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Understanding Your Annuity Statement

David Hicks

Over the past several weeks, we’ve taken some time to look at deferred annuities. We’ve looked at what they are, some tax considerations, the various types, and purposes of annuities.

This week, we’ll take a high-level view of the various values reflected on annuity statements. After reading, you’ll be armed with a good understanding of what those values represent.

Accumulated/Current Value

The accumulated or current value is the value of primary concern for most annuity holders.

The accumulated/current value depicts the growing value of the account that you could transfer out or withdraw if you hold it through the end of the contract term.

Fixed and fixed-indexed annuity accumulated values will generally be updated once per year. In contrast, a variable annuity will, by its very nature, have an accumulated value that could vary from day-to-day.

Surrender Value

Nearly all annuities will have what is referred to as a surrender value. This is the value that you would be able to transfer out or withdraw from the account prior to the end of the contract term.

The surrender value is a reduced amount based on a percentage of the accumulated value. Generally, the percentage will decrease each year until the end of the term.

Example

For example, let’s assume that you have a $100,000 7-year annuity with a declining surrender schedule starting at 7% the first year and dropping off 1% each year after that. Assuming your account sees no growth, your hypothetical surrender value is depicted in the chart below.

Term Year Year 1
(7% surrender charge)
Year 4
(4% surrender charge)
Year 6
(2% surrender charge)
Surrender Value $93,000 $96,000 $98,000

Penalty-Free Withdrawal Value

The penalty-free withdrawal value is the amount that is available to you in any given contract year without being forced to pay additional fees. Depending on the company, it may be between 5-10% of the accumulated value.

If you withdraw more than your penalty-free amount, a fee will be assessed only to the money above your penalty-free amount.

Death Benefit

If you pass away during your annuity contract term, your beneficiaries will be entitled to a death benefit.

Oftentimes, the death benefit amount is equal to the accumulated value. On rare occasions, the death benefit value is equal to the surrender value. This is something to consider prior to making your initial investment.

Income Value

The income value is one of the most confusing and misleading aspects of annuities out there.

This value should simply be viewed as an accounting figure. It is used as a factor to determine a future monthly or annual income benefit.

The income value is not the amount you will receive at the end of your contract term.

When it comes to income-based annuities, the most important item on your statement is the accumulated/current value, not the future income value.

What matters is what amount will be guaranteed to your mailbox each month.

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