If you purchased an annuity in the past, and it isn’t exactly performing the way you had anticipated it would, then you may be feeling stuck. This is particularly the case if your annuity is still in its “surrender period,” where you will be hit with a penalty for canceling the contract and withdrawing all of your money.
Oftentimes, insurance companies will make it unappealing – and expensive – for consumers to make changes, so investors may be sandwiched between the “lesser of two evils”…paying the penalty to get out, or forging ahead knowing that the product isn’t right for you.
Ways to Get Out of the Wrong Annuity
Even when it seems like there are only “bad” options available, it will still be necessary to commit to going in one direction or another. (After all, even not making a decision is technically making a decision. Right?)
So how exactly can you “break up” with your annuity and move forward?
There are actually a few possible alternatives.
One option could be to simply cash out and take the penalty. While this isn’t appealing to most people, there are situations where you just simply don’t want to continue throwing “good money after bad.”
Note here that in addition to paying the surrender fee, you could also be liable for paying the tax on any gain that took place in the contract. And, if you are under the age of 59 ½, there is also the possibility of having to pay an additional 10% “early withdrawal” penalty to Uncle Sam.
This being said, most annuities will allow you to withdraw up to 10% of the contract’s value each year – even during the surrender period – without having to pay a penalty. So, if you’re willing to keep the annuity in force, you could “chip away” at getting your money out of it in small portions.
As another possible option, depending on how long ago you purchased the annuity, you may be able to return it to the insurer during the “free look” period. All annuities come with a window of time during which you can return it, no questions asked, if you should change your mind. This, however, will only work if you have just recently purchased the annuity, as most free look periods are between 10 and 30 days.
There is also another possible solution to getting out of the wrong annuity. That is to exchange it. Just like buying a pair of pants that’s the wrong size, there are options for changing out one annuity for another. This is referred to as a 1035 exchange.
Here, the IRS allows you to exchange an annuity that you currently own for a new one, without having to pay tax on the gains that were earned in the original contract. In this case, you must directly exchange the annuity, as versus personally cashing out and taking a check from the original contract and then applying it to the new one.
While a 1035 exchange might be a good alternative for you, there are some items to be mindful of here before you move forward. First, if your current contract is still in the surrender period, you will likely be liable for a surrender fee. Also, know that you could be giving up certain income and/or death benefit guarantees with the old annuity.
With that in mind, it is important to discuss your potential options with someone who is well-versed in annuities. Otherwise, you could end up being a participant in an expensive transaction.
Don’t Stay Stuck Forever – Talk to Us About How to Find the Right Annuity for You
Sometimes, the choices we make in the past don’t necessarily correlate with our new or current circumstances. This is oftentimes the case when it comes to choosing financial vehicles.
At Annuity Gator, we don’t think you should have to stay in a product that is no longer fitting your needs. That’s why we work with consumers to help them better understand how annuities work, and how certain annuities may or may not be right for particular goals and needs.
This includes comparing different annuities side-by-side – and we do so using your specific parameters, such as your risk tolerance and anticipated time to retirement – rather than using generic examples that we pulled out of the air.
Want to learn more about whether or not your current annuity is still the best option for you?
If so, feel free to reach out to us using our secure contact form and talk with one of our annuity experts.