As an independent agent, I see a lot of misinformation on annuity policies. One of the primary concerns with investors is liquidity. Some critics say annuities offer no liquidity. This is simply not true.
There are several way you can withdraw money from your annuity account. Many have several different liquidity options so you can access your income and principal. Withdrawals can be taken on a regular basis – or as needed. We discuss all of your options below.
Annuity Interest Withdrawals For Income
Most annuities allow the owner/annuitant to take regular interest withdrawals. They are fantastic products for regular income payments in retirement. You can choose from monthly interest payments, quarterly, semi-annual or annual disbursements.
We see many of our clients use fixed annuity accounts for regular income – and indexed policies for annual withdrawals. The point is that you’ll have a lot of flexibility in determining how and when you want to take payments. And if your need for income decreases, you can stop your interest payments and defer them for a later date.
Annual Liquidity Of 5%-15% Of Principal
Almost all annuity contracts offer an annual free withdrawal of between 5-15% of the accumulated value. This gives you access to interest and principal during the year and at arbitrary times. The most common amount is a 10% annual withdrawal feature. However, some will stack your withdrawals if you did not use it one year. In other words, you could have a 20% withdrawal available after two years.
The requirement for most contracts is the owner wait for one year before taking their 10% out. But if you find yourself needing a little extra for a small emergency of some kind, an annual annuity withdrawal amount can be a nice feature to access your principal.
Annuitization – Principal & Interest Disbursements
Another option many policy owners use for regular annuity payments is called an annuitization. Annuities can be annuitized in several ways in order to create a regular stream of income.
Once annuitized, your policy is guaranteed to provide payments for a set numbers of years – or even a lifetime. If you pass away prematurely, then your annuity payments will continue to your listed beneficiaries assuming that’s how you set it up.
In some cases, an annuitization can start right away, and in others, it would begin after a few years of deferral. Most other policies are never annuitized and the accumulated value is passed on to a loved one. It’s up to you.
Withdrawals For Chronic Illness & Health Issues
One of the biggest concerns for retirees is paying for future income expenses. Fortunately annuities can help. Almost all contracts have chronic illness and hospitalization riders available at no cost. These provisions allow will waive surrender penalties on some – or all of the contract value – if one of the owners is diagnosed with a chronic illness. But many policies go beyond that.
There are several indexed annuities with income riders that will double your income if you’re needing long term care. Some will double your payments for a nursing home and others for a home healthcare stay, but this a great no-cost way to increase your income for LTC.
Another possibility is to buy a tax-qualified long term care annuity. These policies require medical underwriting (some will not medically qualify), but those who do can see their initial investment tripled in the event long term care is needed. These hybrid long term care annuities are quite popular and allow owners to account for many different scenarios during retirement.
Term Expiration – Non Renewal Of Contract
There is no rule that says you have to renew your contract once the term is up. Most of our clients purchase short term annuities with 3-5 year terms. After the term is up, you can usually keep your contract surrender-free and allow it to continue to earn interest year to year. With interest rates up (and more annuity competition) many of these accounts renew at very competitive levels.
Once your contract is out of its surrender period, you can withdraw all of your funds at anytime – no questions asked. As you grow older in retirement, it may be a wise way to assure liquidity as oppose to choosing the highest rates with policies that may offer less liquidity.
No Surrender Penalties At Passing
A common question about annuities is what happens at passing. With the vast majority of policies sold today, your beneficiaries would receive the lump-sum annuity value at passing surrender free. In other words, all surrender penalties are waived at passing.
It should be noted that this is not the case with every annuity. Some contracts will provide higher rates if you remove the death benefit feature. Some of our younger clients who add their spouse on as a joint owner/annuitant are comfortable waiving this rider in order to lock-in higher rates and larger income payments. Again, it’s up to you.
Selling Your Annuity Payments
One final option is to sell your annuity (or annuity payments) for a lump sum cash settlement. We are not proponents of this strategy as you might only get 60 cents on the dollar. It’s really a last resort kind of thing, but we see some owners sell their structured settlements for cash to make ends meet. We are not buyers of such contracts, but there is a market for them.
Contact Us For More Information
Do you still have questions about annuity liquidity? Contact us today to learn about your options with the highest rates and easiest access to your interest and principal. We are an independent brokerage and can help you compare and contrast the most suitable investment options for your situation.