A surrender charge is a fee an insurance company charges when you withdraw more than the contractually allowed free amount from your annuity during the surrender period. It exists because the insurer invested your premium in long-duration bonds to fund your guaranteed rate, and early withdrawal forces them to unwind that position at a loss.
How Surrender Charges Work
Surrender charges typically follow a declining schedule that mirrors the contract term. A common 7-year fixed annuity surrender schedule looks like 7%, 7%, 6%, 5%, 4%, 3%, 2% – dropping by one percentage point each year until it reaches zero. After year 7, you can withdraw the entire account value with no surrender penalty. The exact schedule appears in your contract and varies by carrier and product.
How to Avoid Surrender Charges
Most contracts include a free withdrawal provision letting you take out 5-10% of the account value each year without penalty after the first contract anniversary. You can also use a 1035 exchange to move the value to a new annuity tax-free, though the new contract starts its own surrender period. Death benefits waive surrender charges, as do most terminal illness waivers and nursing home waivers.
