Exploring the Pros and Cons
Understanding Annuity Surrender Charges
Annuity surrender charges are fees that are imposed by insurance companies when annuity owners decide to withdraw or surrender their annuity contract before a specified period of time, known as the surrender period, has elapsed. These charges are designed to discourage early withdrawals and protect the insurance company from potential financial losses.
Weighing the Pros and Cons
Like any financial decision, it is important to carefully consider the pros and cons before making a choice regarding annuity surrender charges.
On one hand, surrender charges can serve as a deterrent for individuals who may be tempted to prematurely cash out their annuity. By preventing early withdrawals, these charges encourage individuals to maintain their annuity contract for the intended duration, ensuring long-term financial security.
Additionally, annuity surrender charges often decrease over time. This means that the longer an individual holds their annuity, the lower the surrender charges become. As a result, if the annuity is held until the surrender period is over, the charges may eventually become negligible or even disappear completely.
On the other hand, annuity surrender charges can be viewed as restrictive and inflexible. Life circumstances may change unexpectedly, and individuals may find themselves in need of immediate access to their funds. In such cases, surrender charges can significantly hinder their ability to withdraw their money without incurring substantial penalties.
Making Informed Decisions
To make informed decisions regarding annuity surrender charges, it is essential to carefully evaluate one’s financial goals, risk tolerance, and liquidity needs. Considerations should include the length of the surrender period, the magnitude of the surrender charges, and the expected returns offered by the annuity.
Those with a high risk tolerance, long-term financial goals, and stable financial situations may find annuities with surrender charges to be a worthwhile investment. However, if liquidity and flexibility are a priority, individuals should carefully review all associated fees and potential penalties, and explore alternative investment options that better align with their needs.
Ultimately, the decision regarding annuity surrender charges should be based on a thorough understanding of the terms and conditions of the annuity contract, personal financial circumstances, and individual goals for both short-term and long-term financial security.
To Elaborate…
Video Trascript:
📍 📍 📍 Good morning, everyone. I wanted to take a minute to talk about something that comes up a lot in conversations with my clients, and that is annuities. And more specifically, one of the features, I don’t know if you really call it a feature, but one of the parts of an annuity and what makes the annuities work are the annuity surrender charges.
So in my experience I found that people will be scared away from annuities because of surrender charges. So let’s talk about that for a minute. The annuity is one of the safest vehicles out there for cash accumulation. Whether it is a qualified account, And that’s money that there has not been tax paid on it, which can be put in annuity, or a non qualified account, where you’re just putting after tax dollars in there.
And one of the best and greatest features, especially now, with the market being volatile, is that the money you put in an annuity will never earn less than zero. So again, I just want to emphasize that. It will never earn less than zero. So the worst that you will have, as far as a return, because annuities will credit their accounts once a year.
And but the less, the worst that you’ll ever do is zero. First, if you look at a equity account, which is composed of stocks and bonds, if the market drops, the value of your account drops. So if you have a hundred thousand dollars, And it loses, and the market loses 10%. You now have $90,000. That’s a real, live $10,000 that’s gone… Pool!.
And an annuity, the crediting that you use to grow your annuity. does minus 10%, you’re not going to lose anything. You’re not going to lose one penny of that $100,000. So on your statement, it’ll say zero. It’s not going to say minus 10. It’s going to say zero. So you might have a year or two when you look at your statement that it was $100,000 this year and it was $100,000 the next year.
Let’s say on that third year, it makes 10%. Well, you’re going to, your account will have grown from that a hundred thousand. So now you’re going to have a what would it be? A hundred and a $110,000 in your account on the equity and on the bond type of retirement accounts, you’re now at $90,000
So if you earn 10%. You’ve only gotten back to $99,000, so would you rather have a hundred and would you rather earn zero and have $110,000, would you rather have an account that now you’ve earned back that 10%, but it’s only at $99k, so it hasn’t even caught up to where it was, and it certainly hasn’t grown.
Now annuities will have varying years in surrender charges. So let’s say you have a 10 year annuity. It’s going to have 10 years of decreasing surrender charges. So I just had a client that needed to and then for the most part, and you always need to check with your annuity. For the most part, annuities will allow you to take out 10 percent penalty free.
So if you have $100,000 and you need that money, you can take out 10% without any kind of penalty. If you take out more than 10 percent within a calendar year, there would be a surrender charge or a fee, and that’s going to decrease over years. So let’s say if it’s a 10 year surrender, the fee might be 10 percent that first year, 9 percent the next year,
8 percent the next year. And you keep it for the full 10 years at 11 years, now you have zero. So anything going forward from 11 years on up and you take the money out, you take out whatever you want and there’s no fee. I just had a situation with someone that had taken out their 10%. They had an emergency, they needed to take out some more. So the annuity had decreased to a 4 percent surrender charge. So In this case, this person, if they were to take out another $10,000 they would pay a penalty of $400. Because of the surrender charge feature of an annuity, this is what’s allowing the annuity to not decrease in value.
So that’s the key. So when you’re looking at options, And, again, this isn’t a 100% all the time, but annuities are, good for someone 50 and over. But I’ve had some 20 somethings that have purchased annuities where they got a 401(k) from a previous employer. And we rolled it into the annuity and we’re just gonna let that sucker sit and it’s just gonna cook so intentions is not to touch that thing for 40 years, you know, if they’re 25 or 35 years (old)..
Traditionally, 50 and over, certainly if you’re looking for an annuity that you want to pull income, which I’ll get into this in another video, but one of the great features of an annuity is very good annuities will have a lifetime income. So when you turn on income, It will pay you whatever that amount is for your lifetime, even if the account value is zero.
So it’s pretty significant because one of the two or three things that people are concerned with the most is outliving their money. So annuities have that feature. First, a stock in a bound account and the money’s gone. You take that and you start drawing income off that. It’s gone, it’s gone.
But in the case of annuity, you can get that feature. So. wanted to really focus in on surrender charges. I don’t know, you know, we need to change that name, but it’s really not a negative. It’s a very positive. If you see this video and you go, Hey, I’ve thought about annuities. I was kind of scared of them.
Reach out to us. You know, you can contact me at FinancialProf.org. We can have that conversation and see if it makes sense for you. So make sure you like, share, subscribe this video. Put on your notifications so you don’t miss any of the next ones coming up, and make it a great day.
