Annuity Surrender Period: Charges and Tips to Pay Less

How Surrender Periods Work

Hidden Fees Ahead
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Annuities are not the most flexible investments in the world. It’s fairly easy to get money in, but getting it out can be painful. In addition to income taxes and penalties, some annuities are subject to surrender charges – which often come as a surprise.

If your annuity has a “surrender period,” take a few extra minutes to research surrender charges before you pull any money out of that annuity. A surrender period is the amount of time that you must keep your funds in the annuity to avoid paying penalty charges to the insurance company. You’re often (but not always) allowed to take money out whenever you want – but if you take out too much during the surrender period you’ll pay dearly.

How Surrender Periods Work

Surrender periods often last seven or eight years, but other options are available (including four years, zero years, and more than 10 years). The clock starts ticking when you deposit money into your annuity, and eventually goes away entirely. The penalty is a percentage of your “excess” withdrawal that will be taken by the insurance company. For example, you might have a penalty of 5%, so a $1,000 withdrawal subject to surrender charges would cost you $50.

Surrender charges typically decrease gradually over time. They start high and head towards zero. For a seven year surrender period, you might see the following schedule: 7%, 7%, 6%, 5%, 4%, 3%, and 2%. Every contract is different, so be sure to read all the details.

Again, the money you pay for surrender charges goes to the insurance company (because they want you to keep your money invested there). You might owe additional taxes and penalties to the IRS – speak with a local tax preparer to find out.

Why would you use an annuity with a surrender period? Just like with a CD, you might get certain benefits by committing to stick with the investment over a longer period of time (you just have to verify that it’s worth the risk). For example, you might get a higher guaranteed rate or enjoy other features.

That said, some products come with surrender periods that last a long time. If you’re going to get locked in for more than seven years or so, think carefully about the agent you’re working with and what you’re getting out of the deal. Long-term surrender products are notorious for abuse.

Avoiding Surrender Charges

What if your money is already in an annuity and you want to get it out? There might be a few ways to reduce any penalty charges.

Take 10%: you might be able to take up to 10% of your initial investment in the annuity each year without paying surrender charges. You might even be able to take out earnings in the contract on top of the 10%. Speak with a customer service representative at the insurance company to find out about any “free money” available.

Find out about waivers: insurers will waive surrender charges in some cases, depending on your circumstances and your annuity contract. For example, if you’ve gone into a nursing home, you might get a break on fees.

Happy anniversary: if you have some flexibility, it might be worth waiting until your contract anniversary to take money out (or take what you need now, and take the rest after the anniversary). Each year might present the opportunity for a lower surrender charge, and that anniversary might only be a few weeks away.

Annuitize: depending on how much you need, how quickly you need it, and other factors, you might consider annuitizing your contract – turn it into a stream of income. If you annuitize for a short period of time (10 years, for example) you might get what you need.