Have you been considering the benefits of an annuity? In this guide, we will discuss when an annuitant may want to surrender their annuity early and what they can expect if they do. We’ll also go over how much money is owed to the insurance company that sold them the annuity in a situation like this. This guide will provide information for those who are looking into purchasing an annuity and want to know what happens when it’s surrendered early.
Annuity Surrender Charges
Annuity contracts are long-term retirement plans that range between two to ten years. The period during which your money is supposed to grow, accumulating your savings is called the accumulation period, and if an annuitant cancels their annuity pre-maturely, penalties called surrender charges may incur.
The penalty a contract owner will incur if they surrender (cancel) their deferred annuity contract before the agreed surrender charge period or withdraw a portion of their account balance above their penalty-free withdrawal amount is known as surrender charges.
The penalty decreases the longer the annuity is held, and can be referenced in a surrender schedule.
Tax Penalties on Annuities
Early surrenders of annuities may also result in an IRS penalty, which is the same as that charged on early withdrawals from a 401k or individual retirement account (IRA).
Exceptions to Annuity Penalty Rules
- Annuities allow for early surrender with no penalty in the event the annuitant becomes disabled or dies. Additionally, most deferred annuities offer a benefit for taking penalty-free withdrawals to pay for long-term care expenses.
- The Return of Premium (ROP) option in annuities allows you to get your original premium back without penalty during the deferral period anytime you want to cancel or surrender the policy.
- A bailout provision in fixed indexed annuities waives all surrender charges if a cap or participation rate renews at a reduced level or below, all surrender charges will be waived from the account balance, and the contract owner can move the entire annuity account penalty-free.
Tip * Most deferred annuity contracts also let the owner withdraw up to 10% of the contract value or premium each year, penalty-free.
