Annuity Share Classes

Purchasing an annuity provides you with future income.dollars image by Mikhail Olykainen from Fotolia.com

A variable annuity is a contract between you and an insurance company through which you invest a specified amount of money during the accumulation phase. The insurance company then invests your money in order to give you a regular income starting at a specified time, often at retirement. The annuity is variable because your future income depends on how well the insurance company's investments perform.

Annuities are available in various share classes, which determine the fees you pay for the annuity. The most common annuity share classes are Class B, Class C, and Class L. It is important to read the annuity prospectus to understand the annuity fees.

Class B Shares

Class B share annuities usually do not have a front-end sales charge. Rather, you pay a contingent-deferred sales charge, also called a surrender charge, if you take money from the annuity (a partial or full surrender of the annuity) within the surrender period. The prospectus defines the surrender period, which is often six to eight years. Typically, the surrender charge decreases each year until it ends at the end of the surrender period.

Class C share annuities do not have either a front-end sales charge or a surrender charge, making them a good choice for someone who needs a liquid investment. However, C share annuities have higher maintenance fees to compensate for lack of front-end or surrender charges.

Class L share annuities also have a surrender charge if you take money from the annuity within the surrender period. However, the surrender period for L share annuities is much shorter than for B share annuities, and L share annuities usually have higher maintenance charges than B share annuities.