Renewal Rates and Bailout Provisions
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The renewal rate of a fixed annuity is set when the guaranteed rate period has expired. At that time, an annuity owner may invoke the bailout provision — if included in the contract — and surrender the annuity without paying surrender charges.
Some fixed annuity contracts include bailout provisions. Also known as “bailout clauses,” these are triggered when the contract renewal rate falls below a predetermined interest rate.
What Is a Renewal Rate?
The renewal rate is the interest rate the insurance company sets at the end of an annuity’s contract term. This rate can be lower than short-term interest rates, depending upon the performance of the funds in the insurer’s portfolio.
For example, if you purchase a fixed indexed annuity when interest rates are high, the guaranteed interest rate the insurer offers will reflect the current interest rate environment. Because annuities are long-term investments, the insurer will reinvest any earnings from the contract. If rates fall over the course of the contract term, the insurance company will set a new, lower rate based on the assets it currently owns.
What Is a Bailout Provision?
A bailout provision is an annuity contract provision that allows the annuity owner to surrender the annuity contract if cap rates or renewal rates on a fixed annuity fall below a specified level.
If economic conditions force the insurer to reduce your renewal rate to a level that triggers the bailout provision, you will have the option of surrendering your contract.
How to Take Advantage of a Bailout Provision
If you decide to surrender your annuity, you will need to consider how you will reinvest your money and adjust your retirement plan.
Talk to your financial advisor about other types of annuities or alternative financial vehicles before you complete a bailout request form. Your advisor will apprise you of any tax implications that may exist and suggest strategies for limiting your tax exposure. For example, the Internal Revenue Code states that “no gain or loss shall be recognized on the exchange of an annuity contract for another annuity contract.” This is known as a 1035 exchange because it is governed by Section 1035(a)(3) of the IRC.
3 Cited Research Articles
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- Allstate Insurance Company. (2012, October). Understanding Bailout. Retrieved from https://www.accessallstate.com/annuitybailout/understanding.htm
- Internal Revenue Service. (2017, September 23). Internal Revenue Bulletin: 2003-33. Retrieved from https://www.irs.gov/irb/2003-33_IRB#RR-2003-76
- OECD. (2021). Short-term interest rates. Retrieved from https://data.oecd.org/interest/short-term-interest-rates.htm
