Fixed Annuities

Annuity Charges and Fees

Surrender Charges within annuities contracts generally are a disadvantage to the investor; however, these charges often are waived at least in part according to contract terms. Further, investors with a time horizon that reasonably matches the surrender charge period should not be adversely impacted.

Basically, a surrender charge is a fee assessed for withdrawing funds from an annuity during an initial pre-set number of years. Sometimes, for certain types of Variable Annuity contracts, this fee is referred to as a "contingent deferred sales charge," or CDSC for short.

How exactly does a surrender charge work?

The pre-set number of years to which a surrender charge applies is called the "surrender charge period."

For most annuities, the surrender charge period begins at the start of an annuity contract. Some annuities that accept additional funds following original policy issue apply a separate "rolling" surrender charge (or CDSC period) to each purchase payment in addition to the first one.

Surrender charge periods vary and decrease the fee charged during the period. For example, an annuity with a seven-year surrender charge period might have the following schedule of charges by policy year:

• Year 1 – 7 percent
• Year 2 – 6 percent
• Year 3 – 5 percent
• Year 4 – 4 percent
• Year 5 – 3 percent
• Year 6 – 2 percent
• Year 7 – 1 percent
• Years 8+ – No charge

If $10,000 is withdrawn in the third policy year, the surrender charge amounts to $500 ($10,000 X 5%). This is just an example, and the number of years and surrender charge percentages will vary depending on the terms of the annuity.

It is also important to understand that most annuities offer what is called a 'free withdrawal provision'.

This provision allows a contract owner the ability to withdraw a designated portion of their funds during the surrender charge period (often 5% or 10% of contract value each year) without incurring any charge. Withdrawals are subjected to ordinary income tax, and when taken prior to Age 59 ½, may be subject to an additional 10 percent federal income tax applied to the taxable portion of the withdrawal.

Annuities may waive surrender charges in other situations, such as for Required Minimum Distributions (RMDs) taken on Qualified Annuity contracts. Often, annuities waive charges if the Annuitant passes (in this case, the accumulated value passes in its entirety to beneficiaries). Some annuities waive surrender charges due to Nursing Home Confinement, use of Home Health Care, or diagnosis of a Terminal Illness.

Market Value Adjustment (MVA)

Some Fixed Annuity contracts also have a Market Value Adjustment (MVA) provision that can affect values when withdrawals are taken during the surrender charge period. Unlike a surrender charge, an MVA can have either a positive or negative effect depending on the market conditions at the time.

An MVA is an amount by which a full or partial withdrawal is adjusted, resulting in a positive or negative impact. The adjustment will apply to any withdrawal subject to a surrender charge and applied on the withdrawal date before applying the surrender charge. If market interest rates now are higher than when the contract was purchased, the MVA adjustment reduces the withdrawal (and vice versa).

Not all annuities include MVAs, and some states prohibit them by insurance laws and regulations.

Bonus Recovery

Some annuity contracts credit a Premium Bonus to the account value at time of purchase; and the bonus amount typically is subjected to recovery during the annuity's surrender charge period.

Bonus recoveries apply to amounts withdrawn exceeding any free withdrawals allowed. The bonus recovery schedule is a percentage of the bonus amount, with recovery percentages declining over the surrender charge period. Use of a recovery schedule allows the company to credit higher interest than would have been possible otherwise and may allow a higher lifetime withdrawal benefit.

Here is an example of one company's bonus recovery table, for a Fixed Indexed Annuity with a 10-year surrender charge period and a 5% bonus amount credited to the initial investment:

• Year 1 – 100 percent
• Year 2 – 95 percent
• Year 3 – 95 percent
• Year 4 – 95 percent
• Year 5 – 95 percent
• Year 6 – 90 percent
• Year 7 – 85 percent
• Year 8 – 80 percent
• Year 9 – 75 percent
• Year 10 – 50 percent
• Years 11+ – No recovery

This is just an example, and the number of years and bonus recovery percentages will vary depending on the terms of the annuity.

Further information on Fixed Annuities may be found by clicking on the links below. If you would like a consultation or a product illustration, please Contact Us or Request a Custom Quote.

Back to Top | Back to Fixed Annuities Home

• Who Should Buy an Annuity?
• Options for Taking Annuity Payments (Annuitization)
• Annuity Charges and Fees
• Buying a Deferred Annuity for Accumulation or Guaranteed Income
• How Fixed Annuities Can Be Used to Cover the Long Term Care Risk