Annuities are life insurance policies that provide you with living benefits such as monthly income payments. Like many types of insurance products, some annuities have a cash value, which means that you can cash-in your contract at any time. You pay no fees to cash-in your contract once it has reached maturity. However, you may incur fees if you cash in the contract before the end of the annuity term.
Fixed annuities are deferred annuities, which means that you have to wait for a number of years after you purchase the contract before you start to receive income payments. In terms of structure, fixed annuities work similarly to certificates of deposit, because you invest a lump sum and you earn a fixed rate of interest for a certain number of years. On a standard fixed annuity contract you have a "money back" guarantee which allows you to withdraw your principal at any time. You do lose your interest if you cash-in your fixed annuity before the term ends. Some annuity companies will pay you a higher rate of interest if you waive your right to the money-back guarantee. When you waive this right, the annuity company can assess a principal penalty if you cash-in the contract before maturity.
Variable annuities are also deferred annuities, but in these contracts your funds are usually invested in mutual funds, although some contracts also enable you to invest in fixed-interest accounts. You can cash-in a variable annuity during the accumulation phase before the contract matures. However, when you do this you get back the current cash value of the investment as opposed to the amount you originally invested. Annuity companies assess fees on variable annuity accounts, and these fees usually top 2 percent of the contract value. Fees are deducted from the cash value on an annual basis and can deplete the cash-in withdrawal value. You also have to pay surrender fees that can amount to more than 6 percent of the withdrawal amount if you withdraw funds before maturity.
Equity Indexed Annuity
Equity indexed annuities are complex deferred annuity contracts. Insurance firms track the performance of a market index like the Standard & Poor's 500, and you make money if the index increases in value over the term of the annuity contract. If the market performs poorly you normally get back at least 90 percent of your original investment if you hold the contract until maturity. Equity indexed annuities often have terms that last for a decade or more, and you pay surrender fees of up to 25 percent of the contract value if you cash in the account before it reaches maturity.
You cannot cash in an immediate annuity, because when you buy one of these contracts the annuity provider exchanges your purchase payment for a lifetime income stream -- and you cannot reverse this process. However, in some states you can sell an immediate annuity contract on the secondary market. This normally involves you selling the contract for a sum of money that amounts to less than the total value of the income payments that the contract entitles you to. Obviously, you lose money with such a deal in the long run, but if you need a lot of money at one time then you may benefit form selling your contract in the short term.
In some states, you are entitled to a "free-look" that may last for up to 30 days when you buy an annuity. This means you can get a full refund if you cancel the contract within a specific time frame, although you stand to lose any account earnings. Annuities are tax-sheltered investments, so you have to pay income tax on your earnings when you cash in your contract. You also pay taxes on your return of premium if you bought the contract with pre-tax income. Additionally, if you are younger than 59 1/2 you pay a 10 percent federal tax penalty when you make a withdrawal. Therefore, consider the tax consequences and penalty fees before you liquidate your contract.