Getting Out of an Annuity

An annuity is an insurance policy of sorts where you agree to one of two types of plan, either a fixed or variable annuity, and agree to the stipulations of purchasing payments. With the sum paid into the annuity the insurer agrees to pay either periodic payments based or a large lump sum at the end of a pre-set length of time. This type of financial insurance is helpful for those who like to know they have something tucked away in case of an emergency that is at their disposal regardless of the economic condition of the bank. But what happens when you or a loved one have a medical emergency and need that money now rather than 10 years from now? Breaking an annuity can be a difficult and costly endeavor. There are several reasons why cashing out of an annuity is a bad idea.

The first reason is the consideration of the payment dates. The closer to the payment date, the larger your payment will be. Subsequently, the farther away your payment date, the smaller your payment will be if you choose to close early. For example, a $100,000 annuity which pays you in 2015. If you were to close it now, in 2008, your payment would be considerably less than if you waited 4 years to 2012. Often, if you try and cash the annuity out early, you'll be very lucky to get 1/4 of what you might at the payout date.

Second reason related to the first, is the consideration of the bottom line. The payout date, as discussed before, should be taken into serious consideration as to whether or not having the money in hand now is worth the loss of potentially half of your original investment. The short term benefit of having money in your hand today rather than in the future can often overshadow the security of allowing the money to grow long term. Be certain that you are ready to give up more money at a future date to less money now.

The last reason is the consideration of hidden charges, fees, or taxes which may decrease your payment even further if you close out the annuity early. As an example, the fee for someone under 59 years of age who, upon closing the annuity, would forfeit 10% of the taxable portion to the IRS. Getting around such penalties is near impossible. To buy another annuity would still involve IRS penalties.

Though cashing out an annuity without penalty may seem after this information, hopeless, there are alternatives. One such alternative is the 1035 exchange, where you literally exchange one kind of annuity for another. One can also research any waivers which can fend off the penalties which may incur.

Clearly investing in an annuity is intending to be a long term deal and breaking it before the agreed time may greatly decrease your return. Before deciding whether or not to close an annuity, go over the details, yes even the fine print, and refresh your memory on what penalties may accompany your decision. Luckily there are some instances where serious injury or illness may wave the penalty if the result of such illness is the cashing out of your annuity. As with any major financial decision, do not act without first carefully weighing your options.

Author : Joe
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