When you purchase an annuity, you enter into a contractual agreement with an insurance company. As with many types of contracts, you often have to pay a penalty fee to terminate the agreement. You can avoid penalty fees if you cancel your contract soon after entering into it. However, if you wait for a few months or more, you may find that you no longer even have the option of canceling your annuity.
Annuities ultimately provide you with a lifetime income stream, but many people find these complex contracts difficult to understand. Consequently, many states, including Florida, require insurance companies to include a free-look provision in your annuity contract. During the free-look period, which begins on the day that you sign the annuity contract, you have the opportunity to thoroughly review the contract and, if necessary, to seek advice from a broker, an attorney or even a tax professional. The free-look period lasts between 10 and 30 days, and you get a full refund if you decide to cancel the annuity during this period.
When you buy an immediate annuity, the insurance company converts a single purchase premium into a lifetime income stream in a process called annuitization. Once your free-look period ends, you cannot cancel an immediate annuity and turn your income stream back into a lump sum. However, depending on the terms of your contract and your state's laws, you may have the option of selling the contract. Investors who buy annuities offer contract holders a lump sum of money that amounts to less than the payments the contract holder would receive over the remaining term of the contract. Therefore, you do not get all of your money back when you sell an annuity.
When you purchase a fixed annuity, the insurance company deposits your premium into a fixed interest account. At the end of the term, you can either take back your money plus interest or convert the annuity into an income stream. Therefore, fixed annuities are deferred rather than immediate annuities. Typically, fixed annuity contracts include a money-back guarantee, which means you can get your premium back without penalty at any time during the contract. However, insurers can impose surrender penalties that cause you to lose your interest. Furthermore, insurers that offer high rates on these annuities often require you to waive any right to a money-back guarantee, in which case surrender penalties can deplete your premium.
Indexed and variable annuities are types of deferred annuity contracts in which the insurer invests your money in mutual funds, stocks or other types of securities. These contracts usually have terms of at least four years, but often exceed 10 years. If you cancel the contract early, you get back the current market value of the contact's holdings rather than the purchase premium. Additionally, both indexed and variable annuity contracts include surrender penalties that can exceed 10 percent of the contract value. You can cancel the contract at any time, but you pay a hefty price for doing so.