FEIA: 3 of 3 – Surrender Charges

Fixed Equity Indexed Annuity 

Part 3 of 3:  Surrender Charges

One of the restrictions placed on a Fixed Equity Indexed Annuity (FEIA)  is the Surrender Charge.  The fundamental question is why are the charges there, and can the charges be avoided?  First, the Insurance Company provides a number of Contractual Benefits  when an FEIA is opened.  Among these are 100% of the premium becomes the opening Account Value (AV), the AV is guaranteed against market loss, and the AV generally has a guarenteed minimum lifetime return of  1 to 3%.  Additionally, there may be participation rates and/or caps on the gains, but generally there are no management or Account fees charged against the AV.

Although most policies allow for an annual penalty free distribution, the remaining balance is needed to help develop profit for the Insurance Company to enable it to provide the benefits to the annuity owners.  Time allows the Insurance Company to recover the costs for opening a contract.  If the contract is cut short prematurely (surrendered), the owner of that annuity must pay the surrender charge as outlined in detail in each annuity contract.  It is generally a declining charge from  5 to 17  years depending on the benefits provided.

If the new annuitant is properly informed, understands that this is a longer term instrument, and has a plan to use the funds that does not include surrendering during the surrender period, it should be relatively easy to avoid any charges.  Although unforeseen circumstances do happen, only the annuitant that surrenders their policy during the surrender period will pay the price, not those who have planned properly.  The remaining policies will continue to potentially grow as depicted in the annuity contract from the first day.

Penalty Free Withdrawals:

As mentioned above, most companies offer annual penalty free withdrawals of up to 10% from the Life Insurance Company.  Please note that a qualified and non-qualified annuity withdrawal must comply with the 59 1/2 IRS distribution rules.   However, part or all Insurance Company surrender charges are generally waived for Nursing Home needs or death.   Continuation without interruption is often a choice for the surviving spouse.  Thus, if planned properly, even cash flow needs can be planned each year to help avoid Surrender Charges.

In conclusion, what can seem like a negative at first, is actually a positive for the annuitant who purchases and uses it properly for the planned income needed in the future.  Again, only the annuitant who chooses to surrender prematurely, pays the Surrender Charge.  Once the surrender period ends (from 5 to 17 years depending on the annuity), the annuitant may surrender the annuity free of surrender charges.  Please seek accounting advice for income tax related questions.


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