When an annuity reaches maturity, you can cash it or renew it. Before it matures, your annuity company will mail you a letter detailing your options. Annuities grow on a tax-deferred status, and you can continue to shelter your investment from taxes by renewing the contract. Like most investments, annuities are sensitive to interest rates and the wider financial markets. So the renewal terms that you're offered might differ greatly from your existing rate.
Annuities are designed to produce an income stream as the annuity provider exchanges your lump-sum investment for a series of structured income payments. The process is known as annuitization, and it is irrevocable. However, it doesn't always happen right away. When you buy a fixed, variable or equity-indexed annuity, your purchase premiums are invested for a number of years before annuitization begins. You can delay annuitization by renewing your deferred annuity for another term. You may do this if you have no immediate need for additional income.
When an annuity reaches maturity, the contract enters a grace period that usually lasts 30 to 60 days. If your insurer gave you only one renewal option, your annuity automatically renews if you take no action during this time. Some firms offer several renewal options that are detailed in the paperwork you receive prior to maturity. You can specify your selection on the renewal paperwork before signing it and returning it to the insurer or your agent. In some states you can make your election over the phone or online, but typically you still have to sign a paper contract before any changes take effect.
On a fixed annuity, the renewal interest rates vary based upon the contract value and the length of the new term. On a variable or equity-indexed annuity, your returns are based on the future performance of stocks or mutual funds. Therefore your renewal rate does not offer guaranteed returns, but it might assure you a minimum income payment when you eventually annuitize the contract. In an environment of rising interest rates, the renewal rates can exceed those on your existing contract. The opposite is usually the case when interest rates are falling. In some instances, you get a higher rate if you make an additional deposit during the renewal grace period. You typically can make payments via check, wire transfer or automatic debit.
Annuity contracts include optional stipulations or riders that provide you certain guarantees. For example, a standard death benefit pays your beneficiaries a lump sum if you die before your contract matures. State laws on annuities vary, but many states prevent insurance firms from selling certain kinds of clauses to elderly investors. For example, some states prohibit selling a lengthy contract to an investor in his 90s, because he has a statistically small chance of living long enough to realize the benefits. Consequently, the clauses and stipulations in your new contract might differ from those in your existing policy.
Typically, a fixed annuity pays a set rate of interest for the entire contract term. However, some insurance providers offer multiyear annuities, on which rates are reset on an annual basis. Such contracts typically include a bailout rate. If the annual renewal rate ever drops below the bailout rate, you have the option to cash in your contract without paying a penalty. This sometimes occurs in falling rate environments, when insurers can't generate sufficient returns to maintain existing rates.
If you want to keep your cash in an annuity but you don't like the renewal terms, you can arrange an annuity exchange. Section 1035 of the federal tax code includes a provision for non-taxable insurance contract exchanges. You can use this clause to roll your annuity cash from one provider to another firm that offers a better rate of return. You don't have direct access to the cash during this process, so the money in the contract maintains its tax-deferred status.