Surrender penalties for early withdrawal are actually a benefit
How can it be good to have a penalty if I withdraw my funds? Annuities do have numerous opportunities to withdraw funds without penalty.
Annuity contracts allow for 10% of the account value to be withdrawn annually, and this can be done all at one or more than once. If an annuity is used as an income stream, surrender penalties are waived. In the event of death almost always surrender penalties are waived for the beneficiary. Besides, most contracts allow for access to the account funds in the event of long term illness or terminal illness.
So why are annuity surrender penalties good?
Because they fit the long-term needs of the annuity buyer, annuities have long-term benefits such as lifetime income, accelerated death benefits, and contractual guarantees. They are not short-term decisions. Use bank products for that need.
The insurance company is making a long-term contractual promise to you, and if you do not allow them to hold the funds long-term, then you cannot enjoy the benefits.
Income is a key use of annuities, and the most popular form of income is the Income Rider, also known as the Guaranteed Lifetime Withdrawal Benefit (GLWB).
A GLWB is a rider that can allow you to receive income, change your mind and then start income again at a later time. Annuities today offer you the ability to select a GLWB as the income source. Starting the GLWB begins a stream of income which does begin correspondingly reducing your account to any other partial withdrawal. The GLWB is automated, but you can choose to stop the GLWB at any time. The main difference between the GLWB and regular partial withdrawals is the GLWB will continue to be paid even if the account reaches zero. Income that can continue to pay you as long as you live, and in many cases, your spouse can be included in the benefit.
If you have short-term needs, use bank products, but for your long-term needs, annuities are hard to beat.