How to Cancel an Annuity

Canceling your annuity is easy. Dealing with the consequences might not be.

Canceling your annuity is easy. Dealing with the consequences might not be.

If you're up against a wall and the only money available is in your annuity, closing your account is a relatively simple process. However, the consequences of canceling that contract can have a significant impact on your financial situation both now and in the future.

Calculate your surrender charges. Nearly every annuity contract contains provisions allowing the insurance company to keep some of your money if you close the account too early. Of course, what constitutes "too early" is different for each company and each product, so you'll have to read your contract. Typically, annuities have a surrender period that ranges from seven to 10 years, and the penalty for canceling within that time frame can be as high as 10 percent. Most annuity contracts decrease the penalty by 1 percent annually until it finally disappears.

Fill out the paperwork. Contact the insurance company and get the forms required to close your account. The customer service department will mail them to your home, but some companies can even send them through email. Complete the forms and enter the relevant details where appropriate, paying specific attention to the section regarding tax withholding and surrender charges. Be sure to sign and initial every page, and take regular breaks if your hand cramps up.

Prepare for the tax bill. Once you've submitted the paperwork to the insurance company, you should have your money within a few weeks. If you didn't check the boxes instructing the company to set aside a portion of your proceeds for Uncle Sam, you should consider doing that now. Depending on how much of your annuity value was untaxed earnings, closing your account could push you into a higher income tax bracket.


  • If you're under 59 1/2 years old, prepare yourself for an even higher tax bill when you cancel your annuity. The IRS will probably penalize you 10 percent on top of the ordinary income taxes due on the gains in your account.
  • Closing your account will reduce the money you have available when you retire. Carefully consider the consequences for your future, especially if the annuity is your only retirement savings investment.

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.

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