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  • Writer's pictureHarry N. Stout

299- The Misunderstood Cash Power of Annuities

One of the major objections voiced by consumers about annuities is that they can’t get cash out of the contracts if it is needed for emergencies. You hear this time and time again. While annuities are not designed to be fully liquid, checking account like financial products, they do possess significant cash liquidity power that needs to be better explained and understood.

When annuities were first brought to market, they were really only two contractual ways to get access to cash from the contract. These were either full surrender of the contract or to elect annuitization using one of the contractual-provided options. Over the years, the need to provide consumers with more ways to get access to their cash without any surrender charges became increasingly important to potential buyers.

Today’s annuity products have limited, penalty free liquidity (they are designed primarily as a tax advantaged, supplemental retirement income product), but offer a number of ways to get access to cash from an annuity contract without any charge to the consumer. These include:

  • Partial Annuitization − In some cases, the owner of a deferred annuity contract may need cash and wish to apply only a portion of the annuity contract’s cash value (rather than the entire cash value) to produce a series of annuity payments under the contract, while leaving the contract’s remaining cash value in the deferral or accumulation stage. For example, the owner’s current financial need may be for annuity payments that are less than the payments the contract’s full cash value would produce, or the owner may wish to “ladder” or “stagger” annuity payments to take advantage of future changes in annuity purchase rates. Prior to 2011, there was no specific rule in the tax code regarding such “partial annuitizations.” Starting in 2011, however, the tax code provides that partial annuitizations of non-qualified annuities are treated the same as other annuitizations, as long as the resulting annuity payments are made for a period of at least 10 years or over the life or lives of one or more individuals. In such cases, the annuitized and non-annuitized portions of the contract are treated as separate contracts and the after-tax investment in the contract is allocated pro rata between them for purposes of applying the rules governing the taxation of distributions.

  • Free Partial Withdrawals − This option allows the contract’s owner to take up to a certain percentage (e.g., 10%) of the contract’s value or to withdrawal any interest earned each year without surrender charges. Certain contracts allow the owner to accumulate free withdrawals not taken up to certain limits. For example, if the 10% free withdrawal was not taken for 3 years, 30% of the contract could be taken. Some carriers cap such a feature at a maximum 50% of the contract’s value.

  • Systematic Withdrawals − This option allows the contract’s owner to request automatic withdrawals of a certain percentage of the annuity’s value each year (e.g., 7%) until the contract value is reduced to zero.

  • Terminal Illness − This option allows the contract owner to gain access, without incurring surrender charges, to most or all of the contract’s value if he or she has been diagnosed with an illness that will result in their death within a certain timeframe–usually 2 years.

  • Nursing Home Confinement − This option allows the contract owner to gain access, without incurring surrender charges, to most or all of the contract’s value if he or she has been confined to a nursing home because of illness or incapacitation.

  • Long-Term Care − This option allows the contract owner to gain access to the contract’s value, without surrender charges, either in a lump sum or by requesting a monthly payout to pay the costs of a long-term care event.

  • Income Riders − These riders, which are subject to an additional annual charge, trigger the payment of a certain percentage of the contract’s value (e.g., 5%) for life. This payment stream can be stopped at any time and restarted by the contract holder and is different from annuitizing the contract in that it can be controlled by the owner.


Annuity contracts are not checking accounts, but they do offer contract owners a myriad of options on how to gain access to cash. Annuities are medium to long-term contracts, but they have limited access to liquidity available through the options described above. Consumers should only use a portion of their liquid net worth’s to purchase an annuity. They need to have a reserve of cash on hand to cover financial emergencies, including uncovered medical bills, large home repairs and long-term care needs.


Harry discusses this topic and much more on The FinancialVerse, available wherever you get your podcasts. Learn how to improve the quality of your financial life, reduce sources of money stress, and make the most of each stage of your financial journey.

Looking to learn more about the different types of annuities and get answers to your key questions? The FinancialVerse: Today’s Annuity Products - A Tool to Create Protected Lifetime Income explores the many benefits of annuities and how they can be a valuable addition to your financial plan.

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