- Annuities are generally long-term contracts
- Early withdrawals can have contractual costs
- Keep adequate liquid reserves outside the contract
Annuities are generally designed as long-term insurance contracts. That makes liquidity one of the most important issues to evaluate before purchasing. Many contracts impose surrender charges when withdrawals exceed an allowed amount during an initial period.
Some contracts permit a percentage of the value to be withdrawn annually without a surrender charge, while others include waivers for specified events. Terms vary. A market value adjustment may also apply to certain withdrawals or surrenders in contracts that include one.
Because of these restrictions, money needed for near-term expenses or emergencies generally should not be committed to a long surrender schedule. Maintaining an appropriate emergency reserve outside the annuity can reduce the risk of having to access the contract at an unfavorable time.
For qualified retirement accounts, tax rules can add another layer. Withdrawals are generally taxable as ordinary income when distributed, and distributions before age 59½ may be subject to an additional federal tax penalty unless an exception applies. Required minimum distribution rules can also be relevant.
Before buying, identify the surrender schedule, free-withdrawal amount, any rider charges, income provisions, and the circumstances under which you might need access to principal. Suitability depends on the full financial picture, not just the illustrated rate or bonus.
Discuss your specific situation
If you want help comparing the protection need, available options, and a premium or funding level that fits your budget, SummitLine can walk through the details with you.