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Do Index Annuities Have High Surrender Fees?

Jeffrey KieselSurrender fees for Fixed and Fixed Index Annuities can be very high and should be avoided at all costs; especially with your retirement funds. The surrender fees could be as high as 18% or more for some annuities. This would put a real dent in your nest egg if you have to pay it in the event you ever had to liquidate an annuity. Fortunately, there is a very easy way to not have to worry about surrender fees… don’t use annuities for short term investments because that would be the wrong use of these insurance instruments on two accounts. 

First, fixed index annuities are tax deferred insurance instruments – not investments. They are guaranteed financial contracts which pay a minimum interest rate each year. The contract will also guarantee that your premium (principal) and earned annual interest will never go down in value. These Fixed Index Annuities may also be structured to earn potential double digit interest, based on the growth of a specified index. Secondly, these instruments are normally for long term planning and use, which is why they are excellent products to use as an integral part of your retirement plan. When these instruments are used as they are designed, and properly managed and executed, you should never be in the position to pay the surrender fee. Most of them are designed to allow up to a 10% free withdraw every year, in the event of an emergency. 

A well-structured retirement plan should at least consider the use of a portion of your nest egg to purchase an annuity (or several of them), to fit your personal long-term financial needs and retirement expectations. The portion is determined by a thorough evaluation and analysis of your current and expected expenses, your lifestyle choices and travel plans, residence location, family structure, income sources and assets as well as your health history and life expectancy. Many well-designed retirement plans will use annuities with an income rider, to develop an income stream payout during your retirement years. This income stream may also be structured to keep pace with future inflation rates, as well as guarantee that the income payments will continue throughout your retirement years and never run out. 

These annuity contracts may also have provisions to allow for extra, free withdraws that you could use in the event of a long term care need or if you are diagnosed with a terminal condition. Whenever the contract is ended, either by choice or death, and cash value balance is paid back to the owner or their beneficiaries. Even though the owner has access to their funds, they can avoid the surrender fees if they withdraw their funds after the surrender fee period. These periods average between five and sixteen years, which is why you only want to use these annuities for your retirement income. Generally, if the owner waits until after the third year of ownership for a complete withdraw, they would at least break even due to the interest earned and any vested premium bonuses that may have been applied. 

When a portion of your Nest Egg funds are used to purchase an annuity, this would be a proper and best use of the funds, especially to protect them from any market fluctuations and loss. An annuity is a valuable tool which may be used strictly for your own personal “pension” plan safety net. In this function, an annuity will give you the guaranteed income payout for the rest of your retirement life, and therefore, you would never need to withdraw the funds prematurely or risk paying any surrender fee charges. Your challenge is to determine what portion of your nest egg do you want to protect, and how much of it do you want to use as your personal pension type plan.                                                                                                                                             

About the Author:

Jeffrey Kiesel operates his own Retirement income and planning business with a specialty in Social Security benefit maximization strategies.  Visit LinkedIn to learn more about Jeffrey and his practice or email him at jjkiesel@verizon.net.

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