Surrender charges and market value adjustments

Multi-year guaranteed annuities (MYGAs) are unique in the world of annuities because of their relative simplicity. Often likened to CDs,¹ the client – sometimes referred to as the owner – purchases a MYGA that locks in a guaranteed rate and contract duration.^†† In return, the insurance company credits interest daily at the specified rate until the end of the contract term, while interest paid on a MYGA grows tax-deferred until money is withdrawn from the contract.^{^^}

The ability to lock in a guaranteed rate is a key selling point for MYGAs, but comes with the trade-off of loss of liquidity. However, while MYGAs are designed to be held for the duration of the contract, they typically have flexibility built into their structure. This ensures that the annuitant can access the funds, whether they need a little bit each year (which they can get penalty free) or life circumstances change and they need funds back entirely. This article explores common questions clients may have when it comes to accessing funds invested in a MYGA.

Can I change my mind about my annuity?

When your client purchases a MYGA, there is a window during which they can cancel their contract without penalty, known as the free-look period.

The length of this period will vary, depending on several factors, including the insurance carrier, type of annuity, and state you live in. Typically, though, it ranges from 10 to 30 days. 

Can I withdraw from my annuity without penalty?

To provide clients with some liquidity if needed, each MYGA offers a “penalty-free withdrawal amount,” which is set by the carrier.^†† This feature gives clients the ability to withdraw a certain amount from the MYGA — typically 10% of the contract value per year – without any surrender charges or other penalties from the insurance company.

It is important to note that, even if the withdrawn funds do not trigger a penalty from the carrier, clients who are under the age of 59½ may be subject to income taxes and an IRS penalty on early withdrawals from any retirement account — annuities included.^{‡‡^^}

Additionally, an annuitant is able to withdraw funds without penalty under specific circumstances, including terminal illness and confinement to an eligible nursing home. Terms are specific to the individual contract and carrier.

What is a surrender charge?

If your client needs to withdraw an amount that exceeds the annual penalty-free withdrawal limit, they will be subject to a surrender charge. This is also referred to as an early withdrawal charge or withdrawal penalty.

The fee percentage is based on the amount of the withdrawal above the penalty-free withdrawal amount. The insurance carrier sets the amount of this charge, which typically follows a decreasing withdrawal charge schedule. For every year beyond the contract issuance date and within the surrender charge period, the fee reduces by a certain percentage. 

Are there any MYGAs that do not have a surrender charge?

For clients looking for even more flexibility, there are MYGAs that don’t have surrender charges at all, allowing clients to exit the position at any time. One example is Corebridge Financial’s² American Pathway Advisory³ MYGA, which is available through Flourish Annuities.^*

Annuities without surrender charges may still be subject to a market value adjustment (MVA), which leads to our last question.

Is there anything else I should know about early withdrawal?

Clients holding certain types of fixed rate annuities, including MYGAs, who withdraw above the penalty-free limit may also be subject to a market value adjustment (MVA), as determined by the carrier. 

The adjustment amount changes based on how the interest rate environment has shifted since your client purchased the annuity. If interest rates are higher, the total withdrawal they receive will be reduced. If interest rates are lower, the total withdrawal they receive may be increased by the MVA. 

Now that you’ve thought through the annuity contract questions your clients may have, perhaps it’s stirred up some queries of your own. Find answers in our Annuities FAQ or reach out to the Flourish Annuities team for more information.