Covering your Back: Know the Basic Annuity Fees

With great investment come great policies and fees. In times such as these, it will be more than helpful to have a good background about annuity surrenders.

So, what are the things you must understand in an annuity surrender fee? First you must know what an accumulation phase is. As the word suggests, this is the stage where in you as an annuity policyholder will add money to your account to gather assets in a tax-deferred manner.

When you signed your annuity contract, a date was agreed upon on when you can withdraw the money from your account. If you have decided to take out money from your account before the date specified, there will be an annuity surrender fee for failing to comply with it.

Before you throw the towel in realizing you are in such arrangement, there is a bit of silver lining in it. The fees may be higher if the withdrawal is done within the first few years of the contract. But if the withdrawal is done nearer to the maturity date of the premium, then the annuity surrender charges also decreases.

If you are curious how much a typical surrender fee is, picture this percentage of surrender fees vis-à-vis the year you plan to withdraw them:

• 1st year: 7%
• 2nd year: 6%
• 3rd year: 5%
• 4th year: 4%
• 5th year: 3%
• 6th year: 2%
• 7th year: 1%
• 8th year and ahead: 0%

See? It really isn't that bad especially if you were able to wait for a couple of more years in withdrawing your investments. Such surrender fees allow your insurer sufficient time to recover their expenses on commissions and setting up the contract. It also serves as a business tactic to retain annuity policyholders and putting them off in using deferred annuities as a way of quick cash investments.

It is important to know that some annuity contracts may permit you to withdraw a portion of your funds annually (usually up to 10%) without the pains of a surrender fee. If such option is important to you, the best way is to consult your annuity agent about it before you invest on a specific annuity.

You might also be interested in checking your annuity policies about mortality and expense risk charge. This is an insurance fee that will cover death benefits, the option of a guaranteed lifetime payout options and the assurance that the insurance charges will no longer increase. Also, there is also what you call an annual policy fee (APF). An APF is a processing fee for the maintenance and administration of an annuity account during its accumulation phase. Other companies waive this in lieu of a certain amount reached in an account.