If you withdraw money from an
annuity
or cancel your contract
within a certain time period, the insurance company usually imposes
surrender fees.
Like
Class B
— or
back-end load
— mutual fund shares, surrender fees include the sales charges paid to
the financial adviser who sold you the annuity. The charge is
asset-based, or calculated as a percentage of the withdrawal, and is
subtracted from your account value.
In
most cases, the percentage you’re charged declines each year over
several years, called the surrender period. A typical contract imposes
a charge of 7% on withdrawals in the first contract year, dropping to
6% in the second year, 5% in the third year, until it disappears
entirely in the eighth year. With some annuity contracts, however, the
surrender period may be as long as 10 years.
Some
contracts allow you to withdraw a fixed percentage of your account
value each year — 10% or 15% for example — without paying surrender
fees.
A word to the wise
Because of the high surrender fees and taxes that may apply
if you withdraw your money in the early years of the contract,
annuities are usually best suited to meet long-term financial
goals of at least 10 or 15 years or more.
