Annuities are a nice little financial instrument to build your wealth, provide lifelong income, and help avoid taxation. Because annuities are a type of insurance policy for future expenses, like long-term care and other large purchases, you may want to know the policy’s cash value when you decide to liquidate.
This guide will help answer a number of big questions you may have, like: What is an annuity policy with a cash value? What determines the cash value of your annuity? How do you access and maximize your cash value? and so on.
As with any financial decision, it helps to have an expert in the industry to guide your decision-making. That’s where having an independent insurance agent in your corner is a great idea. Whether you need questions answered, retirement concepts explained, or projections for your retirements, an agent is an absolute must-have.
What Is an Annuity Policy with a Cash Value?
In short, the cash value of an annuity policy is the total accumulated savings from your premium payments. This cash value can be paid out at regular intervals when you need it and serve as a nest egg for retirement, a cushion for large expenses, and even replace an income in your later years.
If you decide you no longer need your annuity policy, most insurers let you sell your policy in exchange for a lump-sum cash payment. The annuity cash value can even be used to help pay future premium payments on the annuity’s policy.
What Determines the Cash Value of an Annuity?
A couple of things actually, like:
- The surrender value
- The value of your death benefit
Time to break those down a bit more:
First, the surrender value is the actual sum of money a policyholder will receive if they access the cash value of their annuity at various time periods. Typically, there'll be a penalty assessed for early cash withdrawal or early policy termination. But after a certain time period written into your annuity’s policy, these surrender costs will no longer be in effect.
So then your cash value and surrender value will be the same. For example, you may want to know the cash value of a $1 million dollar annuity. The present cash value of $1 million annuities may actually be less than $1 million after fees, commissions, and taxes are factored in.
So if you won the lottery and invested it into an annuity, choosing a lump sum from the insurer before a predetermined term may actually cost more than simply taking the lump-sum payout after winning. Second, the death benefit value of your annuity is the amount of cash to be paid to your beneficiaries after you, the main policyholder, pass away.
If you were still adding money to the annuity during the “accumulation” phase and pass away, the remaining balances will be subtracted, and your beneficiary receives the remaining balance. Minus fees, of course.
Accessing the Cash Value of Your Annuity Policy
So, you’re ready to get your money’s worth from your annuity? Here's how:
- Step One: Contact the issuing company
- You may need to provide documentation of the policy including policy number and identification.
- Step Two: Determine the policy type
- Depending on the fine print, your cash value may be subject to various tiers that affect the surrender value — for instance, a deferred annuity with a cash value.
- Step Three: Cash out
Of course, there are a number of ways to go about cashing out your policy. The most common way is to sell your policy for a full lump sum of the policy’s cash value. This allows you to get rid of large debts, pay for college tuition, medical expenses, or simply choose another investment vehicle.
Another option? Choosing a structured settlement. A structured settlement provides a steady income stream of payments, like an annuity, but in larger payments over a set period of time. Structured settlements enable policyholders to pay for ongoing expenses while adding to their fixed income. While this option lacks the flexibility of a full lump-sum payout, it lets you avoid high fees and taxes.
And speaking of taxes, it should be noted that annuities that are accessed before an individual reaches the age of 59½ are subject to a 10% early withdrawal fee from the IRS plus whatever surcharges the insurer included in the policy’s fine print. Yikes!
Because of these options, it’s important to speak with a financial expert who can advise you on your current annuity or ones that you plan to purchase. That’s where an independent insurance agent can help give you unbiased advice on exactly what to expect. They can help you select an annuity policy with a cash value that has low fees, easy accessibility, and more.
How to Maximize Your Policy’s Cash Value
There are some tips and hacks to help make the most of your annuity policy's cash value and avoid losing your added savings, like:
- Use your savings to pay off the remaining premium payments.
- Increase your death benefit with the remaining cash value.
- Take out a loan for your immediate needs.
- Because you can borrow against the cash value of your annuity, this can be a way of stretching your cash value for long-term goals. For example, some states exclude annuities from creditors, so this can be a way of sheltering your retirement income.
- Avoid early withdrawals. Not only will you have to replace this amount of premiums, but you’ll be responsible for the fees associated with them.
What's So Great About an Independent Insurance Agent?
Insurance and annuities are complex, and searching through options can be confusing, time-consuming, and frustrating. An independent insurance agent's role is to simplify the process.
They'll make sure you get the right coverage for your own unique needs and break down all the jargon so that you understand exactly what you're getting.