The ever increasing popularity of annuities among investors and advisors has motivated insurance companies to constantly modify and enhance their working parts to gain market share over the competition. However, this has indirectly lead to more complexity, scrutiny, and confusion in the industry for regulators and individual investors alike.
There are just a few basic things to be cautious of when selling out of your annuity, whether it be fixed, variable, indexed, or some combination of the three.
1. Whats the motivation?
Advisors are constantly moving clients in and out of annuities to either put you into a better product with features that suit your needs or to make a buck. Be careful to understand why someone is recommending moving your annuity. Other factors that you may want to understand is the expenses inside the annuity contract. Some fully loaded variable annuities can cost upwards of 3.5%.
CDSC is the industry abbreviation for Contingent Deferred Sales Charge. Basically this is the penalty for getting out of your annuity before the term is over. Not unlike getting out of a CD prematurely. Most recent annuities will have a 7 year or 4 year surrender schedule that would asses a penalty if you withdrawal before the time period is up. Watch out for older annuities or indexed annuities, on occasion these will have CDSC periods of up to 15 years!
3. Taxable gain?
An annuity is primarily used as a tax deferred savings vehicle. As a result, when you surrender your contract there will most likely be some sort of taxable gain on the earnings that have been deferred. Also, on deferred income withdrawn prior to age 59.5 may incur a 10% excise tax.
4. Death benefit?
Most annuities will come with some sort of death benefit protection. This is an important feature that you will not want to overlook. For instance, if you were to invest in a variable annuity around the market downturn in 2001, your death benefit may be significantly higher than the actual contract value.
These four items would be the first step to determine whether you should sell your annuity. As always, consult your investment advisor to better understand your individual situation and needs.