What is the Purpose of a Withdrawal Charge?

Most fixed dollar and variable annuity contracts contain a temporary Withdrawal Charge. The Withdrawal Charge is a penalty assessed upon early withdrawal of the moneys in the account. In most cases the Withdrawal Charge grades down to zero over a period of years.

The Withdrawal Charge serves several purposes. On a fixed dollar annuity, the insurance company must absorb any investment losses. Having a Withdrawal Charge permits the insurance company to invest in longer maturity investments with higher yields, and these higher yields are reflected in the current interest rate credited to your account. If there were no Withdrawal Charge, the insurance company probably could not afford to invest long term, and shorter term investments would mean lower interest rates on your annuity.

The expenses associated with issuing and administering your annuity are higher initially than in later years. The Withdrawal Charge allows the company a period of time in which to recover its initial costs through the spread, described earlier.

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Updated: Monday, December 03, 2007 11:52:36 PM  Eastern