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, as well as 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 kind of surrender charge, which is higher in the early years of the contract 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 having to pay surrender charges if interest rates drop by a certain amount within a specific time 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 prior to annuitization. Which of the following best describes the nonforfeiture value of the annuity?
The surrender value should be equal to 100% of the premium paid, minus any prior withdrawal and surrender charges.