It is a common question for annuity holders to wonder what the nonforfeiture value of an annuity is. This guide will discuss the definition and meaning of this term and how it can be calculated. We will also provide some examples of how this figure may change over time, which you may find useful when determining your own needs in retirement.
What is the Nonforfeiture Value of an Annuity?
During the accumulation period, an annuity contract owner who stops paying premiums does not lose the money invested in the annuity. Instead, the contract holder will have nonforfeiture options or rights to cash value accumulation in the annuity.
Surrender Charges
The contract may be surrendered for its cash value in a lump sum payment. However, most insurance companies will inflict some surrender charge, which is higher in the contract’s early years and then scales downward as time goes on.
The surrender charge acts as a deterrent to annuitants and compensates the annuity company for the loss of investment value. An annuity can only be surrendered during the accumulation period.
If the policy is surrendered before age 59½, there will be a 10% penalty from the IRS in addition to the surrender charge and income taxes.
If you surrender or withdraw a nonqualified annuity during the accumulation period, the cash withdrawals are made on a last in, first out (LIFO) basis. In other words, the first funds taken from the nonqualified annuity are the gains and are taxed as interest income on the principle.
Bail Out
A bail-out clause allows the annuity owner to give up the contract without paying surrender charges if interest rates drop by a certain amount within a specific period.
Annuities with Nonforfeiture Value
| Annuity Type | Nonforfeiture Value |
|---|---|
| Fixed Annuity | Yes |
| Fixed Index Annuity | Yes |
| Variable Annuity | Yes |
| Long-Term Care Annuity | Yes |
| Immediate Annuity | Yes |
| Medicaid Annuity | Yes |
Frequently Asked Questions
A deferred annuity is surrendered before annuitization. Which of the following best describes the nonforfeiture value of the annuity?
The surrender value should equal 100% of the premium paid minus prior withdrawal and surrender charges.
What does Nonforfeiture mean?
Nonforfeiture means a policyholder does not lose the cash value of a life insurance policy if they stop paying premiums.