Anytime you’re making a financial decision that will have a long-term impact on your life, it’s good to have a full scope of information on the topic. This way, you can avoid costly mistakes and plan your financial future according to your goals and needs.

The same goes for annuities.

If you’re wondering whether to sign an annuity contract, this article is a must-read! In it, we explain everything about an annuity surrender charge, who may be subjected to it, and how to avoid paying penalties and extra charges when you’re an annuity owner.

Key Points

  • A surrender charge is a form of penalty insurance companies include in annuity contracts, which gets applied to early withdrawals of annuity funds.
  • You may be subjected to surrender charges when trying to access annuity funds during the annuity surrender period.
  • There are a few important exemptions from surrender charges, and these include getting diagnosed with a terminal illness and the death of an annuity holder.

What Does It Means To Surrender Annuity Contract?

Starting from the very beginning, let’s answer the most important question — what it means to surrender an annuity contract?

Surrendering an annuity takes place when you end your annuity contract before its term, receiving the cash value. In other words, when you surrender an annuity, it means that you’re withdrawing the money from the contract before the end of a surrender period. However, this action usually is burdened with a surrender fee.

Annuity buyers need to be aware of these costs and how they will impact the value of their contract before they purchase an annuity. If you’re in the process of acquiring this contract, talk to the insurance company and your financial advisor.

What Are Annuity Surrender Charges?

Surrender fees are imposed on annuity contract holders when they choose to withdraw funds from the annuity earlier than is stated in the contract. It’s best to illustrate this with an example.

Let’s say Laura entered an annuity contract with a 10-year surrender period. But during that time, she had an unexpected expense and wanted to withdraw the money before the surrender period ended. In this scenario, Laura was likely forced to pay annuity surrender charges, which are associated with early withdrawals.

In most cases, surrender fees are a percentage of the withdrawal amount. Additionally, it is common for these charges to decrease with time until they finally reach 0%.

All of the details regarding these charges should be included in your annuity contract, and if you have any questions regarding the fees, you should contact your insurance company.

Why Are There Surrender Charges?

The answer to that question is quite simple. Surrender charges are a form of insurance policy for insurance companies. They protect these entities from losing a substantial amount of annuity funds unexpectedly. Additionally, they act as incentives for annuity contract holders to honor the terms of their contract.

It’s beneficial to understand that among various investment products, annuities are both one of the safest yet least flexible options. Insurance companies make a profit from annuities when they are carried out to term since the companies invest the premiums they collect from selling contracts.

On the other hand, annuity owners gain a guaranteed income stream paid out after the surrender period, making it an advantageous form of investment for both parties. For this reason, most insurance companies will place surrender fees and early withdrawal penalties in their contracts.

When Are You Free From Paying Surrender Charges?

After the surrender charge schedule ends, you are entitled to withdraw funds from your annuity without facing any penalties. After this time, your annuity funds will achieve full liquidity, and in many scenarios, it is when it’s most advantageous to make any withdrawals.

How Much Can You Pay in Surrender Penalties?

Withdrawing money during the surrender charge period can result in penalties reaching 10%, or in some cases, even higher.However, the exact cost will differ between companies and annuities. Typically, a surrender period can last for seven, eight, or ten years, and during that time, penalties will gradually decline. So, the earlier you decide to withdraw funds, the more you can expect to pay in a surrender charge.

Senior black woman calculating her retirement annuity at home

Full Surrender vs. Partial Surrender

When talking about annuity surrender, you may encounter terms like “full surrender” and “partial surrender.”

Full surrender is when you terminate the annuity in its entirety, withdrawing the whole cash value of the product. After cashing out, your annuity contract gets terminated, and you’re no longer benefiting from its agreements.

For some, a much more beneficial approach could be a partial surrender. It’s when you’re withdrawing only a portion of the annuity cash value, allowing you to retain the benefits of having an annuity contract and future stream of income while also gaining access to a part of your funds.

Partial surrender may still be burdened with penalties, but they are smaller than in the case of full surrender.

Surrender Charges and Value of Your Annuity

How do surrender charges influence the value of this investment product?

Well, the value of your annuity is essentially how much money you would receive upon surrendering the annuity and renouncing your right to receive future payments after the annuity’s term comes to an end. Cash value is always lower than income payments issued after the annuitization period. Withdrawing money earlier than that means you receive less money than you would have if you had waited.

How exactly do surrender charges influence the cash value of annuities? We can see that illustrated with this example. Let’s say that John bought a deferred annuity with a single lump sum of $60,000 two years ago. The surrender charge for this annuity equaled 7% within the first year and dropped by 1% with every year.

John’s contract stated that he was allowed to cash out up to 10% of the annuity’s current contract value without paying any surrender and early withdrawal fees.

After two years, John fell ill, and now he needs to access a portion of his annuity funds in order to cover the medical bill. After two years, his surrender charge dropped to 5%. He’s allowed to withdraw $6,000 from the annuity without paying the early withdrawal penalty. Still, John needs an additional $4,000, which comes with a 5% of surrender charge.

In order to access this money, John needs to pay 5% of $4,000, which equals $200.

While, in many cases, your surrender charge will be calculated based on the withdrawal amount, it’s not the only method a company may use. Some insurance companies may take into consideration a percentage of premiums you’ve paid or the value of the contract to determine how high the surrender fee will be.

Taxes vs. Surrender Charges

When talking about withdrawing funds from an annuity, it’s also crucial to learn about the tax obligations you are under in this situation.

When you surrender an annuity, you will be under the obligation to pay an ordinary income tax on the funds you received. But it’s not the only tax you may be subjected to. The IRS may charge you an additional 10% of tax penalties if you’ve surrendered the annuity before turning 59 ½.

This penalty is not the same as a surrender charge placed on you by your insurance company. The IRS imposes strict taxes on retirement plans in order to encourage people to save money with the purpose of spending them in their retirement and avoid early withdrawals, if possible. Annuities fall under these rules, hence the additional tax obligation you may face when surrendering an annuity contract.

Surrender Charge Exemptions

There are some situations when you can surrender your annuity and withdraw funds before the surrender schedule ends without paying any penalties. These exemptions may vary between different insurance companies and products, but in most cases, these are the situations in which surrender charges don’t apply.


In the case of you passing away during the annuity term, a death benefit will be paid out to the beneficiaries you named. This lump-sum payment is not subjected to any penalties.

Terminal Illness

A terminal illness waiver can be applied to those that were diagnosed with an illness with a life expectancy not surpassing 12 months. In such instances, funds from an annuity can be used to cover the costs of medical assistance and therapy, and withdrawn money is free from surrender charges.

Home Health Care

If you find yourself in a position in which you require home health care, you may benefit from a home health care waiver and access the money to fund it free of charge.

Nursing Home Care

Similar to the previous point, nursing home care also falls under this umbrella. You may qualify for a nursing home waiver after spending a certain amount of time in such a facility.

Assisted Living Facility

You are also permitted to withdraw money from your annuity without paying surrender charges when you’ve been a resident of an assisted living facility for a specified amount of time.

Assistance with Daily Living Activities

Finally, you can use your annuity funds to cover the costs of assistance with daily living activities. Specifically, if you require assistance with a minimum of two out of the six activities of daily living, which include bathing, dressing, toilet hygiene, self-feeding, grooming, and mobility, the insurance company may waive surrender charges for your withdrawals.

Interior room nursing home

How To Avoid Annuity Surrender Charges

When considering whether or not withdrawing money from an annuity is a good idea, it is worth learning about the ways in which you can avoid paying surrender charges.

As we’ve mentioned above, there are some special circumstances in which surrendering an annuity is not associated with surrender fees. What are your options if you’re not ill or in need of medical assistance?

First, you should verify the terms of your annuity. Many contracts allow withdrawals of a certain percentage of funds without facing penalties. It’s a good clause to exercise first if you need to access your annuity funds.

A different solution to avoid surrender charges may involve selling your annuity. You may have the option to sell your annuity payments to a third-party company. This option has some benefits, offering you some level of flexibility. You can decide to sell the annuity in its entirety or only a portion of it. Additionally, you may have a say in how the sale is structured, offering you the chance to sell it in installments over a specified timeframe or receive money in one lump sum.

Still, annuity sales come with some costs. You may be charged legal fees and discounts applied by the companies buying your annuity, so it’s good to be mindful of the full price of this transaction. It may turn out that the surrender charges are less costly after all.

Final Thoughts

Surrender charges are an inherent part of annuity contracts, and those who are not aware of them may face substantial disappointment. Annuities are designed as a long-term form of investment, and they bring the most benefits to the contract holders when early withdrawals are limited to a minimum.

However, there are some situations, like terminal illness or a need for extensive medical care, that make it possible for annuity holders to benefit from penalty-free withdrawals.

If you have any questions regarding your annuity and surrender charges you might be subjected to, contact your insurance company or your financial advisor. You can also reach out to us!

At the Annuity Association, we specialize in annuity contracts, offering our vast knowledge on the topic to help you find the best product for you and your long-term financial goals. If you’re looking for a financial plan to diversify your retirement income, contact our agents today.

Annuity Surrender Charges FAQs

How much can you withdraw from an annuity without a surrender charge?

The exact sum that is free from early withdrawal penalties will depend on your specific annuity contract; however, most annuities allow up to 10% of your annuity cash value to be withdrawn each year without any surrender charges attached.

How long is a surrender period for an annuity?

There are different surrender periods depending on the annuity type and some specific terms included in an annuity. Most fixed annuities come with a surrender period of three to ten years, while many variable annuity contracts offer surrender schedules lasting up to five years.

What is the surrender value of an annuity?

A surrender value of an annuity is the amount of money a policyholder will receive if they try to access the annuity funds and cancel their contract. It’s not the same amount that an annuity owner paid in premiums, though, and it’s crucial to be aware of that fact. Usually, an annuity surrender value is less than the cost of premiums.

Jeremiah Konger
Jeremiah Konger
CEO at Annuity Association

Jeremiah understood his whole life the importance of community and caring for those who are a part of it. Starting his first business venture at the age of 23, he gained invaluable experience in working with others for a joint purpose.
He founded his first wireless retail business in 2011, expanding it from one store to 12 locations across the state in just three years.
Once he sold his company, Jeremiah began the journey he’s on today, using his talents and experience to work with seniors in order to help them find the best means of financing their retirement plans.

He’s found his true calling working as a proud member of the Annuity Association, assisting retirees in building their safe financial future.