Annuity Surrender Charges? Ask yourself three questions.


You may have heard it on the radio, or have read annuities are terrible financial vehicles because annuity contracts have withdrawl surrender charges. It is alledged by financial planners and financial advisors the surrender charges do not allow an owner to have full liquidy to all of your investment premium when you need it. This is a misconception.

Think about it. Every financial vehicle has strengths and weaknesses. Each financial vehicle is designed for a specific purpose to meet an investors specific risk tolerance and financial goals. If there was a perfect financial vehicle then everyone would invest all their retirement savings in the same place. Right? A properly selected annuity can achieve a person's financial goals of safety and earnings potential.

Financial products like securities and mutual funds may provide earning potential, but lack a guarantee of safety. Alternatively, a bank account may provide safety and allow access to funds whenever needed, but lack earnings potential. Owning an annuity combines the best of both worlds.  An annuity is specifically designed to have certain guarantees such as interest rate, a flexible payout option, and provide a continuous income stream that you cannot out live.

A surrender fee is a fee paid by an annuity investor who withdraws some or all of his or her principal before the annuity surrender period has expired. These surrender fees are usually a small percentage which decreases over time depending on each annuity product. Surrender fees essentially discourage investors from canceling their annuity contract during which they have received or are receiving substantial earning benefits via the guarantees.

For example, the annuity may provide certain benefits outlined in a contract. These benefits may include: a rollover deposit bonus, guaranteed interest rate, and earnings tied to a particular index for optimal return. All benefits are designed to increase value of the principal over time. An investor can essentially enter into the contract agreement, receive a guaranteed benefits, withdraw all their money, and walk away. Surrender fees prevent scenarios like this from happening.

Understand that during the surrender charge period, a fixed annuity typically offers a free partial withdrawal provision so you can withdraw a portion of your  funds without incurring a surrender charge. Usually, these provisions allow a person to withdraw 10% every year with penalty free. And, most fixed annuities allow a client to convert the annuity into a lifetime guaranteed income stream without incurring any surrender charges. Therefore, annuties can be considered semi-liquid at best.

Determining your financial goals can help you alleviate the concern about surrender charges. When evaluating your financial portfolio and retirement goals, there are three questions you should ask:  1) What is the specific purpose for the funds? 2) When do you plan to actually use the money? 3) Do you have other funds available, such as an emergency fund? These are considerations as annuties can be considered long-term retirement financial vechicles. 

We believe annuities are an important part of your total financial plan. Especially if you are a person who believes in safety and earnings potential. Let one of our agents here at Insured Portfolios of Albuquerque, NM assist you in determining if an annuity is suitable as part of your financial plan. Call us at 505-750-4363 to schedule an appointment.