An annuity is an investment vehicle and insurance contract that is often used by individuals close to retirement. An annuity works in two stages: accumulation and annuitization. During accumulation, you pay money over time or in a lump sum to the insurance company. Then, during the annuitization stage, the insurance company makes periodic payments to you over time. The money invested in an annuity may or may not increase in value over time, depending upon how the annuity will be invested. Canceling an annuity requires several considerations on the part of the annuity owner. Cancellation of an annuity is also sometimes referred to as surrendering an annuity.
1. Review your annuity contract to determine if there are any surrender fees. A surrender fee is a common aspect of annuity contracts and imposes a fee for the early termination of an annuity. A surrender fee may be imposed due to cancellation for several years after the annuity contract was signed. If there is a surrender fee, determine if it is worthwhile for you to cancel the annuity at the present time. For example, if the surrender fee is 15 percent of the annuity value, you may decide that it is not economical to cancel the annuity.
2. Calculate any tax implications prior to surrendering your annuity. If you surrender and cash out your annuity prior to the age of 59 and one-half for reasons other than death or disability, a 10 percent Federal tax penalty will be assessed on the value of the annuity. Furthermore, you will have to pay the taxes on any gains in the value of the annuity due to interest.
3. Contact your insurance broker to verify the information that you discovered regarding the surrender penalty. If you decide that surrendering the annuity is in your best interest, request the required documents from the insurer to process the cancellation. Complete them, sign and return the cancellation documents to your insurer.
- You can also move your annuity to another insurer by what is known as a 1035 exchange. This sort of exchange does not incur surrender or tax penalties.
- U.S. Securities and Exhange Commission: Annuities
- "Annuities For Dummies"; Kerry H. Pechter; 2008
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