Annuities are tax-deferred investments offered through insurance companies that generally have a contract term of three to 15 years. If you have purchased an annuity and now wish to terminate the contract, you will need to surrender the policy. There are several things to consider when surrendering the policy to make sure you are not paying more fees than you need to: time frame, reason for termination and tax consequences.
Establish why you want to terminate the contract. Needing the money versus being unhappy with the performance of the annuity will generate different options and tax consequences.
Needing the funds will require pulling money out of the tax-deferred account and generating a tax consequence on the money the annuity has earned.
Not being happy with the performance may warrant looking into a more competitive annuity and doing a 1035 Exchange, which is an annuity-to-annuity transfer that does not create a tax liability.
Review your annuity contract to see what the contract inception date is, how long your surrender period is and what, if any, waivers exist for you to pull money out of the account.
A surrender period is the number of years that you must hold the contract in order to not be assessed a surrender charge when pulling money out. Generally, the fee for pulling money out is a percentage of the total disbursement and is larger in the early years of the contract and declines over the course of time until there are no more fees for withdrawal or termination.
Some contracts have waivers for long-term care or disability needs.
Determine if you will be charged anything for pulling the money out based on the contract terms.
If your annuity is brand new and within the "Free Look Period" defined in the contract, you can terminate it with no charges or penalties.
If you are in the surrender period, calculate how much you will pay to terminate the contract regardless of whether it is a cash surrender or a 1035 Exchange.
If you are out of the surrender period, you will not be charged any money for terminating the contract. Keep in mind a 1035 Exchange keeps the money in the tax shelter, while a cash surrender will give you the money but generate taxes.
Surrender the contract.
You can accomplish a cash surrender by requesting a surrender form from the annuity company, filing it out and sending it back. If you qualified for any of the waivers of surrender charges, be sure to include all information the form requires in order to prevent any extra charges on money coming out.
To complete a 1035 Exchange, find an annuity you wish to move the money into, open a new account and fill out 1035 Exchange paperwork that is provided by the annuity company.
Tips & Warnings
- If you are unsure about what annuities investments are best for you, speak with a financial adviser or look at online resources such as AnnuityFYI.com that compare annuities side-by-side for you (see link in References below).
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