Annuity Withdrawal Charges Explained

A withdrawal charge (also known as a surrender charge) is imposed by an insurance company when an early withdrawal is taken from the annuity before the stated maturity date.  Typically these penalties or charges are larger in the first year of an annuity and become less and less as it approaches the maturity date.

For example, a 5 year fixed annuity may a withdrawal charge or surrender charge that looks like this 5, 4, 3, 2, 1, 0…  If you ever see a table like this the way to read it is as follows:  This is a 5 year annuity contract and if you were to cancel the contract in the 1st year you would pay a 5% penalty, if you were to cancel it in the 2nd year you would pay a 4% penalty and so on, until the 5th and subsequent year you would pay no penalty whatsoever.  

Withdrawal charges are typically the downside to most annuity contracts as there are very few fixed annuities with no surrender charge or withdrawal penalties.  Most annuities however allow you to take out what are called Free Withdrawals each year.  Typically annuity contracts allow you to withdrawal 10% per year of the accumulated account value without incurring any penalties whatsoever.  For example, supose you purchased a $100,000 fixed annuity with a surrender schedule as follows, 5, 4, 3, 2, 1, 0… and it allowed you to withdrawal 10% each year.  If you needed money early what would happen?  This annuity would allow you to take out up to 10% or $10,000 each year without any penalty at all.  However if you needed to withdrawal say $20,000 in a given year your first $10,000 would be free and the other $10,000 would be hit with a 5% penalty or approximately $500.  

There are other ways to avoid surrender charges:

• Death
  
   
• Annuitization
  
   
• Long Term Care or Nursing Care
   

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