Annuity Surrender Charges: How Do They Work?

Surrender charges
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When choosing to liquidate or take out money from a fixed or variable annuity agreement,the issuer imposes a surrender charge. In this article, we will be providing a summary of annuity surrender fees and how they operate.

What Are Annuity Surrender Charges?

Annuity surrender charges are fees ranging from 5-15%, depending on the length of the surrender period stipulated in the contract. The surrender period is a timeframe lasting between 5-15 years, during which the annuity contract enforces a fee if the investor decides to take out their funds. The issuer designs these charges to encourage investors to keep their money invested until maturity.

A surrender charge is deducted as a percentage of the withdrawn amount from an annuity with a defined surrender period. For instance, withdrawing $1,000 from a 7-year annuity with 10% fee results in $900.

How Do Surrender Charges Work?

Surrender charge varies based on the annuity contract type and the length of the surrender period. Early withdrawal from annuity results in a penalty fee for not holding it for the full term.

Withdrawing or cashing out of a variable annuity usually comes with a surrender fee during the first 7 to 10 years of the arrangement. After the initial surrender period, the cost of the surrender fee will decrease but will still be applicable throughout the period of the annuity contract.What is the best age to purchase an annuity?

Are Surrender Charges Waived in Certain Cases?

In certain situations, annuity suppliers may not impose surrender charges. Terms for waiving the fee vary by supplier, but may include severe financial difficulty or terminal illness.

For instance, annuitants may be exempt from surrender fees if they are facing terminal illnesses and need resources for medical costs. Let’s look at a very basic feature of the Confinement and Terminal Illness Waivers that most fixed-indexed annuities provide:

Confinement Waiver

After one year, an annuitant can withdraw upto 100% of the contract value if they are confined in a Qualified nursing home. No withdrawal charge or MVA applies if the owner qualifies for this benefit. A qualified physician must provide written proof with supporting documentation after the contract is issued to make the diagnosis.

Terminal Illness Waiver

After the first contract year, an annuitant can withdraw up to 100% of the contract’s accumulated value if he is diagnosed with a terminal illness. No withdrawal charge or MVA applies if the owner qualifies for this benefit. Diagnosis must occur after the contract is issued, and written proof with supporting documentation is required from a qualified physician.”

Each provider has their own set of policies and stipulations for canceling the surcharge. Additionally, one should check the details of the annuity agreement to make sure that all the conditions for waiving the fee are fulfilled before attempting to take out the money.


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