Annuities are retirement products offered by insurance companies. When compared to ordinary retirement investments in brokerage accounts, annuities have several features that make them attractive to investors. Because annuities can offer multiple benefits and guarantees not available in other types of accounts, understanding the different values and definitions on statements can be confusing.
The “accumulation value” of an annuity is the raw value of the account after interest is credited or after adding and subtracting the performance results of investment choices. The amount available for withdrawal may not necessarily match the accumulation value, especially in the first several years after your annuity account is opened.
Next to the accumulation value figure on your annuity statement is usually a “surrender value” figure. The surrender value is the amount of money you would receive if you closed your account and withdrew the money. Due to the potentially significant expenses incurred by the insurance company while opening your account and the cost of providing the extra features and guarantees, your contract stipulates that you must leave money in the annuity for a minimum duration to avoid paying surrender charges.
Every annuity’s surrender schedule is different, and the specifics of your particular schedule are detailed in your contract documents. Annuity surrender charges typically decrease on an annual basis, with the percentage withheld as a penalty for early termination diminishing over time. Eventually, the surrender charge will no longer exist when the surrender schedule has expired. During the course of the surrender schedule, the surrender value will slowly rise to meet the accumulation value.
After holding an annuity for a long enough period to surpass the expiration of the surrender schedule, your surrender value figure will match the accumulation value. From that point forward, your accumulation value represents the actual dollar amount you would receive if you closed the account.
Almost every annuity contract includes a provision allowing annual withdrawals that are exempt from surrender charges. Typically, the amount of the penalty-free withdrawal is 10 percent of the accumulated value, and the funds can be withdrawn in any manner. The accumulated value will be decreased by the amount of the withdrawal, resulting in smaller gains within the account. Most penalty-free withdrawals are not required to be repaid unless the annuity is within a 401(k) or similar group retirement account.
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.