Insurance--Annuities
Getting out of your
annuity
You may be
thinking of getting out of your annuity. If so, you should carefully
consider the consequences. Annuities are known for being difficult to
leave.
There are many reasons
that investors may want to leave an annuity. Perhaps you want to combine
several annuities into one. Your financial situation may have changed,
meaning you can no longer contribute to your annuity.
When you cash out of an
annuity early, and before you are 59 1/2, you face a 10% penalty on the
taxable portion of your annuity. This will be paid to the IRS. You will
also pay taxes as you would on regular income.
You will also pay a
surrender charge to the insurance company for your surrender. This is
usually 7% if you surrender in the first year, 6% in the second year and
so on. Low-load and no-load annuities feature smaller surrender charges.
You are allowed an IRS
1035 transfer that makes a transfer between accounts tax-free. However,
this is for transfers between like accounts - annuity to annuity, life
insurance to life insurance and life insurance to annuity. You cannot
transfer an annuity into a life insurance policy without paying taxes.
If you use your annuity
to fund your IRA, you can transfer to another IRA without a tax penalty.
You will have a 60 day window in which to transfer. This is a rare
situation, as it isn't recommended to fund your IRA with an annuity due to
unnecessary fees.
Alternative to
surrendering your annuity
If you don't want to
exchange your annuity under the 1035 exchange, you do have some other
options available.
If you need immediate
cash, your policy may allow you access to some or all of your money in the
event of terminal illness, nursing home confinement or disability. A few
policies allow you to withdraw up to 15% of your annuity under certain
circumstances.
You could change your
sub-accounts within your variable annuity to fully take advantage of the
current market. You will pay fees for the changing of sub-accounts.
If you are considering early retirement, you could consider
transferring your variable annuity into an immediate annuity. You aren't
getting out of your annuity, you are changing the type of annuity. With an
immediate annuity you are guaranteed a lifetime income. Some insurance
companies offer options that make adjustments for inflation and provide
easy access to your assets. You will pay higher fees for these options.
