When you buy a fixed deferred annuity, your contract may specify that some charges are subtracted from the value of the account. You need to read your contract for specific information about what is deducted and when. These charges may include administrative fees, surrender charges (a penalty imposed on withdrawals), mortality expenses (charges for insurance against death), and income taxes (state or federal).
Surrender or Withdrawal Charges
If you need access to your money, you may be able to take all or part of the annuity’s value at any time during the accumulation period. You may face withdrawal fees if you take out part of the money. If you withdraw all of the money or terminate the annuity, you will be charged a surrender charge.
After a certain length of time, the insurance company may reduce or even eliminate the surrender charge. When the annuity company pays a death benefit to beneficiaries, they typically waive the surrender charge.
Auto-renewal, expiration, and windows
Annuities are often offered with stated terms. The contract may automatically terminate or renew when the term is up. You usually have a short period of time, referred to as a window, to decide whether or not you want to renew your annuity.
- If you surrender during the window, you will not be charged any surrender fees.
- If you don’t surrender during the window, the annuity may automatically renew, and surrender charges start over.
If you surrender your annuity contract when the insurance company’s current interest rate falls below a specified threshold, you may incur no charges or fees in some annuities. This might be referred to as a bail-out option.
Rolling Surrender Charge
In a flexible-premium annuity, the surrender charge may apply to each premium paid for a certain period of time. This may be called a rolling surrender or withdrawal charge.
Market Value Adjustment
Some annuity contracts have a market value adjustment. If interest rates are different when you surrender your annuity than when you bought it, a market value adjustment may make the cash surrender value higher or lower. Since you and the insurance company share this risk, an annuity with an MVA feature may credit a higher rate than an annuity without an MVA.
Your annuity may have a limited penalty-free withdrawal provision that lets you make one or more withdrawals without a surrender charge. Penalty-free withdrawals are often limited to a set percentage of your annuity’s contract value. If you make a larger withdrawal than the allotted percentage, you may pay withdrawal charges. You may lose any interest above the minimum guaranteed rate on the amount withdrawn.
Some annuities waive surrender and withdrawal charges in certain situations, such as death, confinement in a nursing home, or terminal illness.
A contract fee is a fixed dollar amount charged either once or annually.
A transaction fee is a charge per premium payment or other transaction.
Percentage of Premium Charge
A percentage of the premium charge is a charge deducted from each premium paid. The percentage may be lower after a certain number of years or after total premiums paid have reached a premium threshold.
Some states charge a tax on annuities. The insurance company pays this tax to the state. The annuity provider may deduct the amount of the tax from your premium, when you terminate your contract, as soon as you begin receiving income payments, or when it pays a death benefit to your beneficiary.