What Are Surrender Charges?

When possible, avoid investments with surrender charges.

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Watch out for surrender charges that limit flexibility. Paul Thomas / Getty Images

A surrender charge is a fee you incur when you sell, cash in, or cancel, certain types of investments, insurance policies, or annuity policies. 

Why Do Companies Charge a Surrender Fee?

Most investments that carry a surrender charge, such as B-share mutual funds, annuities, and whole life insurance, pay upfront commissions to the people who sell these investments to you. The company issuing the investment recoups the cost (commission) they paid, through internal fees in the investment.

If you sell the investment before enough years have passed, the internal fees on the investment will not have been enough to cover the cost of the commission paid, and the investment company would end up losing money. To make sure this doesn't happen, the issuing company will attach a surrender charge to the investment.

In the case of mutual funds, sometimes you see a short-term surrender charge or redemption fee that applies if you buy and then sell the investment within 30, 60 or 90 days. For example, a 1% redemption fee may apply if you sell shares within 60 days of buying them. This is to discourage people from using that investment for short-term trading purposes.

What Types of Products Have Surrender Charges?

Fees to get your money back are most common with deferred annuities (such as fixed, variable and index annuities), whole life insurance, and B-share mutual funds. Surrender charges can also be called a contingent deferred sales charge, or back-end load.

How Long Do You Have to Own the Investment to Avoid the Fee?

Surrender charges can vary from as short a time period as 30 days on mutual funds, and as long as one year to fifteen years in length on annuity and insurance products. For annuities and life insurance, usually the fee starts high, such as a 10% surrender fee if you cash in your investment in year one, which scales down to a 1% fee if you cash it in during year nine, and no surrender fees if you cash it in after owning in ten years or longer.

This is a common structure you see on variable annuities. If you have to cash in your annuity or insurance policy, make sure you are not a few days away from an anniversary date.

Are Surrender Charges Bad?

As a general rule of thumb, avoid investments with surrender charges. Life circumstances change. Look for investments that give you flexibility, and stay away from investments that lock your money up for long periods of time. 

As with any rule of thumb, there are always exceptions! There are high quality annuity and life insurance products that can be appropriate for you, if you purchase and own them for a long time. 

If it is a life insurance product with a surrender charge, then before you buy it, know that for this purchase to work to your long-term benefit, you will need to own it, and pay premiums, for a long time.​​​​ Make sure you will be able to pay the premiums even if you were to suffer a job loss.

If it is an annuity product with a surrender charge, make sure the benefits outweigh the lack of liquidity and flexibility.

If you are looking for financial advice, you might consider working with a fee-only financial planner, as they cannot be compensated from the sale of investment or insurance products.