The process of surrendering an annuity will vary from company to company but essentially, you will call the company, fill out the necessary forms and then collect your money. Simple, right? While, in most cases, you can surrender your annuity for any reasons, before you do this, you need to be aware of the fees you will face as well as the other options available to you.
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Surrendering your annuity means that you are withdrawing the entirety of the money in your annuity to use for another purpose. There are no hard and fast rules about when you are able to surrender your annuity, although your insurance company may have stipulations that other insurance companies don’t. Understanding your contract before you start your annuity is important.
You also need to understand that if you have an immediate annuity; it is very possible that you will be unable to surrender that annuity. Immediate annuities work differently from deferred annuities and insurance companies usually specify that you cannot withdraw from or surrender an immediate annuity.
The good news is, however, that you may be able to request an advance, of sorts, when you have an immediate annuity. Because you are guaranteed a specified amount of money a year, you can discuss with your insurance company the possibility of switching to annual payments rather than monthly payments. This will allow you to get a lump sum of money to use for your emergency.
Be aware, however, that the larger the sum of money you receive, the higher your tax bracket will be. This could leave you with a much larger tax bill than you would like.
Should I surrender my annuity?
An annuity is a long term, stable investment that is not designed to be used for liquid cash or other needs. There isn’t a single insurance expert that will recommend surrendering your annuity, but it is recognized that there are situations that may arise that may make it necessary for you to do so.
Surrendering your annuity means that you are cashing in on your retirement. If you can get a loan from a friend, family member, or even the bank, you should consider this option before surrendering you annuity.
If a loan isn’t possible, considering changing your deferred annuity to an immediate annuity. This won’t be an alternative for everyone because an immediate annuity will benefit you the most if you have over $200K in your account; but if you have this or even a larger amount of money in your deferred annuity, you can switch to an immediate annuity and start receiving money from it immediately.
While an immediate annuity can be used to receive payments for the rest of your life, you can also create a limited immediate annuity. Basically you are paid a larger sum of money for a shorter period of time. Typically, this option comes in 5 year intervals, which means you can get all of your investment paid back to you in 5 years, 10 years, 15 year, etc. This may be a viable option if you have the right amount of money and if whatever you need the money for can be paid off in installments.
The main reason for finding other alternatives is that you could lose almost 50% of your original investment once you have paid all of the fees and taxes associated with surrendering your annuity. This is your money and not many people can afford a 50% loss of an investment.
If you don’t need the entirety of your annuity, you should consider only withdrawing the amount that you need. 10% of that will not be subject to fees, but any amount over 10% will be penalized. Your overall loss will be much smaller if you choose to withdraw a specified amount rather than surrendering your annuity.
What fees will I face if I surrender my annuity?
How many fees and the amount of those fees will vary depending on the insurance company that you choose and the terms of your contract; however, can expect to receive penalty fees of up to 10% of your total balance if you surrender your annuity. Here are some of the fees you will face:
- The insurance company may also have an additional set fee for surrendering your account as well. Typically, if this fee exists, it will be in the $250 to $500 range. This is in addition to the fee based on the balance of your annuity. You may be thinking that this doesn’t equate to 50% as suggested earlier in this article, but the insurance company is not the only place that you are going to face fees.
- The government is going to fine you 10% as well for withdrawing before you are 59 and 1/2 years old. If you are over this age, then this fee will not apply to you.
- In addition, you will be taxed on your withdrawal as well. How much you will be taxed will be based on your tax bracket with your investment being counted as income. If, for example, this places you in the 29.9% tax bracket, then your total fees will be 49.9% of your total investment.
Although these same fees will apply if you withdraw over 10% of your annuity, your total loss will be less because you will be using less money. This is really something that you should consider before surrendering your annuity.
Are there situations where I can avoid the fees and taxes if I surrender my annuity?
Unfortunately, there aren’t any situations that excuse you from fees or taxes if you surrender your annuity. It would be nice if the insurance company and the government would make exceptions for a death or loss of job, etc. but they don’t.
If you rely on someone’s income entirely then it is important that you maintain a life insurance policy on that person so that you aren’t left in a difficult financial situation upon their passing.
What’s more, there are insurance policies that you can purchase in case of job loss. Mortgage insurance, food insurance (yes really), accident insurance and so on can provide you with a bit more security so that you don’t have to surrender your annuity of the primary bread winner loses their job.
If you are wondering about your options for surrendering an annuity before even purchasing an annuity, then you need to consider whether an annuity is right for you. There are investment options that don’t penalize you if you have to close your account or cash it in. While a fixed annuity offers you a guarantee for your investment, if you have to surrender your annuity in an emergency, then it is best to avoid purchasing one in the first place.
Before you make any type of decision, however, you need to know how much an annuity will cost you in the first place. The initial cost of different types of annuities will vary depending on the insurance company you choose.
By taking the time to compare what each insurance company offers, what their fees are and how much money you will need to have to make your initial investment, you can make an educated choice about buying an annuity.
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