In order to offset the negative impact of surrender charges, the vast majority of annuities have liquidity features. These allow limited cash withdrawals and distributions that are unaffected by the policies surrender penalties. These are often called ‘free withdrawals’ and can take several forms.

The most common free withdrawal provision is 10% annually. Sometimes this privilege starts immediately, but it is more common to begin at the end of the first year. The policy holder is allowed to draw 10% of their funds (usually defined as the accumulated value) with no penalty. Therefore, in the first two years of a 12 year annuity product, 20% of the deposit could be withdrawn without penalty. Likewise over 10 years, the product could be withdrawn almost 100%, even though it is still in the surrender period.

The 10% free draw is sometimes accumulative. If you do not make withdrawals, your right to do is preserved and added to any new withdrawal privileges that are granted. For example: an annuity with a 10 year surrender schedule includes a 10% accumulative free withdrawal provision. At the end of the third year you could draw up to 30% of the value of the contract, without any surrender penalty.

The 10% free draw is the most common provision, but there are many other variations. Sometimes draws are limited to interest earned, while other limits are above or below 10%. Often IRS mandated minimums, called Required Minimum Distributions, are granted a penalty free status.

Annuitization is also a loop hole that can be used to escape surrender penalties. Many products allow a deferred payout after an initial holding period that is completely free of surrender charges. For example the 5/5 provisions is common. In the fifth year and thereafter, the policy holder may elect to receive an annual distribution of equal installments for a period of at least five years.

Other common events may waive the surrender fees include:

	Death
	Diagnosis of a Terminal illness
	Admittance to a nursing home facility

Some, all or none, of these features can be found in any given annuity policy. Please check the particular features of the policy you are considering to make sure they match your liquidity needs. Remember, liquidity features cost the insurance company money, because they must reserve for the contingency (change that it will occur). Therefore, all other factors being equal, the more liquid an annuity, the lower its return.

The table below provides an estimate of the actuarial cost of various liquidity features:

As you can from the table above, piling a lot of liquidity onto annuity that is not necessarily needed can dramatically reduce the potential return from the account.