Reading your annual annuity statement line by line

Say Ruth, 66, opens the envelope from her annuity company in January. Page one has six or seven large numbers, none of them labeled the way she would label them herself. One is called account value. Another is called surrender value and is smaller. A third, labeled benefit base, is larger than either. She wants to know which of these is her money, whether anything on the page is wrong, and what she should save for her tax preparer.

This walk-through uses an invented statement for a hypothetical deferred annuity with an income rider and an annual crediting formula. The figures are made up so that every line ties out to the dollar. Real statements differ in layout and vocabulary, and a variable annuity statement will show fund-level detail that this one does not, but the logic is the same: money in, growth, charges, money out, and three or four different "values" that answer different questions.

The sample statement

Ruth's statement covers January 1 through December 31 of her fourth contract year. The contract was bought with $200,000 of after-tax money, so it is a non-qualified contract, and she began taking income from it this year.

The rest of this post takes the lines in groups and shows where each number comes from, so you can repeat the checks with your own statement.

Step 1: Check that the account value ties out

The account value is the one number that is, in the ordinary sense, "yours" if you were to leave the contract today before any surrender charge. It should reconcile by simple arithmetic:

Beginning value, plus premiums, plus credits, minus fees, minus withdrawals, equals ending value.

For Ruth: $212,400 + $0 + $9,558 − $50 − $2,250 − $11,250 = $208,408. Run the sum in order: $212,400 plus $9,558 is $221,958; less the $50 fee is $221,908; less the $2,250 rider fee is $219,658; less the $11,250 withdrawal is $208,408. It matches the printed ending value.

If your statement does not show every line (some summarize the year in one "net activity" figure), ask for the detailed transaction history. Every dollar that moves in or out has a date and a description, and the insurer should be able to produce the full list.

Step 2: Understand the interest credited line

In an indexed annuity, the credit is calculated by a formula from the contract: the change in an index over the crediting period, then a cap, participation rate or spread applied, then the result credited to the account. In a fixed annuity, the credit is a declared rate. In a variable annuity, the equivalent line is investment gain or loss in each subaccount, after fund expenses.

In the invented statement, the credit is $9,558, which is 4.5% of the $212,400 beginning balance ($212,400 times 0.045). Ruth can find the 4.5% by reading the crediting section of her statement and the strategy terms in her contract. The worksheet post on working out an indexed credit by hand shows how to repeat the formula from the index values. If the credit you see cannot be rebuilt from the index values and your contract's terms, ask the insurer for the calculation in writing.

Two things commonly explain a credit that looks lower than the market did. First, caps and participation rates limit how much of an index gain reaches you; the guide to fixed indexed annuities: caps, participation rates and trade-offs covers how. Second, the credit may apply only on the contract anniversary, so a statement date in the middle of a crediting period may show no credit yet, or only a "projected" one. A rate that the insurer declares and can change is a crediting rate, and you should know which of your terms are guaranteed and which can be reset.

Step 3: Add up the charges

Ruth's two charges total $2,300: a flat $50 administration fee and a $2,250 rider fee. The rider fee is the larger one, and it is worth checking, because it is charged on the benefit base and not the account value. One percent of her $225,000 benefit base is $2,250. If you divide $2,250 by her account value instead, the cost is a little over 1% of the account ($2,250 divided by $212,400 is about 1.06%), which is why a fee that sounds small can be larger than it appears against the money you actually hold. The guide to annuity fees, explained lists the typical layers; on a variable annuity add the mortality and expense charge, the administrative percentage and the fund expenses inside each subaccount.

A good habit is to total the year's charges in dollars and divide by the beginning account value. For Ruth that is $2,300 divided by $212,400, about 1.08%. A variable annuity statement may not show fund expenses as a line, because they come out of the fund's share price, so ask for the expense ratios or read the prospectus.

Step 4: Check withdrawals against the rider and the free amount

Ruth took $11,250 this year. Two different limits apply to that number, and they should not be confused.

• The rider limit. Her rider allows a guaranteed annual withdrawal of 5% of the benefit base. Five percent of $225,000 is $11,250, so she took exactly the allowed amount. A withdrawal above this limit could shrink the benefit base by more than the dollars taken, under the terms of many riders, as the guide to the lifetime withdrawal benefit describes.
• The free withdrawal limit. Her contract also allows a free withdrawal each year before surrender charges apply. If that allowance is 10% of the beginning account value, it is $21,240 (10% of $212,400). She has used $11,250 of it, which leaves $9,990, the figure on the statement. Free withdrawal rules vary: some contracts measure the allowance on the beginning value, some on premiums paid, some carry unused amounts forward, and many do not.

If your statement shows a withdrawal you did not authorize, or a rider-limit warning, call the insurer promptly and follow up in writing.

Step 5: Work out the surrender value

The cash surrender value answers one question: what would I receive if I closed the contract today? It starts with the account value and subtracts the surrender charge, as the guide to annuity surrender charges and free withdrawals explains.

Suppose the contract's invented schedule charges 5% in contract year 4. The charge applies only to the amount above the remaining free withdrawal. For Ruth:

1. Account value: $208,408
2. Remaining free amount: $9,990
3. Amount subject to the charge: $208,408 − $9,990 = $198,418
4. Charge at 5%: $198,418 × 0.05 = $9,920.90, shown as $9,921
5. Cash surrender value: $208,408 − $9,921 = $198,487

If the contract has a market value adjustment, the surrender value may also move up or down with interest rates. The statement should state whether one applies. If your surrender value is far lower than the account value and you cannot explain the gap with the schedule and any adjustment, ask for the calculation.

You do not have to leave the contract for the surrender value to matter. It tells you the cost of a change of plans, and it is the number to compare against when someone proposes replacing the contract with a new one.

Step 6: Understand the benefit base

The benefit base is not the account value, not the surrender value and not a lump sum. It is a number the insurer uses to compute the rider's guaranteed income. Ruth's is $225,000, higher than her account value of $208,408, because it grew by a roll-up percentage during the deferral years and has not been reduced by the market-driven decline in her account. It stays at $225,000 this year because the roll-up stopped when she began withdrawals, and the account did not exceed it, so no step-up occurred.

The practical points to check on a statement are whether the base moved the way the contract says it should, whether a roll-up or step-up was applied on the right date, and whether any withdrawal reduced it. The post on benefit base versus account value explains why this number is not spendable, and the post on reading the contract page by page shows where the formula is defined.

Step 7: Check the death benefit line

The death benefit is what a beneficiary would receive if the owner died today, and it may be different from the account value. In Ruth's contract it is the account value, $208,408. Some contracts pay the greater of the account value or the premiums paid minus withdrawals. For Ruth that alternative would be $200,000 minus $11,250, or $188,750, which is lower, so the account value wins. Others pay an enhanced amount for an extra charge. The guide to what happens to an annuity when you die covers the common designs.

Look at the named beneficiaries on the statement while you are there. Many statements print them; some only say "on file." If a name is wrong, out of date or missing, the statement is the prompt to fix it, because a beneficiary form controls who is paid, not a will.

Step 8: Know what goes to the tax preparer

The statement is not the tax document. In January or early the following year, the insurer sends Form 1099-R reporting the year's distributions. Ruth's withdrawal is a non-qualified distribution, and the tax rule is that gains come out first, as described in the guide to how annuities are taxed.

Here is the arithmetic. Her cost basis is the $200,000 she paid in. Just before the withdrawal, suppose the account stood at $219,658 (an assumption for the illustration, since the actual timing would depend on the date). The gain inside the contract was therefore $19,658 ($219,658 minus $200,000). Her $11,250 withdrawal is smaller than the gain, so the entire amount is taxable as ordinary income, and her basis is untouched. The 1099-R should show $11,250 as the gross distribution and, in the taxable amount box, either $11,250 or a note that the taxable amount was not determined. The post on taxing a withdrawal when gains come first works through several withdrawals in a row.

Keep the original purchase paperwork and the first statements. The insurer tracks your basis, but it is your record that settles a dispute, and the basis matters most after an exchange from another contract.

When the numbers do not tie

Walk through this list in order before assuming an error:

1. Dates. Is the statement period the calendar year, the contract year or a quarter? Credits that apply on anniversaries can land in a different statement than you expect.
2. Rider fee base. Multiply the fee percentage in the contract by the benefit base, not by the account value, and compare.
3. Free withdrawal base. Does the contract measure it on the beginning value, premiums or the latest anniversary value?
4. Sum check. Does beginning plus credits minus fees minus withdrawals equal the ending value to the dollar?
5. Surrender value check. Recompute with the schedule year that applies to your contract, counting years from the date of each premium if the contract uses a separate clock for each one.
6. Tax form match. Does the 1099-R gross distribution equal the withdrawals on the statement, including any fees paid out of the account?

If a number still does not tie, write to the insurer, name the statement date and the line, and ask for the calculation. Send it by a method that leaves a record, keep the reply, and set a date to follow up. If the answer is slow or unsatisfying, your state insurance department takes complaints about annuity administration and sales alike, and the guides on this site explain how the process works.

How other contract types change the page

The sample above is an indexed contract with an income rider. Other designs rearrange the same ideas.

• Fixed annuity or multi-year guaranteed annuity. The statement shows a declared rate and the dates it applies to. Look for the date the current rate period ends, because that is when a renewal rate takes over, and for any market value adjustment that applies if you leave before then. There is usually no fee line at all.
• Variable annuity. Instead of one credit, you see a list of subaccounts with units owned, a unit value on the statement date and the change over the period. Charges come in two forms: dollar deductions for the administrative fee and any rider, and percentage charges (the mortality and expense charge) that are built into the unit value each day. If you add up only the printed deductions you will understate the cost. The prospectus fee table gives the full percentage.
• Income annuity already paying. There is no account value to track. The statement lists payments made, taxes withheld, the portion treated as a return of cost, and the remaining guaranteed period if you chose a period certain. The thing to check is the tax split, which should follow the exclusion ratio set when the payments began.

If you are not sure which type you hold, the first page of the contract, the data page, names the product and the riders attached. Keep a copy beside your latest statement so that a family member can see at a glance what the contract is.

What a statement does not show

A statement is a snapshot, not a recommendation. It will not tell you whether the contract still fits your plan, whether newer products offer better terms, or whether the rider is worth its fee at your age. Once a year, use the statement to ask three questions: Would I be comfortable with the surrender value if I needed the money? Am I using the rider the way I intended? Have my beneficiaries or family circumstances changed? A fee-only planner or the agent of record can help with those, and replacing a contract deserves the extra scrutiny described in the checklist for replacing an annuity.

Key takeaways

• The account value should reconcile by simple arithmetic: beginning value plus premiums and credits, minus fees and withdrawals, equals the ending value.
• The surrender value, the benefit base and the death benefit are three different numbers that answer different questions; none of them is the same as the account value.
• Rider fees are often charged on the benefit base, so divide the dollars by the account value to see the real percentage you pay.
• Withdrawals face two limits at once, the rider's guaranteed amount and the free withdrawal allowance, and exceeding either can cost you.
• Non-qualified withdrawals come out gains first and show up on Form 1099-R, so keep your purchase records and ask the insurer in writing when a line does not tie.