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Jeff Riddell of Riddell Law Group Explains Annuity Surrender Charges - Annuities from an attorney's point of view: annuity surrender charges - RLGlawfirm.com
Jeff Riddell of Riddell Law Group Explains Annuity Surrender Charges

 

NewswireToday - /newswire/ - Sarasota, FL, United States, 2012/04/12 - Annuities from an attorney's point of view: annuity surrender charges - RLGlawfirm.com.

   
 
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Surrender charges for annuities can scare some people. You can’t surrender (cash in) an annuity that has been annuitized (where ownership of the funds has been relinquished permanently to the insurance company in exchange for lifelong income), but for those annuities that can be surrendered, surrender charges almost always apply.

The surrender charge schedule is usually five to 10 years, but some annuities with premium bonuses or other enhanced features can go up to 16 years. This is a worry to those who question how they will be able to get their money out in the case of an emergency. But surrender charges are not always a deal breaker. Annuities are long-term investments and you should not plan to cash them in early. There are annuities available that have surrender charge schedules as short as three years.

Why do insurance companies have surrender charges? First, people who sell annuities don’t do it for free; they get commissions. The annuity buyer does not pay the commission, the insurance company does. The rates on commissions can range from 3 percent to 8 percent. In addition, there are administrative costs to process the annuity applications, prepare the contract, etc. Surrender charges help them reimburse these costs if you have to cash in your annuity early. The more you wait to cash it in, the more years the company has to recoup these costs, thus the declining graduated surrender schedules. Usually surrender charges start at 10 percent the first year, and decline thereafter.

Here’s an example of how a typical 10-year surrender charge works. You may be required to forfeit 10 percent ($10,000 on a $100,000 contract) if you cancelled during the first year. But by the fifth year, the surrender charge may have dropped to 7.5 percent, and by the ninth year to 2.5 percent. If your account value has grown by the fifth year or the ninth year, the surrender charge will apply to the full account value, which may seem worse, but the actual result would be that less of your original investment would actually be left behind (some of your surrender charge would be paid from earnings). Don’t think that only annuities have surrender charges; even CDs have early withdrawal penalties. You forfeit a portion of the interest earned (interest you have already paid tax on, by the way).

Earlier annuities had no middle ground: it was leave the money alone or withdraw some or all and suffer the applicable surrender charge. Because the fear of surrender charges made many shy away from annuities, the insurance companies began allowing for withdrawal of up to 10 percent per year without penalty. This became standard in the industry.

This withdrawal flexibility has made annuities much more popular. But if you want to hedge even more on your ability to withdraw money without penalty during the surrender charge period, there are now annuities where you can buy a rider that increases the 10 percent per year to 20 percent per year. This is an example of how insurance companies are constantly fine-tuning their annuities to address consumer concerns.

IRAs and other retirement plans have early withdrawal penalties if you take the money out before age 59. This is a consideration for people who start planning their retirement at a young age by contributing to retirement plan and/or annuity. I do not think you should ever buy an annuity unless you are already taking full advantage of retirement plan options available to you. Of course, withdrawals from any type of annuity will reduce the living and death benefits and account value, and in addition may be subject to a surrender charge.

This article is for information purposes only and does not constitute legal advice.

Jeff Riddell is a Sarasota, Florida attorney with Riddell Law Group (rlglawfirm.com). He has published numerous articles on real estate transactions and most recently authored a book titled “21st Century Real Estate Investing.” He can be reached at (877) 455-2628.

 
 
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Jeff Riddell of Riddell Law Group Explains Annuity Surrender Charges

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