How to Unload a Horrible Annuity

If you have no choice but to back out of an annuity contract, there's a right way to do it

Annuities are long-term retirement investment vehicles and disposing of one is not always a simple process. Several factors must be carefully considered before unloading an annuity.

Income taxes, retirement stability and future purchasing power are just some of the issues that terminating an annuity may negatively affect.

If you determine, however, that the best option is to get rid of your current annuity, there are two methods of accomplishing this: surrender or rollover.

Surrender

Step 1

Request account closure paperwork from the insurance company. Contact the customer service department and ask for the proper forms to initiate the surrender of your annuity.

Step 2

Fill out the annuity termination paperwork. Enter all required information in the forms, including your personal demographic details and annuity account details. You must acknowledge your understanding of the possible income tax ramifications of surrendering the annuity, as well as the possibility that surrender charges may be subtracted from your account.

Step 3

Submit the completed forms to the insurance company. Once you have entered your personal and account details on the appropriate documents and acknowledged your understanding of the potential consequences, sign each page where indicated and mail the packet.

Step 4

Collect the check. Typically, annuity surrender requests are processed within a few weeks. You should expect your check to arrive after the insurance company has finalized the termination of your contract and conducted the necessary calculations. The check should consist of your annuity's value minus any surrender fees deducted by the insurance company for early termination. Additionally, it is not uncommon for insurance companies to withhold up to 20 percent of your annuity's net surrender value for estimated income tax liability.

Rollover

Step 1

Choose another annuity to replace your current product. If you still believe that an annuity may suit your retirement savings goals, and you're simply unsatisfied with your current product, research other annuities with other insurance companies and find one with the features and options you feel are more appropriate.

Step 2

Open an account with the insurance company. Complete the new account forms and provide your personal demographic information. Indicate that your annuity will be funded via rollover from an existing annuity with a different provider.

Step 3

Complete rollover paperwork. Funding a new annuity with money currently held inside another one requires separate documents and forms. In some cases, rollover forms from the new insurance company are insufficient by themselves, meaning you must also fill out account closure paperwork for your existing annuity.

Step 4

Verify that your money was transferred. Once the paperwork is received, it should only be a matter of time before your old annuity account is terminated and the surrender value is forwarded to the new insurance company.

Tip

Review the reasons for your decision to terminate or switch your annuity. Ensure they are valid and logical, not emotional. Common reasons for cancelling an annuity or rolling your money into a new product may include: unreasonably low interest rates, lengthy surrender periods, excessive surrender charges, inadequate sub-account choices and insurance company instability.

Warning

Surrendering your annuity may result in hefty taxes and penalties from both the insurance company and the IRS. Insurance companies may charge surrender penalties ranging from 7 to 10 percent of your annuity value, depending on how soon you close the account after first opening it. The IRS may impose early withdrawal fees if you take distributions from retirement accounts before you are 59 1/2 years old. These penalties may severely reduce your savings, especially if you are subject to both at the same time.

References

Insure.com: The Basics of Annuities
MetLife: Fixed Annuities FAQ
IRS.gov: Publication 575 -- Pension and Annuity Income
Prudential Financial: Annuity Basics

About the Author

Gregory Gambone is senior vice president of a small New Jersey insurance brokerage. His expertise is insurance and employee benefits. He has been writing since 1997. Gambone released his first book, "Financial Planning Basics," in 2007 and continues to work on his next industry publication. He earned a Bachelor of Science in psychology from Fairleigh Dickinson University.

Article originally published on The Nest (12/17/2012)