How this instrument works
A variable annuity is an insurance contract wrapped around an investment: you hand an insurer a lump sum — Initial premium, $ — and instead of crediting a rate the company guarantees, as a fixed annuity does, the money is allocated to subaccounts that behave like mutual funds and rise or fall with whatever markets they hold. Expected gross annual return, % is not a promise from anyone; it is the assumption you want to test, standing in for whatever the subaccounts might actually earn over Years until withdrawal.
The formula compounds monthly at the gross return minus the fee, because that is closer to how the charges are actually taken than treating them as one yearly bill. Annual fee (mortality, expense, fund fees), % is meant to hold everything the contract bills in a single number: the insurer's mortality-and-expense (M&E) charge for its guarantees and risk pooling, the expense ratios of whichever subaccounts are chosen, and often a rider fee for an optional benefit like a guaranteed minimum income. Divide that combined rate by 1,200 to get a monthly decimal, raise it to the power of Years until withdrawal times 12, and multiply by the premium — the usual compound-growth shape, with the fee subtracted before the exponent does its work rather than after.
What Projected account value, $ leaves out matters as much as what it includes. Real subaccount returns move year to year rather than holding at one flat assumed rate, most contracts carry a multi-year surrender-charge schedule that penalizes early withdrawals, and gains are taxed as ordinary income when the money finally comes out, not at capital-gains rates. This sheet prices one clean, level-return scenario so the fee's own arithmetic is visible on its own — a benchmark for reading a contract's cost structure, not a projection of what any specific annuity will actually pay.
- Enter the lump sum going into the contract as Initial premium, $.
- Set Expected gross annual return, % to the subaccount performance you want to test, before any charge is subtracted.
- Combine every charge the contract bills — mortality-and-expense, fund expense ratios, any rider fee — into Annual fee (mortality, expense, fund fees), %.
- Enter Years until withdrawal for how long the premium stays invested before you plan to take money out.
- Read Projected account value, $ for what the contract is worth at that point, net of the fee load you entered.
Worked example — a $100,000 premium over 20 years
Set Initial premium, $ to 100,000, Expected gross annual return, % to 7, Annual fee (mortality, expense, fund fees), % to 1.25, and Years until withdrawal to 20. The net monthly rate is (7 − 1.25) ÷ 1200, about 0.4792%, compounded across 240 months. Projected account value, $ reads $314,953.10.
Run the identical premium, return and horizon with the fee set to zero and the account reaches $403,873.88 instead — the fee-free ceiling. The 1.25-point charge alone accounts for $88,920.78 of that gap, not because 1.25% sounds large on its own, but because it is subtracted from the growth rate every month for 240 months running. Raise the fee to 2.5%, the kind of load a heavier living-benefit rider can carry, and the same premium and return only reach $245,546.64 — proof that fee structure moves the outcome nearly as much as the assumed return itself.
Questions
What makes a variable annuity 'variable'?
Unlike a fixed annuity's guaranteed crediting rate, a variable annuity's return comes from subaccounts you select yourself, which behave like mutual funds and can rise, fall, or lose money outright in any given year. Expected gross annual return, % is therefore an assumption you are testing, not a rate anyone has promised — the actual figure could run well below it, or below zero, in a real market.
Why does Annual fee need to bundle several charges into one number?
Because the industry rarely quotes one all-in figure. A typical contract layers a mortality-and-expense (M&E) charge for the insurer's guarantees and risk pooling, the expense ratios of whatever subaccounts are chosen, and often a rider fee for an optional benefit such as guaranteed lifetime income. Add those three together yourself before entering Annual fee (mortality, expense, fund fees), % — the sheet has no way to separate them once combined.
Why does a 1.25% fee remove nearly $89,000 over 20 years?
Because the fee is subtracted from the growth rate every month, not billed once. On the default sheet, a fee-free $100,000 premium reaches $403,873.88 in 20 years; the same premium at a 1.25% annual fee reaches only $314,953.10 — an $88,920.78 gap. Each month's missing fraction of a percent also stops compounding on itself for every month that follows, so a small-looking annual number removes far more than it appears to.
How is this different from a plain compound-interest calculator?
A plain compound-interest sheet grows a balance at one stated rate; this one is shaped for an insurance-wrapped contract specifically, where Annual fee (mortality, expense, fund fees), % already stands in for three or four layered insurance and fund charges a taxable brokerage account never bills, and Initial premium, $ describes a single-payment insurance contract rather than an ordinary deposit.
Does this include the surrender charge for withdrawing early?
No. Most variable annuity contracts carry a declining surrender-charge schedule, commonly running six to eight years, that can start near 7-8% of the amount withdrawn and step down roughly a point a year. Projected account value, $ assumes the premium stays untouched until Years until withdrawal; money pulled out earlier than that schedule allows would be reduced further, on top of this figure.
What happens to taxes when the money finally comes out?
Growth inside a variable annuity compounds tax-deferred, but withdrawals are taxed as ordinary income on the gain rather than at capital-gains rates, and money taken out before age 59 1/2 usually adds a 10% IRS penalty on top. Projected account value, $ is a pre-tax figure — what actually reaches you after a withdrawal depends on your tax bracket and timing, not on anything this formula calculates.
References
Read this first: This instrument shows arithmetic, not advice. Real offers add fees, taxes and terms that vary by lender and place — verify the figures against your actual paperwork before deciding anything.