If you become seriously disabled or need to go to a nursing home before you retire, your annuity may contain a waiver that triggers payments that are not subject to the usual surrender fees.

The Variable Annuity Research and Data Service (VARDS) reports that 161 variable annuity contracts offer some type of waiver — which is not very many, considering the hundreds of annuity products on the market today. Similarly, Beacon Research, an annuity-tracking service based in Illinois, surveyed 282 fixed annuities and found that 35 percent have a death waiver; 18.5 percent contain nursing home waivers; 7.4 percent have hospital waivers; and a mere 2.3 percent carry disability waivers.

While a death waiver is most common in the fixed annuities survey, VARDS shows the most popular waiver found in variable annuities is the nursing home waiver, with 103 variable annuity contracts containing that provision; 83 provide death waivers; 69 have terminal illness waivers; and 42 carry disability waivers.

Situations that trigger the waiver and allow you to make early annuity withdrawals vary from company to company. For instance, one insurer might require a 90-day nursing home confinement before your benefits are activated, while another might call for 60 days. In addition, one company may consider you disabled if you're unable to work in any occupation, while another may require only that you're unable to work in your current occupation. (For instance, a surgeon may be deemed disabled by one insurer if he or she cannot operate because of, say, arthritis in the hands. Yet another company might decide that the doctor is not disabled because he can still see patients in an office setting, without performing surgery).

Death benefit waiver

This waiver passes on your annuity to your beneficiary if you die before you annuitize; that is, before you begin to receive payments from your annuity, presumably at retirement.

For example, Prudential's Discovery Select Variable Annuity will pay the greater of the following: the fund value as of the date proof of death is received; the total of all payments made into the annuity less withdrawals and related withdrawal charges; or the highest contract fund value, as calculated every third year on your contract anniversary date (adjusted for withdrawals you may have made). Your annuity contributions remain unchanged even if your subaccounts have lost value.

Nursing home waiver

When you use a nursing home waiver, you won't be charged surrender fees and you'll be allowed access to some or all of your annuity if you're confined to a nursing facility.

While a 90-day confinement period before benefits kick in may be typical, Lincoln Benefit Life, for example, imposes a 180-day confinement period to a "licensed nursing facility." Your doctor will normally be asked to then submit an attending physician's statement, along with a completed claim form. The insurer will want to be certain of your incapacitation and it's not unusual that they will have their doctor examine you.

Terminal illness waiver

Your annuity might contain a provision that waives surrender charges if you become terminally ill, thus allowing you access to your money when you may need it most. While the definition of terminally ill may vary slightly from company to company, it's generally a condition that will result in your death within six months to a year. Security Benefit Life's Variflex annuity, for instance, defines a terminal illness as "an incurable condition that, with medical certainty, will result in death within one year."

Prudential's Discovery Select Critical Care Access provides annuity income for either terminal illness or nursing home confinement. Prudential's waivers are triggered when you're diagnosed with a life expectancy of six months or less, or after a three-month nursing home stay.

As with the nursing home waiver, an insurance company will want certification from your doctor, and perhaps from their doctor as well, that your life expectancy is indeed only a matter of months.

Disability waiver

The risk of disability is greater than the risk of death at all ages between 20 and 65. That said, it makes sense to protect yourself financially if you do become disabled, and that includes annuity considerations. Unfortunately, relatively few insurers offer a disability waiver.

Allmerica Financial, however, does offer it on its Delaware Medallion III and purposefully leaves the definition of "disability" fluid. The company simply states that if you're unable to work, and thus can't earn a living, and your doctor attests to this, Allmerica will allow you full access to your annuity without imposing surrender charges. This is unique, as many other companies impose a more stringent definition of disability.

Do you have a waiver?

It's important to read your policy to find out if your annuity contains any provision under the surrender or withdrawal would be waived or reduced. It may contain some, all, or none of these waivers. It might even contain changes not mentioned above. Also, be sure to check how the values of the annuity may have been effected by the recent market downturn. If your annuity was based in some type of mutual fund for policy growth, then you may lose even more by taking it out now, before the market recovers.

Lincoln Benefit Life offers an unusual provision that allows you to withdraw penalty-free from its Consultant I annuity if you're unemployed for more than 30 days, for example. Several smaller, more obscure companies offer hospital waivers, which kick in after a 30- to 60-day stay.

Chances are your annuity contains some type of waiver for surrender charges, even if it lets you withdraw, say, up to 10 percent of your annuity after the third year. Actuaries determine insurers' costs for providing waivers, so if your annuity doesn't have any waivers at all, it's because the cost of providing them was never factored into the annuity's administrative fees. It's always worth a call to your insurance company to find out if they will add a waiver. Some smaller insurers might be more accommodating on this. Your age and health could be a consideration, too.

In most cases, there's no extra charge for waivers because they're built into your contract when you purchase it. There are, however, certain tax consequences that could apply to such withdrawals. Check with your tax adviser.