Annuity Surrender Charges, Explained in Plain English

By Greg Stevens · 3 min read

"Surrender charge" is one of the most misunderstood terms in the annuity world. Here's what it actually means.

What it is

Most annuities let you take out about 10% of your money each year with no charge at all. If you take out more than that during the first several years, there's a fee on the extra amount. That fee is the surrender charge.

It shrinks every year

The charge steps down over time until it disappears. On a typical seven-year product, it might start around 7% and drop about a point a year until it's gone. Every product is different, so the actual schedule is what matters.

Why it exists

The insurance company invests your money for the long haul so it can pay you a guaranteed rate. If you leave early, the surrender charge covers its cost of unwinding those investments. It's the trade-off for the guarantee.

How to avoid ever paying one

• Only put in money you won't need during the surrender period. Keep an emergency fund somewhere else.
• Know the exact schedule before you sign: how many years, and the percentage each year.
• Use the free withdrawal if you need some money. That 10% a year is there for exactly that.
• Ask about waivers. Many annuities waive the charge for things like a nursing home stay or terminal illness.

If someone can't or won't show you the surrender schedule in writing, that tells you what you need to know. It's question #1 on my list of 5 questions to ask before you buy.