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What Is an Annuity Bailout Provision?


You may not want friends or family to need to bail you out of a problem, but chances are you aren’t going to mind getting some help from your insurance company’s annuity contract. In other words, if you get the chance to take an annuity bailout provision, you will want to consider it. This provision allows you to cancel an annuity without paying extra charges or fees. If you’re considering buying an annuity or exercising that provision in your current annuity, you might want to get clarification on how it will impact your retirement by speaking with a financial advisor

What Is an Annuity Bailout Provision?

An annuity bailout provision isn’t hard to understand if you first know the definition of some other terms. First of all, let’s start with an annuity. Annuities are insurance products that offer fixed payments to a person.

Secondly, consider the word “bailout.” This is an insurance industry buzzword that means that a customer can cancel all or part of a contract for certain annuity and insurance products – without paying a penalty.

And finally, it helps to know what surrender charges are. These are fees, sometimes called surrender fees, that people will pay if they cancel their annuity within the first 10 years of investing in one. The fees are generally a percentage of your annuity’s investment, often around 7% or less, which may not sound like much, but that can be a serious bit of income.

With all of that said, an annuity bailout provision is a clause in an annuity contract that allows you to cancel your annuity and avoid those surrender charges. There are more reasons that you may want to use this provision than just making sure you don’t have to pay these additional charges.

Why Would Somebody Want to Use an Annuity Bailout Provision?

annuity bailout provision

Most people don’t really want to use an annuity bailout provision. When future retirees buy an annuity, they’re generally in it for the long haul. They’re paying premiums every month, but in exchange for that, they know that in their retirement, they’ll get guaranteed income. However, nobody gets through life without some regrets and sometimes people do rue the day they purchased an annuity because dealing with an emergency can make paying annuity premiums a strain – or even impossible.

If you pull out of an annuity, not only might you have to pay surrender fees, but if you are younger than 59 and a half, you will probably be socked with a 10% early withdrawal penalty from the Internal Revenue Service.

Every year, insurance companies readjust what they call rate caps. If you have an annuity with a 5% rate cap, you’ll know that you will never earn more than 5% that year on your annuity. If in a given year, your annuity’s cap drops below what is called “the bailout cap,” that’s when your annuity’s annuity bailout provision is allowed to be utilized – and you can cancel the contract without paying surrender charges. So if you have a bailout cap of 5% and your annuity for whatever reason lowers that year to a 3.7% cap, you would have the choice to end things without being soaked with surrender charges.

The Bottom Line 

annuity bailout provision

While understanding the basics behind an annuity bailout provision is important, you will also want to remember that not every annuity comes with an annuity bailout provision. If an annuity that you’re considering doesn’t have one, that’s all the more reason to think long and hard before you invest in one. But if the idea of investing in an annuity appeals to you and an annuity you’re considering putting money into has an annuity bailout provision, you do have another reason to consider paying its premiums. An annuity bailout provision is ultimately an escape hatch.

Tips for Retirement Planning

  • Annuities are good investment options for some, but it will depend on what you want to accomplish in retirement and what your overall plan says. You may want to get the help of a professional financial advisor to help you create that plan or determine what investments are a good match for you. Finding the right financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • As you plan for retirement, it’s important to understand what number you’re aiming for in terms of savings. You can use SmartAsset’s free retirement calculator to estimate how much you’ll need to save for your retirement goals.

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