Don't Fear the Surrender Charge
There are different opinions and criticisms associated with
fixed annuities and their associated surrender charges. To dispel the confusion, it is important to
understand the need for the surrender charge.
First of all, surrender charges that are not disclosed by
the agent, are always bad. Obviously any aspect of a financial investment or
product, which is not disclosed, is always problematic because the client is
not able to properly rely on the product benefits or agent representations.
Surrender charges that are disclosed and explained by the agent are fine,
because this eliminates any concerns over liquidity or access to funds in later
years.
Surrender charges are a vital part of the annuity
product. They are in place so the
company issuing the annuity can guarantee the guarantees of the product. If you
think about it, any investment vehicle or product that offers benefits and a
potential return on investment has some type of fee or charge assessed for
early withdrawal. The company that
issues the annuity guarantees the safety of the principle, paying a minimum
interest rate and to pay an income stream at some time in the future if
elected. In addition, most fixed
annuities offer many peripheral benefits the client finds advantageous. An
example of a peripheral benefit is a premium bonus added to the accumulated
value of an annuity. Say the issuing
company offers a 7% bonus on an initial $100,000 deposit. Upon issuance, the accumulated value is
$107,000. The insurance company offers
the bonus knowing recovery of the $7000 will occur over time by holding the
investment. The insurance company cannot
afford to guarantee all these benefits if the client withdraws all the funds
within a period of time shorter than anticipated. The surrender charges are in place to
safeguard the annuity guarantees and benefits offered to the client.
It is important to understand, the more robust and
advantageous the benefits of the annuity are to the client, the more stringent
the surrender charges will be. A
passbook savings account from the bank doesn’t have surrender charges because
it offers no guarantees. Equally as
important to understand is the surrender charges are never assessed as long as
any withdrawals made from the annuity are not in excess of the liquidity
options offered. Annuities are typically
a long-term investment vehicle. If a
client knows access to their funds in short order is critical, they should
carefully examine and discuss the liquidity options and surrender charge
schedule with their agent to determine the best course of action.
Fixed annuities remain one of the safest, most reliable
investment vehicles today. There are many different annuities with different
rates, features, benefits and surrender charges, so it is important to shop
around to find the annuity that best fits your needs.