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Can I withdraw money from annuity

Accessing funds from your annuity

One of the downsides of annuities is the lack of liquidity. Once you have committed premium to the annuity contract, it’s essentially unavailable for the duration of the contract, with a few exceptions.

The main reason insurance companies prefer to hold onto your money is that they also have to commit a large sum to meet its future obligation to you. Each state requires that companies selling life insurance and annuities have enough liquid assets on hand to cover all current and future obligations, plus a little extra. That means when you purchase an annuity, the company has to hold back enough cash to make the required income payments down the road and can’t use it for another purpose. Plus, it has to pay commissions to the salesperson who sold you the annuity and pay its own business expenses. It takes several years for insurance companies to break even on an annuity after it’s been sold.

If you purchase an immediate annuity, you lose access to the full amount of what you paid into the contract. You will receive the income payments for as long as you established in the contract, but you cannot get back your original capital. Nor can you receive additional income above the contracted payment.

Deferred annuity liquidity

Deferred annuities have a little more flexibility and liquidity, but they should still be considered a long-term investment.

Deferred annuities typically have a surrender period. You will be required to leave most or all of the money in the annuity for that set period of time before you can take withdrawals. This will be determined before you purchase the annuity. The length can range from 3 to 15 years. At the end of the surrender period, you can either begin taking income or you can renew the annuity for another period, though it will likely be at a different interest rate.

If the owner of an annuity insists on pulling money out before the end of the surrender period, the insurance company will assess a penalty. This is known as a surrender charge.

In addition to limitations from the insurance provider, the IRS also restricts access to annuity funds, depending on a person’s age. Because annuity account values grow on a tax-deferred basis, the money can’t be withdrawn until at least age 59 1/2. Withdrawals made before that are subject to a tax penalty.

Surrender charges and free withdrawals

The insurance company’s surrender charge is typically a percentage of the amount withdrawn. The percentage will decline over time. For example, your annuity may have an 8 percent surrender charge if you withdraw funds in the first year, a 7 percent charge in year 2 and a 6 percent charge in year 3.

Many annuities, however, offer a free withdrawal percentage. This provision allows you to take out a percentage of the annuity’s value without a penalty. A typical free withdrawal amount is 10 percent of the account value.

Waivers that provide liquidity

Insurance companies also offer several optional waivers that can provide liquidity in certain situations. Often these waivers must be purchased at the time you buy the annuity and they may cost an extra fee.

Bailout provision. A few companies will offer a provision that allows annuity owners to take money out of a fixed annuity without paying surrender charges, provided that prevailing interest rates have risen above a specified level since the time of purchase.

Annuitization waiver. In some cases, the insurance company will forgo surrender penalties as long as you agree to annuitize your contract instead of taking out a lump sum. This means you would start a stream of income payments based on your annuity’s account value before the end of the surrender period.

Long-Term Care Rider. If your annuity is still in the accumulation phase, a long-term care, or confinement, rider will allow you to access some or all of the annuity’s account value without incurring a surrender penalty if you are confined to a nursing home or other care facility. If you are drawing income from the annuity, this rider will increase your income payments, up to double.

Terminal Illness Rider. This rider works similarly to a long-term rider, except that its benefit triggers if the owner is diagnosed with a terminal illness.

Disability/Unemployment Rider. These riders will waive surrender charges in the event the owner becomes disabled or unemployed for a certain period of time.

Return of premium. Some companies will allow you to pull out your original principal without penalty, but the insurance company will keep any growth that occurred in your account value.