Annuity Surrender Charges: Read The Fine Print
Annuities are one of the most popular retirement investment vehicles, but they are also one of the most debated.
People either love them or hate them (there’s usually no in-between when it comes to annuities).
One particular aspect of deferred annuity contracts, and the one that’s at the root of almost every debate or argument, is the legitimacy and validity of surrender charges.
Annuity contracts are retirement investment vehicles developed, marketed, and maintained by life insurance companies. So, at their core, annuities are insurance products.
Yes, they are specifically designed to facilitate growth and an increasing portfolio value, but these products are actually extremely complicated when you take a look under the hood.
Traditional brokerage accounts containing investments such as dividend stocks are fairly simple to understand and to use in retirement planning efforts.
If the value of the individual stocks goes up, the overall value of the account increases proportionately.
Dividends paid by stocks can either sit in cash within the account, or can be reinvested to purchase additional stock shares.
Companies that consistently pay higher dividends are especially appealing. Dividend aristocrats are one such group, and income investors can view data and analysis on all of these popular dividend growers here.
Simply put, there are a number of reasons to be a dividend growth investor.
Annuities, on the other hand, come in a variety of shapes and sizes, and from a plethora of providers.
There are a number of generic characteristics that make up the common threads among annuities, as well as similarly generic features associated with each of the different annuity types.
Before going deeper, I want to be clear that I’m not advocating for a retiree to buy annuities or dividend stocks exclusively – it largely depends on the individual’s unique income needs, assets, and risk tolerance. There are tradeoffs to both approaches.
Instead, given the popularity of annuities with retired investors, my intention is to review one of the key issues investors need to be aware of if they are considering annuities.
After all, each insurance company puts its own spin on these products in an effort to remain competitive and attract new investors.
Now, we all know that it’s extremely important to actually read a contract before signing it, but making sure you actually understand all the unique features of your chosen annuity is only half of it.
The major aspects — the parts that annuity companies and agents alike often skim over — are called surrender charges, and if you’re not careful they can put a massive strain on your retirement finances.
What Are Annuity Surrender Charges?
To put it simply, annuity surrender charges are penalty fees that will be deducted from your account balance if you choose to cancel your contract (close your account) before a pre-determined number of years have elapsed.
Surrender charges differ from company to company, and also depend on the type of annuity product you purchase, as well as the additional benefits (called “riders” in the insurance industry) that you choose to add on to the contract.