No Surrender Annuities
An annuity surrender charge is the amount the insurance company charges an annuitant if he or she withdraws more than the specified amount during a given time period. Most annuity contracts allow the annuitant to withdraw earnings or an amount worth up to 15% of the premium without a surrender charge.
The amount of the surrender charge differs among life insurance companies and usually decreases over time. Sometimes referred to as "level-load" annuities, no-surrender annuities do not charge a fee if more than 15% is withdrawn or if the contract is surrendered. However, no-surrender annuities typically charge more in fees and may not be as attractive from an investment standpoint. In other words, they may not perform as well as some of the company's other annuity or life insurance investment products.
While the rate and schedule of surrender charges varies among life insurance companies, typical charges are as follows: Surrender in the first year results in a charge of 8%; surrender in the second year results in a charge of 7%. The percentage usually drops 1% a year until year six, when it may drop to 0%.
Comparing Level-Load Annuities to No-Load Mutual Funds
A no-load mutual fund is similar to a level-load annuity in that there are no up-front fees. All of the money an investor uses to purchase the fund or the annuity goes to work for him or her immediately in full. But, no-surrender annuities provide additional benefits that some investors may not be aware of.
If purchased as part of a tax-qualified account, mutual funds grow tax-deferred until the account owner begins taking distributions. Annuity growth, however, is always tax-deferred. Whether the annuity is purchased as part of a tax-qualified account or not, it will grow tax-deferred. This means that all interest and capital gains remain in the account to compound at a faster rate. And, there is no limit to the number or amount of no-surrender tax-deferred annuities an individual can own. With tax-qualified mutual funds, there is a limited amount of money that can be placed in a tax-deferred account.
The Ability to Reallocate Investments
To reallocate money in mutual funds, one fund must be sold and another bought. With no-surrender annuities, money can be moved from one investment to another without triggering a taxable event or creating the need for a formal roll over.
Annuities, like life insurance, pass directly to the beneficiary. As long as a person and not the estate is the named beneficiary, the account will avoid probate.
Comparing No-Surrender Annuities
It's often difficult to compare no-surrender annuities. Each life insurance company has its own name for the product, its own surrender schedule and other factors that affect costs and suitability. When comparing no-surrender annuities, always make sure that the company selling the annuity has been rated highly by each of the three credit rating agencies: A.M. Best, Moody's Investor Services and Standard and Poor's. Each of these agencies uses different criteria to rate the financial soundness of an insurance company. As each uses its own proprietary rating system, it's best to make sure that one hasn't uncovered an issue with an insurance company that another hasn't. A profile of the insurance company is created in order to make sure that its ability to meet future financial obligations. As annuities represent a contract that may not come due for decades, investors should feel comfortable knowing that they'll in fact receive the money the annuity contract guarantees them.
Investors who choose variable annuities should be aware that the money that is invested in variable accounts is not guaranteed and in most cases is not used when determining the ratings of the insurance company. Because an investor has the choice of allocating his or her money, he or she is solely responsible for any losses that occur. Even no-surrender annuities can lose money during a stock or bond market downturn.
Which Life Insurance Companies Sell No-Surrender Annuities
All of the major life insurance companies sell no-surrender annuities. AXA Equitable, Lincoln Financial Group, Met Life, Prudential and others offer a mix of level-load annuities. The smallest annuity varies by company, but no-surrender annuities can be purchased in amounts as low as $10,000. This amount can be of great benefit for investors who want to average the cost of their annuities by buying one annuity every year for a number of years.
Additional Benefits of No-Surrender Annuities
Some of the insurance companies that offer no-surrender annuities offer additional benefits with the annuities they sell. For example, a death benefit or living benefit may provide significant value for some annuitants.
No-Surrender Annuity Death Benefit
Upon the death of the annuitant, the beneficiary (or beneficiaries) can be guaranteed the greater of the account value or another value that is determined by the company. Some companies offer the greater of the account value or the value of the account on the last anniversary of the contract. There are a number of other guarantees, all of which are specific to the company that issues the contract.
Lifetime Withdrawal Benefit
This benefit guarantees that the annuitant will receive income for life. Regardless of how long he or she lives, he or she will continue to receive annuity payments. This is different that a guaranteed minimum benefit, which guarantees that a minimum payment will be made each month, but does not guarantee that payment for life. Typically, however, the lifetime withdrawal benefit is a costly addition, as the insurance company must make sure that it does not pay out more in payments than it receives in premiums.
As with all annuities, no-surrender annuities represent a contract between the insurance company and the annuitant. Even though there are no fees charged to the annuitant if he or she decides to surrender the contract, the annuity itself and the annual management fees can be more expensive. Therefore, investors should always be certain that they are well-suited toward the contract they are purchasing.
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