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

## What Is the L Share Annuity Class?

The L share [annuity](https://www.investopedia.com/ask/answers/12/what-is-an-annuity.asp) class is a version of a [variable annuity](https://www.investopedia.com/terms/v/variableannuity.asp) that has a shorter surrender period duration and will start paying out earlier than other annuity classes. L share annuities have relatively high administrative costs. It is designed for investors who want to be able to begin withdrawing funds from an account after a comparatively short period of time. Other share classes offered by variable annuities include A share, B share, C share, I share, O share and X share annuity classes.

### Key Takeaways

*   L share annuities are a class of variable annuity that allows for shorter surrender periods, typically 3-4 years.
*   Other variable annuity classes typically have surrender periods of up to 10 or more years.
*   However, the benefit of earlier access to withdraw funds from the annuity without penalty comes with higher administrative charges.

## How the L Share Annuity Class Works

A variable annuity, in general, is a long-term investment vehicle set up by an insurance company for an investor planning for retirement. The investor pays an annual premium fee, which is invested in any combination of assets like [stocks](https://www.investopedia.com/terms/e/equity.asp), [bonds](https://www.investopedia.com/terms/b/bond.asp), and money market funds.

The wealth that accumulates from these investments is [tax-deferred](https://www.investopedia.com/terms/t/taxdeferred.asp) until the money is withdrawn, and the value of the variable annuity is correlated with the performance of the underlying investments.

In addition to the premium paid, the [annuitant](https://www.investopedia.com/terms/a/annuitant.asp)—or purchaser of the annuity—also pays a [mortality risk and expense](https://www.investopedia.com/terms/m/mortalityandexpenseriskcharge.asp) (M&E) fee to compensate the insurance company for the risk that the annuitant will outlive his or her life expectancy. The insurance company makes guaranteed annuitized periodic payments to the annuity investor.

Variable annuities are regulated by state insurance regulators, the [Securities Exchange Commission (SEC)](https://www.investopedia.com/terms/s/sec.asp), and the [Financial Industry Regulatory Authority (FINRA)](https://www.investopedia.com/terms/f/finra.asp).

## Special Considerations

The L share is most valuable to investors who want access to their investment funds after just four years without being penalized. Consider the following example. A standard variable annuity with a $100,000 initial investment offers a growth rate of 10% over five years.

The surrender period is eight years under the standard contract with annual MEA fees of 1.1%. After five years, the investment grows to $153,157.90, but the annuitant cannot access the funds without being penalized for another three years.

An annuitant with an L share annuity class with a four-year surrender period and annual MEA fees of 1.90% will see that the investment value after five years is $147,614.30, lower than the standard annuity contract above. But the annuitant can withdraw some of these funds during this time, which would not be possible under another annuity class. So the annuitant will pay higher administrative fees but has earlier access to the income.

## Advantages and Disadvantages of L Share Annuity Class

The L share annuity class offers some advantages versus other annuity classes, including earlier access to funds and no sales charge.

### Advantages

There are various share classes available in variable annuities, one of which is the L share class. The L share class differs from other annuity classes in terms of surrender charges, administrative and expense fees, and the M&E fee schedule. The [surrender period](https://www.investopedia.com/terms/s/surrender-period.asp) is the period of time during which an annuitant may not withdraw funds from the account. Otherwise, a surrender charge or penalty will be applied.

The L share class has a surrender period of three to four years, which indicates that the owner may start withdrawing money after three or four years, depending on the financial institution’s contractual agreement. Conversely, the average surrender period for a variable annuity is six to eight years, which makes the L share annuity an advantageous option.

Another advantage of the L share class is that it does not have an upfront sales charge like the A and O share classes. The front-end sales charge associated with A shares is a fee paid when share purchases are made and is deducted from the investment amount of the portfolio. O share classes charge a premium-based sales charge equal to a fixed percentage of the invested amount of an account.

### Disadvantages

However, there are disadvantages to L share annuity classes. L share annuity classes offer a relatively higher mortality risk and expense (M&E) charge compared to other variable annuity classes. The M&E charge is a percentage of the annuitant’s account value and is an ongoing cost that continues even past the surrender period.

The higher the percentage, the smaller the value of the investments. M&E charges for variable annuities typically range from 0.2% to 1.80%, with L share class fees in the higher spectrum of that range.

The administrative and distributive fees are the charges for servicing and distributing annuity payments. Some of these charges relate to the cost of transferring funds between accounts and the cost of preparing monthly statements and confirmation reports.

Variable annuity administrative fees range from 0.0% to 0.6% annually with L shares offering the higher percentage of the account value. Some financial institutions combine the M&E and administration fees into one and classify the combination as an MEA fee, meaning annual mortality and expense fee and administrative charge.

Other fees that may be charged under the L share annuity class include an annual service charge and fees for special features such as long-term care insurance and a [stepped-up death benefit](https://www.investopedia.com/terms/s/stepupinbasis.asp).

It is important that investors read the contractual agreements rigorously to know and understand what costs will be associated with their annuity accounts.

> **Article Sources**
>
> 1.  Morgan Stanley. "[Understanding Variable Annuities](https://www.morganstanley.com/content/dam/msdotcom/en/assets/pdfs/wealth-management-disclosures/understandingvariableannuities.pdf)."
>     
> 2.  U.S. Securities and Exchange Commission. “[Variable Annuities: What You Should Know](https://www.sec.gov/investor/pubs/sec-guide-to-variable-annuities.pdf).”
>     
> 3.  Morgan Stanley. "[Understanding Variable Annuities](https://www.morganstanley.com/content/dam/msdotcom/en/assets/pdfs/wealth-management-disclosures/understandingvariableannuities.pdf)." Page 7.
>     
> 4.  Morgan Stanley. "[Understanding Variable Annuities](https://www.morganstanley.com/content/dam/msdotcom/en/assets/pdfs/wealth-management-disclosures/understandingvariableannuities.pdf)." Pages 3 & 7.
>     
> 5.  Morgan Stanley. "[Understanding Variable Annuities](https://www.morganstanley.com/content/dam/msdotcom/en/assets/pdfs/wealth-management-disclosures/understandingvariableannuities.pdf)." Page 3.