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Annuity Surrender Charges and Penalties

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Let’s face it, sometimes annuities get a bad rap in the investment world and perhaps some of that is deserved. In fairness, those who are talking down these accounts are usually trying to sell some other financial product.

However, the bottom line is investors are usually and understandably concerned about access to their deposited funds. Safe investments need to provide suitable liquidity for living needs, emergencies, and required minimum distributions.

Annuity Surrender Charges

Almost all deferred annuities carry some type of early surrender penalty during the chosen investment term. The penalty is usually a percentage of the invested amount that decreases each year until the end of the chosen annuity term.

Most deferred annuity accounts carry a term that is between 1 and 10 years. Should you withdraw all of your funds before your chosen term is up, then you will incur a surrender penalty. Early surrender percentage amounts will vary from company to company and will always be included in your application and contract material.

Annuity Liquidity and Interest Withdraws

This usually brings up the question of liquidity. In what way(s) can an owner withdraw funds before the annuity  has matured  without incurring a surrender charge? Almost all annuities allow for the following types of penalty free withdraws:

  • Monthly Interest
  • Yearly percentage of the principal
  • Required minimum distributions
  • Long term care expenses
  • Diagnosed terminal illness
  • Return of invested premium

Monthly Interest Withdraws

In reality, there are several ways to withdraw money from your annuity account without penalty. Many consumers use their annuity account to generate needed income on a systematic basis.

Most fixed interest annuity accounts allow for earned interest withdraws monthly, quarterly, semi-annually, yearly or as needed. Monthly interest can be taken after the first month and in the first year of the contract. However, in almost all cases, the owner of the account must be over age 59 1/2 to withdraw interest only.

Access to Your Annuity Principal

Additionally, many annuity policies allow the owner to withdraw a percentage of the principal each year. Most contracts allow for a minimum 10% principal withdraw each year – although some only allow this feature in year two and beyond.

In some cases, if the 10% is not used in one year, then it can carry over to the subsequent year allowing for a 20% penalty free withdraw. Other contracts will allow for higher principal withdraw percentages as outlined in the contract.

IRA Annuity Required Minimum Distributions

All annuity accounts allow for penalty free access to the required minimum distributions that are mandated by I.R.S. once the owner has reached age 70 1/2. In short, your chosen insurance company cannot penalize you for what the federal government requires.

That is why fixed and indexed annuities are popular accounts when establishing stretch or beneficial IRA accounts. Conservative investors will choose an annuity as they are designed to efficiently credit interest and systematically disperse RMD amounts each year without exposing the investment to market fluctuations.

Principal Withdraws for Health Concerns

Annuities offer special provisions for those with major health concerns. If you are in need of long term care, then most contracts allow for sizable penalty free withdraws if not complete access to the principal. As part of the recently enacted Pension Protection Act, many annuity accounts also allow for income tax free withdraws for extended care.

Owners who are diagnosed with a terminal illness also will be provide with enhanced liquidity options. In most cases, the insurance company will allow for penalty free distributions of the entire accumulated value should it be wanted or needed.

Annuities Offering Return of Premium

Finally, and this is something new to the annuity marketplace, some policies allow for a full return of premium. You may not receive any interest should you surrender the account early, but you can withdraw your entire premium without losing any of the invested principal.

This is beneficial for those who might need to surrender the contract in the first couple of years. After two or three years, most fixed and indexed annuities will have credited enough interest to overcome the penalty percentage amount. That way, the owner can withdraw more than what was originally deposited.

Policies including a return of premium provision are suitable for those concerned about large future expenses and for those who want total access to the investment should something unexpected occur. A return of premium provision allows liquidity conscious consumers to rest assured during the early years of their contract.

Annuity Laddering Strategy

It is prudent to invest for an annuity term that meets your known present and future needs. And it is wise for those who need regular access to income and/or principal to use an immediate annuity account or a laddering strategy in order to insure regular access to their funds.

By using a laddering strategy through the purchase of multiple annuities with various maturity dates, you can assure that reasonable sums of principal will come due every couple of years. If the annuity principle is not needed, then the account can be reinvested for another similar term. Just like bank CD’s – annuities can provide ample liquidity when laddered properly.

Summary, Information and Quotes

Annuity investments are not appropriate for everyone. While fixed and fixed indexed annuities provide unmatched safety and above average growth potential, investment liquidity may be what is needed most.

You simply would not invest money in a ten year account that you know will be needed two years from now. It is important to discuss your overall financial needs with an agent before investing to insure the purchase of a suitable account.

Hyers and Associates, Inc is an independent and national provider of annuity investments. Contact us today to discuss annuity quotes, illustrations and information regarding any of the above mentioned accounts or strategies.

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