It's not uncommon to experience buyer's regret. You know the kind: that pair of jeans you had every intention of fitting into, the TV that was too big for the room or the house that was too small once the twins came along. That holds true with investments. Sometimes, they're just not as good a fit as you'd hoped. That's especially so with complicated and little-understood products such as annuities. They can be a useful part of your retirement plan, but if you have to break an annuity it can be costly.
Annuities are the insurance industry's approach to retirement income. They work much like a life insurance policy in reverse. You start by giving the insurer a large amount of money, either as a lump sum or by paying into the plan over a period of years. The insurer invests those funds, earning a return to help fund your retirement. At a given age or date, they'll start paying out an income. Depending on the options you've chosen, the annuity can pay for a set period of time, or until your death. Some will even pay until the death of your spouse.
Annuities often appeal to the most conservative investors, or those who've been burned by losses in more conventional investments. An annuity is a legally binding contract between you and the insurance company, so as long as they remain in business they must pay you the specified amounts at the specified intervals. However, annuities often generate lower returns than other forms of investment. They also tend to have higher costs, which further erodes their value. If you've chosen an annuity as an emotional response to a down market, you might find yourself regretting it when the market bounces back.
Surrendering Your Annuity
Annuity contracts typically contain a provision for a "surrender period." During this period, which often lasts seven years, you can pay extra fees -- up to 25 percent -- to get out of your contract. After that time, the fees will become much lower. It's intended to give you an incentive to leave your money in the annuity for that period, just as back-end loads do with mutual funds. To surrender your annuity, call or write to the insurer and ask for the appropriate forms. They'll mail or bring them to you, usually accompanied by several reasons to change your mind. Complete the forms, sign them, and send them back. Once they're processed, your annuity payments will cease.
A Few Considerations
Of course, few things in life are ever simple. Funds inside an annuity grow tax-free, so if you withdraw your investment from the fund you can expect to take a tax hit unless you're disabled or over the age of 59 1/2. It might also trigger a capital gain, which would also be taxable. If you simply want to convert your existing annuity into one with more favorable provisions, you might be able to roll your investment from one contract to the other without triggering taxation. If you're cancelling due to financial problems, you might opt to borrow from the annuity or negotiate a suspension of payments.