L Share Annuity Class: Meaning, How it Works, Pros and Cons

What is L Share Annuity Class?

L Share Annuity Class is a type of variable annuity designed for investors seeking shorter surrender periods, typically 3 to 4 years, with enhanced liquidity options compared to traditional annuity share classes. These annuities invest your premiums in underlying assets such as stocks and bonds, growing tax-deferred based on market performance.

This class contrasts with longer-term annuities by offering lower or declining surrender charges and penalty-free partial withdrawals, but often comes with higher ongoing fees like mortality and expense charges. It is ideal for those needing greater access to funds within a few years while maintaining tax advantages.

Key Characteristics

Understanding the core features of L Share Annuity Class helps you evaluate if it fits your financial goals.

• Shorter Surrender Period: Typically 3-4 years compared to 7-10+ years in standard classes, allowing earlier access to funds without full penalties.
• Higher Ongoing Fees: Includes elevated mortality, expense, and administration (MEA) charges, often around 1.65%, which are higher than standard annuities.
• Enhanced Liquidity: Permits penalty-free partial withdrawals annually or after the surrender period, providing more flexibility.
• No Upfront Sales Load: Unlike some A Shares, L Shares typically do not charge an initial sales commission, investing fully from the start.
• Variable Investment Options: Your premiums are allocated among various sub-accounts, which may include bond funds like BND or dividend-focused funds such as VYM.

How It Works

When you purchase an L Share Annuity, your premiums accumulate tax-deferred in sub-accounts linked to market performance. The shorter surrender period means you face contingent deferred sales charges (CDSC) that decrease over 3-4 years, after which you can access your funds without penalty.

During the accumulation phase, higher MEA fees fund the enhanced liquidity features and shorter surrender schedule. Upon reaching the payout phase, you can annuitize your contract for fixed or variable payments or take lump sums. Understanding concepts like rate of return is crucial to evaluate expected growth net of fees.

Examples and Use Cases

L Share Annuities suit investors with medium-term horizons who prioritize liquidity over maximizing long-term growth.

• Retirees: Those needing flexible access to funds for unexpected expenses benefit from the shorter surrender and penalty-free withdrawals.
• Investors in Stocks and Bonds: Allocating premiums into diversified portfolios, including bond ETFs like BND, can help balance risk and return.
• Dividend Investors: Using funds such as VYM within the annuity structure offers exposure to dividend-paying stocks with tax advantages.
• Comparing Annuity Classes: Unlike B Share annuities with longer surrender periods, L Shares provide quicker liquidity at the cost of higher fees.

Important Considerations

While L Share Annuities offer increased flexibility, the higher ongoing fees can significantly reduce net returns over time. You should carefully evaluate if the trade-off between liquidity and cost aligns with your financial goals.

Additionally, market risks remain since returns depend on the performance of underlying investments, and early withdrawals before age 59½ may incur IRS penalties. Reviewing contract specifics and comparing with other options like low-cost index funds can help you make an informed decision.