Can Annuities Be Cashed Out?

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Can annuities be cashed out?

You may be wondering if annuities can be cashed out, and the answer is yes. Cashing out an annuity allows you to access the cash value of your investment either as a lump sum or by selling the payments. However, there are important considerations and options to be aware of before making this decision.

Most deferred annuities can be cashed out if you haven’t started receiving payments yet. This includes variable annuities, fixed annuities, and fixed index annuities. There are several ways to cash out an annuity, including withdrawals, loans, return of premium, surrender, or a crisis waiver.

While cashing out an annuity provides immediate access to funds, it’s important to weigh the pros and cons. On one hand, you’ll have immediate cash and the potential for tax advantages. On the other hand, there may be surrender charges, taxes, penalties, and the loss of a future income stream. Ultimately, the decision to cash out an annuity requires careful consideration based on your financial goals and individual circumstances.

Key Takeaways:

  • Cashing out an annuity allows access to the cash value of the investment
  • Most deferred annuities can be cashed out before receiving payments
  • Options for cashing out include withdrawal, loan, return of premium, surrender, or with a crisis waiver
  • There are pros and cons to cashing out an annuity, including potential tax advantages and surrender charges
  • Consider your financial goals and individual circumstances before making a decision
Can Annuities Be Cashed Out?

Types of Annuities That Can Be Cashed Out

When it comes to annuities, there are several types that can be cashed out, providing individuals with the flexibility to access their funds when needed. Whether you have a variable annuity, fixed annuity, or fixed index annuity, all of these options can be converted into cash.

Variable Annuities

Variable annuities are investment accounts offered by insurance companies that allow individuals to choose from a variety of underlying investment options, such as mutual funds. The value of variable annuities fluctuates based on the performance of these investments, providing an opportunity for growth. If you have a variable annuity and find yourself in need of immediate funds, you can cash it out and receive the current cash value.

Fixed Annuities

Fixed annuities, on the other hand, offer a guaranteed fixed rate of return on your contributions. These annuities provide a reliable and predictable income stream, making them an attractive option for individuals looking for stability. If you have a fixed annuity and require access to a lump sum of money, you can cash out the annuity and receive the accumulated cash value.

Fixed Index Annuities

Fixed index annuities combine elements of both variable and fixed annuities. These annuities offer a rate of return based on the performance of a market index, such as the S&P 500. While the return is tied to the index, there is often a minimum guaranteed rate of return as well. If you have a fixed index annuity and need to cash out, you can convert it into a lump sum of money.

Overall, all three types of annuities – variable annuities, fixed annuities, and fixed index annuities – can be cashed out to provide individuals with the liquidity they may require. However, before making a decision, it is essential to carefully evaluate the terms and conditions of the annuity contract, consider any surrender charges or tax implications, and consult with a financial advisor to ensure it aligns with your unique financial goals.

Annuity TypeDescriptionCash Out Option
Variable AnnuitiesInvestment accounts with underlying investment optionsCash out and receive the current cash value
Fixed AnnuitiesGuaranteed fixed rate of return on contributionsCash out and receive the accumulated cash value
Fixed Index AnnuitiesRate of return based on the performance of a market indexConvert into a lump sum of money
Types Of Annuities That Can Be Cashed Out

Annuities That Cannot Be Cashed Out

Annuities come in different types, and while some can be cashed out, others have various restrictions that prevent immediate access to funds. Here are the types of annuities that cannot be cashed out:

  1. Annuitized Contracts: These contracts convert the annuity into regular payments and cannot be cashed out until the annuitant’s death.
  2. Deferred Income Annuities: These annuities provide a fixed income stream and cannot be cashed out until retirement.
  3. Immediate Annuities: Immediate annuities start payments immediately and cannot be cashed out until the annuitant’s death.
  4. Medicaid-Compliant Annuities: These annuities are designed to meet Medicaid’s asset threshold and cannot be cashed out.
  5. Qualified Longevity Annuity Contracts (QLACs): QLACs offer tax advantages and delayed required minimum distributions, but they cannot be cashed out.

Options for Cashing Out Annuities

Cashing out an annuity provides individuals with several options to access their funds. These options include:

1. Withdrawal

Withdrawing money from an annuity allows you to access funds at any time. However, it is important to note that surrender charges, taxes, and penalties may apply depending on the terms of the annuity contract.

2. Loan

Some annuities, particularly fixed annuities, offer the option to take out a loan using the cash value as collateral. This allows you to borrow against your annuity while keeping it intact. However, loan options may vary depending on the type of annuity.

3. Return of Premium

If you decide to cancel your annuity, the return of premium option allows you to receive back the amount you originally paid for the annuity, excluding any interest earned. This option can be useful if you no longer wish to keep the annuity and want to recoup your initial investment.

4. Surrender

Surrendering an annuity involves canceling the contract and receiving the cash value. This option provides a lump sum payment but may come with surrender charges and taxes. It is essential to review the annuity contract to understand any potential fees and considerations before surrendering.

5. Crisis Waiver

A crisis waiver allows for a cashout without incurring surrender charges in specific life-altering situations. These situations may include terminal illness, disability, or long-term care needs. However, qualifying for a crisis waiver typically requires documentation and approval from the annuity provider.

Each of these options for cashing out an annuity comes with its own implications, including potential fees, taxes, and surrender charges. It is important to carefully evaluate the terms and conditions of your annuity contract, consult with a financial advisor or tax professional, and consider your individual financial goals before making a decision.

OptionDescription
WithdrawalTake money out of the annuity at any time
LoanBorrow against the annuity’s cash value
Return of PremiumCancel the annuity and receive the amount paid
SurrenderCancel the annuity and receive the cash value
Crisis WaiverCashout option without surrender charges in specific life-altering situations

Considerations Before Cashing Out an Annuity

Cashing out an annuity can have significant financial implications. Before making a decision, it is important to consider several key factors:

  • Penalties: Cashing out an annuity may incur surrender charges and penalties. These fees can vary depending on the terms of the annuity contract and the length of the surrender period.
  • Fees: In addition to penalties, cashing out an annuity can also involve administrative fees and transaction costs. These fees can further reduce the amount you receive from the annuity.
  • Tax implications: Cashing out an annuity may have tax consequences. The taxable portion of the annuity withdrawal may be subject to income tax, potentially increasing your overall tax liability.
  • Surrender period: Annuity contracts often include a surrender period during which cashing out may result in higher penalties. The surrender period typically ranges from six to eight years. Before cashing out, it is important to determine if the surrender period has ended to avoid additional charges.

Understanding these considerations can help you make an informed decision about whether cashing out your annuity is the right choice for your financial situation. It is recommended to consult with a financial advisor or tax professional to fully assess the potential penalties, fees, tax implications, and surrender period specific to your annuity contract.

ConsiderationDescription
PenaltiesIncurred surrender charges and penalties
FeesAdministrative fees and transaction costs
Tax ImplicationsPotential increase in income tax liability
Surrender PeriodDuration during which cashing out may result in higher penalties
Steps To Cash Out An Annuity

Steps to Cash Out an Annuity

When considering cashing out an annuity, it’s important to follow a step-by-step process to ensure a smooth transition. Here are the essential steps to cash out an annuity:

  1. Review the annuity contract: Start by carefully reviewing the annuity contract to determine if it allows cashouts. Take note of any potential penalties and fees associated with cashing out.
  2. Evaluate tax implications: Consult with a tax professional to evaluate the tax implications of cashing out your annuity. This step will help you understand the potential tax liabilities and any strategies you can implement to mitigate them.
  3. Contact the annuity provider: Get in touch with your annuity provider to obtain the necessary forms and instructions for initiating the cash-out process. They will guide you through the required documentation and provide you with any additional information you may need.
  4. Initiate the cash-out process: Fill out the required forms provided by your annuity provider and submit them according to their instructions. Ensure that all information is accurate and complete to avoid any delays or complications.
  5. Handle received funds: Once the cash-out process is complete, you will receive the funds. Take the time to carefully consider the best way to handle the received funds based on your financial goals. You may choose to pay off immediate needs, invest the funds, or allocate them according to your personal financial plan.

By following these steps, you can navigate the process of cashing out an annuity effectively and make informed decisions along the way.

Selling Annuity Payments Instead of Cashing Out

Instead of cashing out your annuity, you have the option to sell your annuity payments to a third-party company. This can provide you with immediate access to a lump sum of cash. There are two main options for selling annuity payments: partial sale and lump-sum sale.

A partial sale allows you to sell a set number of periodic payments or a specific portion of your contract value. This option gives you the flexibility to retain some of your annuity while still receiving a cash payout.

On the other hand, a lump-sum sale involves selling a specific dollar amount of your annuity. This means that you will receive a one-time lump sum payment in exchange for transferring the rights to your future annuity payments.

It’s important to note that when selling annuity payments, the purchasing company may apply a discount rate. This discount rate reduces the value of the annuity to reflect the time value of money and provides the purchasing company with a profit.

Factors to Consider When Deciding to Cash Out or Sell an Annuity

When it comes to deciding whether to cash out or sell your annuity, several factors need to be considered. These factors include your financial goals, age, surrender period, and tax implications.

  • Financial Goals: Consider your immediate cash needs and how they align with your long-term financial goals. Determine if the benefits of accessing immediate cash outweigh the potential future income from the annuity.
  • Age: Your age plays a crucial role in the decision-making process. Consider your current financial situation and how the annuity fits into your overall retirement plan. If you’re approaching retirement age, the annuity may provide a stable income source for the future.
  • Surrender Period: Review the terms of your annuity contract to understand the surrender period, if applicable. The surrender period is the timeframe during which surrender charges may apply if you choose to cash out the annuity. Evaluate if the surrender charges outweigh the benefits of accessing immediate cash.
  • Tax Implications: Consult with a financial advisor or tax professional to evaluate the potential tax implications of cashing out or selling your annuity. This includes considering any tax penalties or taxable income that may result from accessing the annuity funds.

Before making a decision, seek personalized guidance from a financial advisor or tax professional who can provide expert advice based on your individual circumstances.

Conclusion

Cashing out annuities can provide individuals with immediate access to cash. However, it is crucial to consider the potential drawbacks and alternative options before making a decision. Accessing annuity funds through cashing out entails surrender charges, taxes, penalties, and the forfeiture of future income streams.

Before taking any action, it is advisable to carefully evaluate the pros and cons of cashing out annuities. Exploring alternative options, such as selling annuity payments, can offer flexibility and potentially mitigate some of the associated costs. Consulting with a financial advisor or tax professional is vital to understanding individual circumstances and making informed choices.

At The Annuity Expert, we provide expert guidance and support regarding cashing out annuities, accessing annuity funds, evaluating the cash value of annuities, and understanding annuity surrender charges.

Contact us today to receive a free quote and personalized assistance in navigating the complexities of annuities.

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Questions From Our Readers

Can annuities be cashed out?

Yes, annuities can be cashed out by taking a lump sum or selling the payments.

What types of annuities can be cashed out?

Variable annuities, fixed annuities, and fixed index annuities can be cashed out.

Which annuities cannot be cashed out?

Annuities such as annuitized contracts, deferred income annuities, immediate annuities, Medicaid-compliant annuities, and QLACs cannot be cashed out.

What are the options for cashing out annuities?

Options for cashing out annuities include withdrawal, loan, return of premium, surrender, and utilizing a crisis waiver.

Is selling annuity payments an alternative to cashing out?

Yes, selling annuity payments is an alternative to cashing out. It can be done through a partial or lump-sum sale with a discount rate.

Can I cash out my annuity to start anew after my divorce?

If outside the surrender period, taxes are applicable. If within, consider penalty-free withdrawals first, minimizing penalties. Await the next anniversary date for another penalty-free withdrawal. Once all penalty-free withdrawals are exhausted, cash in the annuity to have less of a penalty.

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Shawn Plummer is a Chartered Retirement Planning Counselor, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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