Annuities & Liquidity

Understanding Liquidity Provisions and Surrender Periods in Annuities

Annuities are a long-term, reliable vehicle for market-linked accumulation. However, a key aspect to understand about annuities is their unique liquidity provisions.

This blog aims to shed light on these features, particularly focusing on penalty-free withdrawals and the surrender charge periods. These aspects are associated with annuity products offered by top carriers such as Midland National, Allianz, and National Life, which form the backbone of our strategies.

The Surrender Period

The surrender period is the minimum duration you should plan to hold your annuity. During the surrender period, you will face a penalty if you withdraw more money from your annuity than allowed by the contract. Think of it as a "lock-in" period where you are encouraged to keep your money invested. The surrender period is structured to protect the insurance company's ability to invest the premiums received and manage their risk appropriately.

If you take out more than the penalty-free amount during this time, you will have to pay a fee called a surrender charge. This period can last several years, and the charges usually decrease over time.

The length of the surrender period and the corresponding charges can vary between products, but most commonly is 10 years.

After the surrender period, you have penalty-free access to the full accumulation value of your annuity.

For example:

Midland National RetireVantage 10 (which is used in our Mid Career Pro and Executive Composite Strategy): This product has a surrender charge period of 10 years, with penalties starting at 9% in the first two years and gradually decreasing to 0% by the tenth year. The charge is applied to any amount withdrawn that exceeds the penalty-free withdrawal limit.

Liquidity Provisions: Penalty-Free Withdrawals

Although annuities are designed for long-term investments, they provide liquidity through penalty-free withdrawals during the surrender period. Typically, many annuities allow for up to 10% of the contract value to be withdrawn annually without incurring surrender charges. This provision is crucial for policyholders who might need access to their funds unexpectedly without facing hefty penalties.

For example:

The Midland National RetireVantage 10 annuity (which is used in our Mid Career Pro and Executive Composite Strategy) allows policyholders to take a penalty-free withdrawal of up to 10% of their accumulation value once per year. This is a significant feature, especially during times of financial need.

Of course, after the surrender period, you’re welcome to withdraw as much or as little as you’d like, taking into consideration your financial and tax situation.

Conclusion

Understanding the liquidity provisions and surrender periods of annuities is essential for making informed investment decisions.

Penalty-free withdrawals offer annuities a degree of financial flexibility, which can be crucial in times of need. However, it's important to be mindful of the surrender period to avoid unexpected charges.

To learn more, take a look at some of our expert built strategies.