Exit your Annuity without Surrender Penalties* - Call (619)564-4873
You just got your annual annuity statement in the mail and you’re wondering the difference between your annuity value and surrender value. Simply put, your annuity value is your account’s value without any surrender charges, fees, or market value adjustments. Your surrender value tells you how much your annuity is worth if you were to cash out of your policy today. It includes charges I’ll discuss below.
CALL (619)564-4873 TO SEE WHAT YOUR SURRENDER VALUE IS. FREE CALL.
If you’re planning on withdrawing money from a fixed or equity-indexed annuity, consider the following: Surrender charges, MVA or Market Value Adjustment, Free Withdrawals, Taxes, and mid-strategy withdrawals.
Surrender Charges: This is a penalty your insurance carrier charges for withdrawing funds before your surrender period is over. Annuities have surrender periods anywhere from 1 year to 12 years. A typical annuity surrender schedule starts higher in the beginning years and decreases each year. Take a single premium deferred annuity with a 9 year surrender period, for example. It might look like this: 12%, 12%, 12%, 12%, 11%,10%, 9%, 8%, 6%, 0% in Premium year 10 and thereafter, +/-MVA (I’ll explain MVA in a minute).
Free Withdrawals: Some annuities have provisions allowing a surrender penalty free withdrawal of up to a certain percentage of your annuity value. The most common I see are 50% of the initial premium during the surrender period, or 10% of the annuity value during every policy year. Note on the latter, some insurance carriers don’t allow 10% withdrawals during the first policy year, and also note that surrender penalty-free withdrawals don’t exlude you from paying taxes, only surrender charges.
I’ve gotten calls from people telling me their surrender penalty was as high as 20% the first year. This is possible when the policy holder got a premium bonus when entering the annuity. So if you got a 10% bonus on your $50,000 deposit, and it vests immediately, your annuity value is $55,000 on day one. The insurance carriers raise their surrender charges for these bonus products. A 9 year surrender schedule for a contract with a 10% bonus might look something like this: 18%, 18%, 17%, 16%, 15%, 14%, 13%, 11%, 9%, and 0% thereafter +/-MVA.
Market Value Adjustment: It is generally understood that insurance carriers buy bonds as underlying investments to deferred annuities. To protect themselves, there may also be a market value adjustment when you withdraw more than your “free” amount. Generally speakign, if interest rates have been rising since you bought your annuity, the carrier’s underlying bond is worth less, so if there would be a negative market value adjustment. If interest rates have been falling, as has been the case in the past couple years, there could be a positive MVA.
When you look at an annuity statement, you should always easily be able to locate the surrender value. This amount is your current annuity value minus any surrender charges, and it may or may not include an MVA. Some surrender values include MVA’s, while others do not. You’ll have to call your carrier to ask if there is an MVA on your policy and if that is reflected in the surrender value. Some carriers may have other fees that apply.
Taxes: Be sure to consult a tax professional before withdrawing from an annuity. Your withdraw may be subject to ordinary income tax. Annuities are treated with LIFO (last in, first out) tax consideration. In other words, by IRS standards, first you withdraw your gains/interest, and then your cost basis. Also, if you withdraw funds prior to age 59 1/2, you may owe a 10% early withdrawal penalty imposed by the IRS.
Middle of year Strategy Withdrawals - Also be aware that if you invest in an equity-indexed annuity strategy, like a one year point-to-point with a cap, that if you withdraw mid-year, no interest will likely be credited to your account, even if the index that the strategy benchmarks is up for the year. If you know you might need to access funds within 12 months of getting an annual statement, it’s best to allocate the appropriate amount in your annuity’s fixed strategy, or guaranteed one year strategy. Most insurance carriers will credit any gains if you withdraw in the middle of your policy year from these strategies.
*Not all annuities will have a positive Market Value Adjustment, meaning that you may incur surrender penalties for exiting an annuity early.
If you have any questions about your particular annuity withdrawal, I’ll be happy to help you even if I’m not your agent. You can call me, Chris Huntley, at (619)564-4873.
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