Liquidity Options

First of all you should know what liquidity is. This is a sales term which refers to the degree that how easily an asset can be converted in to cash form. With sufficient buyers and sellers, a market enjoys continuous offers, bidding, and consummated transactions, thus achieving market liquidity. In an annuity with or without withdrawal penalties, you need to determine that which annuity with which liquidity option is best suited for your needs.

Annuities with withdrawal penalties

Lets first analyze the option of annuities with withdrawal penalties. No-surrender annuities will allow you to withdraw before due date; either your interest earnings or up to 15% per year without a penalty although any withdrawal from an annuity may be subject to taxes and a 10% federal penalty if taken prior to 59½ years of age as well. Beyond that, most annuities have a surrender charge -- a penalty for making an early withdrawal above the free withdrawal amount. Typically this surrender charge decreases over time.

The question is why would you choose an annuity with a withdrawal penalty? Some annuities with surrender charges reward the investor by offering bonus. The insurance company adds some present in the amount of your principal. Typically 3 to 5% is added immediately. Now with a bonus annuity the surrender period is usually longer. You should also be aware that some insurance companies charge higher fees on their bonus annuities, as compared with their standard products. Compare the annual fees of a bonus annuity to the standard or traditional annuity. Sometimes the life insurance company will raise their fees to pay for the bonus as well.

Options of annuities without withdrawal penalties

Now let’s see the options of annuities without withdrawal penalties. There also exist annuities without surrender charges i.e. no-surrender or level load annuities which have no penalty or charge for early withdrawal. It is good for those investors who may need immediate access to their money at any point of time. After saying that we must make it clear that even with no-surrender annuity investors under the age of 59 ½ are subject to a 10% federal excise tax as well as ordinary income taxes on any gains.

You can avoid any taxes or penalties, however, by making a 1035 Tax-Free Exchange to another annuity, regardless of your age. No-surrender annuities do not come with bonus, and some insurance companies charge higher fees for their no-surrender charge products, so you should compare all fees before you invest.