How to Cash Out of an Immediate Annuity
How to Cash Out of an Immediate Annuity
An annuity is a contract between you and an insurance company where you pay a lump-sum and in return the insurance company makes periodic payments to you in the future.While there are many types of annuities, an immediate annuity starts paying you immediately (as opposed to some time in the future). If you have purchased an annuity and wish to "cash out" (i.e., withdraw cash or liquidate the annuity), you can do so by contacting the insurance company holding the annuity. When you do cash out, you may have to pay surrender fees to the insurance company and make tax payments to federal and state governments.
1. Purchasing An Annuity
A. Compare your options. Before you purchase an annuity, you need to shop around and understand what is out there. Do a basic online search using your favorite search engine and see what is out there. For example, try typing in "buy an annuity" into Google. You will find that annuities come in all different shapes and sizes and usually include:
1). Immediate and deferred options. A deferred annuity provides a way for you to accumulate funds on a tax-deferred basis. You can purchase them with a one-time premium or a series of periodic payments.An immediate annuity pays you an immediate income as soon as you purchase the product. Each payment will include some of the principal (i.e., the amount you initially paid to purchase the annuity) plus earnings you have accumulated (i.e., interest).
2). Fixed and variable options. If you choose to purchase a deferred annuity, you will have the option of making it a fixed or variable deferred annuity. A fixed deferred annuity earns guaranteed interest while protecting your principal.A variable deferred annuity, on the other hand, allows the principal to be invested more aggressively in a range of funds. While you are exposed to greater risk, you also have the potential for greater growth.
B. Contact insurance companies. Once you have done your research, contact a number of insurance companies and ask about their annuity offerings. When you do so, ask them about the types of annuities they offer, the charges associated with purchasing one, the average rates of return, and their modes of investment.
Each insurance company will do things differently so be sure to look around. Do not just purchase an annuity from the first company you talk to.
C. Consider charges. One of the most important things to consider when purchasing an annuity is the charges you will incur. This help you make an informed decision about where to purchase your annuity. In addition, some charges are applied only when you "surrender" (i.e., withdraw) money from the annuity. Therefore, it is also important to understand these fees so you know what to expect when you cash out. In general, there are four types of fees when you purchase an annuity:
1). Insurance charges, which will include administrative expenses and other general fees.
Investment management fees, which will depend on how aggressive you are investing. These fees are only assessed on annuities where the premiums are being invested (i.e., variable deferred annuities).
2). Rider charges, which are optional services you can add to your annuity for a fee.
3). Surrender charges, which are fees associated with the early withdrawal of money from your annuity. These are the fees you have to look at closest when you think you may have to cash out of an annuity down the road.
D. Purchase an annuity. When you are ready, you can purchase an annuity by sitting down with the insurance company you feel most comfortable with. When you meet with the insurance company, you will need to bring various form of identification and you will need to fill out a number of forms. The type and number of forms will depend on where you purchase the annuity.
Be aware that the purchase of an annuity will usually include a substantial up-front cost. For example, if you buy an immediate annuity through Prudential, the minimum investment amount is $10,000.
2. Deciding to "Cash Out"
A. Consider other options. Cashing out of an annuity can be expensive depending on when you are doing it. There may be surrender charges, early distribution taxes, and other taxes associated with cashing out. If you can find another way to get the money you need, you might want to consider leaving your annuity alone. However, if you have had the annuity for a long period of time and you are over the age of 59 1/2, the charges and taxes may be low enough to justify cashing out.
B. Determine how much money you need. If you need money that is tied up in an immediate annuity, you may need a nonperiodic distribution (i.e., cash withdrawal). Before you pull out cash from an annuity, consider how much you will need. Figuring this out will help you determine whether you will need to make a partial withdrawal or a full surrender.
1). A partial withdrawal of annuity funds occurs when you only take a portion of your funds out of the account.
2). A full surrender occurs when you take all of the money out of the account and end the contractual relationship with your insurance company.
C. Contact your insurance company. If you have decided that cashing out is the best option for you, contact your insurance company and inform them of your decision. The insurance company will likely talk to you about the risks of cashing out, including the charges and taxes you may incur. Have an honest conversation with your insurance agent in order to get the best results possible. The more information they have about your situation, the more solutions they can come up with.
D. Fill out the required paperwork. When you surrender an annuity or take a nonperiodic distribution, you may have to fill out various forms with your insurance company. Make sure you bring acceptable forms of identification and be prepared to fill out tax forms and contractual documents.
E. Receive your payment. When everything is complete, your insurance company will send you the money in your annuity, minus any fees they charge you. When you receive your payment, try not to spend it all. Remember that some of that money will be taxed according to various Internal Revenue Service (IRS) and state rules and regulations.
3. Paying Surrender Charges
A. Understand surrender charges. Surrender charges are incurred when you cancel your annuity contract and withdraw all the money from the account. A typical surrender charge will hang over the annuity for six or seven years after you purchase it. The fees may start at about 6% or 7% and will decrease annually until it reaches zero.[9] The fee will be assessed on the total amount of money in the annuity (i.e., your principal plus any accumulated interest or investment income). Be aware of annuities with large surrender charges (e.g., 10-15%) and surrender charges that last for a long period of time (e.g., 10 to 15 years).
For example, assume you purchase an immediate annuity with a surrender charge of 7% lasting seven years. The charge begins on your purchase date and decreases one percentage point each year until it reaches zero. In this scenario, if you surrender your annuity in your first year, you will owe a 7% surrender charge. If you surrender your annuity in your fourth year, you will owe a 4% surrender charge.
B. Calculate your liability. Before you surrender your annuity, understand what you will owe the insurance company in surrender charges.
1). For example, assume you have an immediate annuity with a current value of $10,000. The contract includes a surrender charge of 7% over seven years (decreasing 1% annually until it reaches zero). You surrender the annuity in your sixth year. You will owe a 2% surrender charge to the insurance company. In total, you would have to pay $200 just to cancel the annuity contract.
2). In another example, assume you have an immediate annuity with a current value of $250,000. The contract includes a surrender charge of 6% over six years (decreasing 1% annually until it reaches zero). You surrender your annuity in your first year. You will owe a 6% surrender charge to the insurance company. In total, you would have to pay $15,000 just to cancel the annuity contract.
3). In another example, assume you have an immediate annuity with a current value of $30,000. The contract includes a surrender charge of 10% over ten years (decreasing 1% annually until it reaches zero). You surrender your annuity in your thirteenth year. You would not owe the insurance company any surrender charge.
C. Pay the insurance company. Once you have calculated the surrender charges and decided to cancel the annuity contract, you will need to pay the charge to the insurance company. In almost every situation, the insurance company will take the money out of your distribution before they every give it to you.