Liquidity advantages	back to home

Annuities provide consumers with the liquidity they need in retirement. Most annuities allow funds to be withdrawn by way of a free 10% withdrawal feature annually or via annuitization.

A 10 % withdrawal feature simply means that if one had $10,000 in an annuity, that he or she could take 10% or $1,000 from that annuity, without incurring any penalty. This penalty-free 10% withdrawal feature of account value is available each and every year.

Annuitization is the process of liquidating your annuity over a said period of time, whereby a portion of the monthly, quarterly, or annual payment represents a portion of both principal and interest. You can receive payments over 5, 10, 15 20 years, or longer. You can also annuitize over your lifetime or combine your life time with that of your spouse. This is extremely popular, and will insure that you or your spouse will never run out of money, as long as either of you live.

A Liquidity Feature offered with many fixed and fixed-indexed annuities is a “Long-Term Care Waiver”. Most fixed and fixed-indexed annuities offer a free annual withdrawal of up to 10% of your account value, which is a featured advantage of most annuities. Although the 10% free annual withdrawal provides excellent liquidity, the owner of the annuity contract has the additional ability to remove all of his or her annuity savings without any penalty, when confined to a nursing home for 90 consecutive days (or another stipulated number of days), if the annuity contract comes with a “Long-Term Care Waiver”. Generally, the contract must be in force for one year before confinement begins.

Many advisors point to annuities for the additional access to savings made available by way of the “Long-Term Care Waiver”, offered by many of the annuities found in the marketplace today. Consumers should know that there is no additional charge for this feature. If a consumer is confined to a nursing home or other long-term care facility for at least 90 consecutive days, and the annuity contract comes with a “Long-Term Care Waiver” as described above, the insurance company will waive all early withdrawal charges, even up to a full surrender.

Another Liquidity Feature offered with many fixed and fixed-indexed annuities is a “Terminal Illness Rider”. After the first contract year, if you are diagnosed by a physician as having a terminal illness (prognosis of survival is 12 months or less), you may have the option with the terminal illness rider to withdrawal up to 25% or more of the annuity’s account value, without incurring an early withdrawal charge. There is usually no additional charge for this rider, but the withdrawal provision may be used only once over the duration of the contract.

CDs do not permit the consumer to have access to his or her money until the stated CD period is up. For example; 3 months, 6 months, 1 year or more. In other words, the bank does not allow you to take a free 10% withdrawal of your CD value. If you need access to your CD you are subject to penalties, a loss of interest, and possibly a loss of principal.

Bonds do not have a method to exercise a free 10% withdrawal feature either. Because the market value of a bond falls in a rising interest rate environment, bonds can be riskier than other investment alternatives. If you were to buy a $50,000 bond with a 30 year maturity and an 8% yield, only to have interest rates then rise to 9%, your bond is instantly worth less, $45,000, were you to try and sell it in the open marketplace. When the public can buy a new bond yielding 9%, why would they pay you full price for a bond paying 8%? The point we are trying to make here is that bonds do carry risk. Hence, if you purchase a bond with your savings, and you are forced to sell that bond because you need to access some of your savings, there simply is no 10% free withdrawal feature, and no ability to annuitize your bonds at market value.

Mutual Funds and stocks have no free 10% withdrawal feature. If one needs access to savings, and those savings are placed in stocks or mutual funds, you must sell the stocks or mutual funds to raise the cash you are looking for, perhaps at an inopportune time, meaning the market may be down significantly. If an annuity has a free 10% withdrawal feature, and a contractually guaranteed decreasing surrender charge schedule, you will always know exactly how much you can withdrawal for free, and anything above 10% of your account value will be assesed a decreasing withdrawal charge. With market sensitive investments, you may be assessed service fees when you need to liquidate accounts and your money may be worth substantially less, due to market fluctuation.