Michigan Variable Annuities Practice Test

What is a subaccount expense or expense ratio?

An annual fee charged by the insurer to provide the death benefit. A one-time setup fee at issue. A tax charged on distributions. The annual fee charged by investment options within the contract, reducing net investment returns.

Correct Answer:

The annual fee charged by investment options within the contract, reducing net investment returns.

Explanation:

The subaccount expense or expense ratio is the ongoing annual fee charged by the investment options inside a variable annuity. Each subaccount represents a pool of assets managed by an investment manager, and the expense ratio covers costs of managing those assets and running the subaccount. This fee is taken out of the assets each year, so it directly reduces the net return you receive from the investment, even if the fund performs well or poorly. This fits the idea of an annual fee tied to the investment options within the contract, not a one-time setup fee, not a tax, and not a charge for the death benefit.

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