How To Get Out of an Annuity

In this article you will learn important information and resources about how to get out of an annuity.

Annuities can provide a retirement income guarantee. However, you may decide at some point that you no longer want or need the annuity you’ve acquired.

If buyer’s remorse, has you wondering if you may reclaim your investment, we have some good news.

Here are four methods to exit an annuity if you find that it no longer fits into your financial strategy.

A financial advisor can assist you in achieving your retirement objectives by developing and modifying a financial plan.

Discover Four Ways to Terminate an Annuity

There are a number of reasons to terminate an annuity. For instance, you may be able to invest elsewhere with lower costs or place the funds in an account with more advantageous tax treatment. Or you may decide that you don’t need an additional source of retirement income after all.

There may be more than one way to eliminate an annuity, regardless of the reason you wish to do so.

Before terminating an annuity contract, here is what you must know about your possibilities, both positive and negative.

1. “Free Look” Clause

If your annuity is a recent purchase, you may be eligible to terminate the contract during the free-look time.

This is a period of time during which you can test-drive the annuity to determine whether or not you’re comfortable with keeping it.

If you decide within the specified time period that you no longer desire the annuity, you can cancel the contract without incurring a surrender fee from the insurance provider.

Think of the free-look time as a get-out-of-jail-free card, although one with a significant catch.

Most insurers limit the period to 10 to 30 days following contract signing.

If the window of opportunity has already passed, you will need to investigate alternative options.

2. Reintroduction of Premium Rider

A return of premium rider can be added to annuity contracts in a manner similar to that of life insurance policies.

This sort of rider stipulates that any premiums paid can be returned at any moment, essentially terminating the annuity contract.

Adding this and other riders to your contract typically requires additional payment.

If you have a return of premium option, keep in mind that you can only get back what you’ve invested; you cannot withdraw any investment growth from your annuity.

This is crucial because, if you’ve had the annuity for a time, its value may have increased dramatically.

In this scenario, the ease of exiting the annuity must be evaluated against the loss of more funds from the investment.

3. 1035 Exchange

If your primary reason for wanting to exit an annuity is because you don’t like the terms, you may be able to roll it over into a new annuity, which may be particularly attractive if your annuity has a substantial gain.

Without incurring a tax penalty, the IRS permits investors to engage in a 1035 exchange, in which they exchange one investment for another similar investment.

For instance, you may wish to switch from a variable annuity with a variable rate of return to a fixed annuity with a guaranteed rate of interest.

Ordinarily, withdrawing funds from an annuity would necessitate paying taxes on the growth or principal, depending on whether the annuity is eligible or non-qualified.

A 1035 exchange permits you to avoid paying income taxes on your annuity investment indefinitely.

Note: however, that if your contract includes a surrender fee or comparable penalty, you are still responsible for paying it to the insurance company.

Keep in mind that converting one annuity for another may result in the loss of certain features or extras, such as an increased death benefit.

In addition, the surrender period begins again when a new annuity contract is initiated.

Therefore, if you wish to withdraw funds or trade annuities again, you may be required to pay this fee again.

4. Cashing Out

The act of cashing out an annuity entails receiving a lump sum of cash from the annuity.

Comparable to paying out a permanent life insurance policy with accumulated cash value.

If you have a better use for the money or if an annuity no longer meets your income needs, withdrawing cash from the annuity and cancelling the contract may seem enticing.

As with a 1035 exchange, check to see if you would be required to pay a significant surrender fee to the insurance company, which could make cashing out now unprofitable.

If you do not want to pay a surrender charge, investigate whether you can withdraw money annually (subject to a certain limit.)

Some annuities permit you to take a fixed percentage of the contract each year without incurring a surrender charge, provided you are not cashing it out entirely.

Summary of How To Get Out of an Annuity

Before committing to giving up an annuity, you should carefully analyze your objectives.

There may be more than one way to withdraw from an annuity, but not all alternatives are made equal.

Each technique for ending an annuity contract has advantages and disadvantages that should be assessed in light of your own circumstances.

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