investment:
$5,000 in a low-cost S&P 500 index fund (0.10% ER)
S&P 500 index fund receives about 2.15% annual dividend yield
$5,000 in a 5 year MYGA (Multi Year Guaranteed Annuity)
MYGA yielding 3.0% compounded annually (current as of this weekend)
Rebalanced after 5 years

Simulation Details:
S&P 500 price index distribution modeled using a Normal Inverse Gaussian distribution
(accommodates skewed distributions having fat tails - like the S&P 500 !)
20,000 Monte Carlo simulation trials

Results Table:
Image
The Table Column labeled "FIA" is actually the AXA Variable Annuity (VA). The simulation indicates that about 11% of the time you'd be expected to lose money in this AXA VA. The median expected investment total after 10 years is about $14,500.

The Table Column labeled "Stocks + MYGAs" is the Alternative Investment. The simulation indicates that this 50% stock /50% fixed income investment is only expected to lose money about 0.5% of the time over the 10 year period. The median expected investment total after 10 years is about $18,500.

The last column in the table shows the "Excess" simulation data, i.e. for every one of the 20,000 Monte Carlo trials it represents the final value of the Alternative Investment minus the AXA VA investment. The cell at the bottom of that column says it all: in none of the 20,000 trials did the Stocks + MYGA alternative underperform the AXA Variable Annuity.

Why can AXA get away with selling this kind of product given its poor performance against a direct investment alternative. In my opinion it's because 99.9% of potential customers can't perform the type of simulation (calculation) that gives a valid comparison. It wouldn't surprise me if 99.9% of the Registered Reps that sell this VA can't even perform the simulation.

Art "ThePrune"
Investment skill is often just luck in sheep's clothing.
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Nate79
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Re: AXA Structured Variable Annuity - Help me calculate fees/returns

Post by Nate79 »

The people should be in jail selling this junk. What a bunch of rip off artists.
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nyjetfan
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Re: AXA Structured Variable Annuity - Help me calculate fees/returns

Post by nyjetfan »

ThePrune wrote: I'll first speak to your understanding of the fees. Additional posts will address Monte Carlo calculations comparing the AXA Structured Capital Strategies Variable Annuity against a simple alternative of a S&P 500 index fund and a fixed income investment using a Multiyear Guaranteed Annuity.

The annual B Series costs ("Separate Account Annual Expenses") are 1.25% of the Accumulation (Cash) Account value of the annuity. These are the only expenses involved when you use a "Standard Segment" such as the EQ/Equity 500 with a -10% Buffer / 45% Cap over a 5 year segment you cited in your posting.

However... AXA also allows you to invest in so-called "Choice Segments" that have a much higher cap but charge an approximately 1.0% per year additional fee against the Accumulation (Cash) Account value. So that would be roughly a 2.25% annual fee when investing in a "Choice Segment" within a B Series annuity contract.

The latest version of the Boglehead Excel program Monte Carlo FIA Modeler allows quantitative analysis of annuities such as the AXA Structured Capital Strategies annuity. I used this program to calculate the 10 years fees for this annuity (B series) when using a "Choice Segment" investment (2.25% annual fee) and got just about the $2,244 that AXA shows in their prospectus.

Thus I am fairly certain that the fee table in the AXA Prospectus is for "Choice Segment" investments, not "Standard Segment" investments. This is in keeping with industry practice, which is to show tables with the largest fees that might be encountered. But the EQ/Equity with a -10% Buffer / 45% cap is a Standard Segment investment. The fees would only be 1.25% annually.

You, however, were looking at the $1,338 fee at then end of 5 years. If you read the prospectus carefully, you'll notice that 5 years is not yet at the end of the Surrender Charge period for this annuity. Therefore the fees shown for 5 years in the AXA Prospectus table ALSLO INCLUDES a 3% fee on the total Accumulation (Cash) Account withdrawn. You'll find this fee in the table near the top of page 13 in the prospectus. This additional 3% fee is the reason why the 10 year fee ($2,244) is not twice the 5 year fee ($1,338).

One thing is certain - THOSE FEES ARE SKY HIGH!

Art "ThePrune"
So one other question as in prospectus I see the 1.25% you mention and another mention of .61-.72% for underlying investment so would that be added to the 1.25 or is that somehow separate? This is on page 13 of prospectus.

Thanks for the updated simulation as it just confirms that the annuity loses out to the index funds (with age appropriate AA) due to sky high fees so getting them to pull out will help them have more financial security in future if they need it. Thanks again for all the discussions. To be clear I have no interest in this product but an advisor at my parents bank was trying to SELL it to them and I was able to nix it from going into mom's IRA. IRA currently with advisor sitting in cash and he has been instructed to leave all funds in cash until instructed otherwise - these funds will be at Vanguard in the next couple of weeks and he will have no access. Glad I caught this as this was investment he was starting execution of with structured notes on deck - and to think he is supposed to be a fiduciary
Last edited by nyjetfan on Sun Jul 23, 2017 7:24 pm, edited 1 time in total.
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Re: AXA Structured Variable Annuity - Help me calculate fees/returns

Post by ThePrune »

nyjetfan wrote:So one other question as in prospectus I see the 1.25% you mention and another mention of .61-.72% for underlying investment so would that be added to the 1.25 or is that somehow separate? This is on page 13 of prospectus.
In a variable annuity such as this AXA Structured Capital Strategies you also have the opportunity to invest in a "mutual fund"-like separate account investment. This annuity offers 3 such choices - see page 26 of the prospectus. Like any mutual fund these also have an annual "Expense Ratio", which is what the "0.61% - 0.72%" fees refer to. These fees are in addition to the 1.25% basic contract fee for a B Series annuity contract.

If you didn't invest in one of these 3 "mutual fund"-like investment funds, but instead chose one of the index-linked "Standard Structured Investment Options" such as I modeled for you above, then the only annual fee would be the 1.25%.

Art "ThePrune"
Investment skill is often just luck in sheep's clothing.
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nyjetfan
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Re: AXA Structured Variable Annuity - Help me calculate fees/returns

Post by nyjetfan »

ThePrune wrote:
In a variable annuity such as this AXA Structured Capital Strategies you also have the opportunity to invest in a "mutual fund"-like separate account investment. This annuity offers 3 such choices - see page 26 of the prospectus. Like any mutual fund these also have an annual "Expense Ratio", which is what the "0.61% - 0.72%" fees refer to. These fees are in addition to the 1.25% basic contract fee for a B Series annuity contract.

If you didn't invest in one of these 3 "mutual fund"-like investment funds, but instead chose one of the index-linked "Standard Structured Investment Options" such as I modeled for you above, then the only annual fee would be the 1.25%.

Art "ThePrune"
Thanks for the detailed explanation, I would bet their "advisor" doesn't even understand how this thing works (but I'm sure he knows how to calculate his commission to the penny).

Thanks again for all the information it has been a great help.
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Re: AXA Structured Variable Annuity - Help me calculate fees/returns

Post by itstoomuch »

ThePrune wrote:Why can AXA get away with selling this kind of product given its poor performance against a direct investment alternative. In my opinion it's because 99.9% of potential customers can't perform the type of simulation (calculation) that gives a valid comparison. It wouldn't surprise me if 99.9% of the Registered Reps that sell this VA can't even perform the simulation.

Art "ThePrune"
My guess is that the AXA cannot make money on their previous GLWB FI and VA products. They need more risk margin or they simply need to make more profit :twisted: .

I read that ManufLife is spinning off JohnHancock because of future liabilities in annuities and LTCi. :annoyed
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo
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nyjetfan
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Re: AXA Structured Variable Annuity - Help me calculate fees/returns

Post by nyjetfan »

ThePrune wrote:
Thus I am fairly certain that the fee table in the AXA Prospectus is for "Choice Segment" investments, not "Standard Segment" investments. This is in keeping with industry practice, which is to show tables with the largest fees that might be encountered. But the EQ/Equity with a -10% Buffer / 45% cap is a Standard Segment investment. The fees would only be 1.25% annually.

You, however, were looking at the $1,338 fee at then end of 5 years. If you read the prospectus carefully, you'll notice that 5 years is not yet at the end of the Surrender Charge period for this annuity. Therefore the fees shown for 5 years in the AXA Prospectus table ALSLO INCLUDES a 3% fee on the total Accumulation (Cash) Account withdrawn. You'll find this fee in the table near the top of page 13 in the prospectus. This additional 3% fee is the reason why the 10 year fee ($2,244) is less than twice the 5 year fee ($1,338).

One thing is certain - THOSE FEES ARE SKY HIGH!

Art "ThePrune"
So I've been studying this further and still can't say I've fully figured it out.

Anyway, page 14 fees show the following for the Equity 500 (assuming $10k investment, 5% gain on S&P /yr)
If you surrender at end of period (surrender fees included)
1yr - $695, 3 yr - $1,104, 5yr - $1,338, 10yr - $2,244

If you don't surrender at end of period
1yr - $195, 3yr - $604, 5 yr - $1038, 10 yr $2,244

Note differences - year 1 & 2 are $500 which would coincide with the 5% early surrender fee, and 5 year shows the 5 year surrender fee of 3% as the difference, but the 10 yr is identical.

Now if this was the 1.25% + 1% Choice (2.25%) I'd find it hard pressed to see the fees below $200 (2.25% would be $225) for the 1 year case. Also, if you back out the 5% gain it puts the amount to $185.71 which equates to a 1.86% annual fee which is the 1.25% + the 0.61% fee mentioned.

To be clear, this is just my interpretation of the fees, and I think they are correct, however the only thing I can conclude with certainty is that THESE THINGS ARE WAY TOO COMPLEX and FEES ARE WAY TOO HIGH.
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Re: AXA Structured Variable Annuity - Help me calculate fees/returns

Post by David Jay »

nyjetfan wrote:So I've been studying this further and still can't say I've fully figured it out.

Anyway, page 14 fees show the following for the Equity 500 (assuming $10k investment, 5% gain on S&P /yr)
If you surrender at end of period (surrender fees included)
1yr - $695, 3 yr - $1,104, 5yr - $1,338, 10yr - $2,244

If you don't surrender at end of period
1yr - $195, 3yr - $604, 5 yr - $1038, 10 yr $2,244

Note differences - year 1 & 2 are $500 which would coincide with the 5% early surrender fee, and 5 year shows the 5 year surrender fee of 3% as the difference, but the 10 yr is identical.

Now if this was the 1.25% + 1% Choice (2.25%) I'd find it hard pressed to see the fees below $200 (2.25% would be $225) for the 1 year case. Also, if you back out the 5% gain it puts the amount to $185.71 which equates to a 1.86% annual fee which is the 1.25% + the 0.61% fee mentioned.

To be clear, this is just my interpretation of the fees, and I think they are correct, however the only thing I can conclude with certainty is that THESE THINGS ARE WAY TOO COMPLEX and FEES ARE WAY TOO HIGH.
The surrender fee is basically a way to recoup the sales commission that was paid to the salesperson when you purchased the annuity. If you surrender early then the insurance company is "out" some or all of the sales commission that they have paid. So there is a surrender fee to reimburse the insurance company.

I don't think the surrender fee should be used for calculating fee levels.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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nyjetfan
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Re: AXA Structured Variable Annuity - Help me calculate fees/returns

Post by nyjetfan »

David Jay wrote:
nyjetfan wrote:So I've been studying this further and still can't say I've fully figured it out.

Anyway, page 14 fees show the following for the Equity 500 (assuming $10k investment, 5% gain on S&P /yr)
If you surrender at end of period (surrender fees included)
1yr - $695, 3 yr - $1,104, 5yr - $1,338, 10yr - $2,244

If you don't surrender at end of period
1yr - $195, 3yr - $604, 5 yr - $1038, 10 yr $2,244

Note differences - year 1 & 2 are $500 which would coincide with the 5% early surrender fee, and 5 year shows the 5 year surrender fee of 3% as the difference, but the 10 yr is identical.

Now if this was the 1.25% + 1% Choice (2.25%) I'd find it hard pressed to see the fees below $200 (2.25% would be $225) for the 1 year case. Also, if you back out the 5% gain it puts the amount to $185.71 which equates to a 1.86% annual fee which is the 1.25% + the 0.61% fee mentioned.

To be clear, this is just my interpretation of the fees, and I think they are correct, however the only thing I can conclude with certainty is that THESE THINGS ARE WAY TOO COMPLEX and FEES ARE WAY TOO HIGH.
The surrender fee is basically a way to recoup the sales commission that was paid to the salesperson when you purchased the annuity. If you surrender early then the insurance company is "out" some or all of the sales commission that they have paid. So there is a surrender fee to reimburse the insurance company.

I don't think the surrender fee should be used for calculating fee levels.
If you look above, I used the fees WITHOUT surrender fees (ie lower of the two). Just used the fact that the "surrender" option and the non-surrender differed by exactly the surrender fees. So if you look at 1 year, with surrender fees (5%) it was $695 in fees vs $195 in fees for non-surrender.

So $195 in fees is 1.95%, although since there was a 5% gain in the first year per their example, I backed out the 5% which made it the $185.71 in fees. So fees in first year were about 1.86% if you let it ride, and would have been 6.86% if you surrendered it (you pay 1.86% plus 5% surrender)
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Re: AXA Structured Variable Annuity - Help me calculate fees/returns

Post by David Jay »

Remember that even if the labeled "fees" are 1.86% (or whatever), huge costs are hidden in the SP500 Index (versus SP500 Total Return) and in the participation cap.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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