What Are Surrender Charges?
A surrender charge is a fee that an insurance company charges if you withdraw more than the allowed amount from your annuity during the surrender period. Think of it as an early withdrawal penalty — similar to the penalty a bank charges for breaking a CD before maturity, but typically larger and with a longer duration.
Surrender charges exist because insurance companies invest your premium in long-term bonds and other fixed-income assets. If you withdraw your money early, the carrier may have to sell those assets at a loss. The surrender charge compensates the carrier for this disruption and for the upfront costs of issuing the contract (commissions, underwriting, administration).
Surrender charges are not hidden fees — they are clearly disclosed in the annuity contract and in the product illustration you receive before purchase. However, many consumers do not fully understand how they work, which can lead to unpleasant surprises.
Typical Surrender Charge Schedules
Surrender charges are highest in the first year and decline each year until they reach 0% at the end of the surrender period. Here are examples of common schedules:
| **5-Year MYGA:** | ||||||
|---|---|---|---|---|---|---|
| Year | 1 | 2 | 3 | 4 | 5 | 6+ |
| Charge | 5% | 4% | 3% | 2% | 1% | 0% |
| **7-Year FIA:** | ||||||||
|---|---|---|---|---|---|---|---|---|
| Year | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8+ |
| Charge | 8% | 7% | 6% | 5% | 4% | 3% | 2% | 0% |
| **10-Year FIA:** | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Year | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11+ |
| Charge | 10% | 9% | 8% | 7% | 6% | 5% | 4% | 3% | 2% | 1% | 0% |
The surrender charge applies only to the amount withdrawn that exceeds the free withdrawal provision (discussed below), not to the entire account value.
Free Withdrawal Provisions
Nearly all annuities include a free withdrawal provision that allows you to access a portion of your funds each year without triggering a surrender charge. The most common provision is 10% of the account value per year.
For example, if your annuity has an account value of $200,000, you can withdraw up to $20,000 per year without any surrender charge — even during the first year of the contract. Only amounts exceeding $20,000 would be subject to the surrender charge.
Some contracts offer additional free withdrawal provisions for specific circumstances:
- Nursing home waiver: Waives surrender charges if you are confined to a nursing home for a specified period (typically 30–90 days) - Terminal illness waiver: Waives surrender charges if you are diagnosed with a terminal illness - Required Minimum Distribution (RMD) waiver: Allows you to take your annual RMD without surrender charges, even if it exceeds 10% - Death benefit: Surrender charges are typically waived at death, and beneficiaries receive the full account value
These provisions vary by carrier and product, so it is important to review them carefully before purchasing.
Strategies to Minimize Surrender Charge Risk
1. Only commit money you can leave alone. The simplest strategy is to only put money into an annuity that you genuinely do not need for the duration of the surrender period. Keep 6–12 months of expenses in liquid savings.
2. Use the free withdrawal provision strategically. If you need income, structure your withdrawals to stay within the 10% annual free withdrawal amount. For a $300,000 annuity, that is $30,000/year — or $2,500/month — which may cover a significant portion of your income needs.
3. Ladder your annuities. Instead of putting $500,000 into a single 7-year annuity, consider splitting it into two or three contracts with staggered start dates. This creates rolling maturity dates and ensures some portion of your money is always near the end of its surrender period.
4. Choose shorter surrender periods. If liquidity is a concern, opt for a 3-year or 5-year MYGA instead of a 10-year FIA. The rates may be slightly lower, but the surrender period is significantly shorter.
5. Ask about market value adjustments (MVAs). Some annuities include an MVA that can increase or decrease the surrender charge based on interest rate changes. In a falling-rate environment, the MVA can actually reduce or eliminate the surrender charge.
The Bottom Line on Surrender Charges
Surrender charges are a legitimate cost of doing business with an insurance company — they are not a scam or a hidden trap. They exist because the carrier needs to invest your money in long-term assets to generate the guaranteed rates and benefits you receive.
The key is to understand them fully before you purchase, plan your liquidity needs carefully, and use the free withdrawal provisions to your advantage. If you work with a knowledgeable licensed professional, they should explain the surrender schedule clearly and help you determine whether the commitment period is appropriate for your situation.
If a salesperson minimizes or glosses over surrender charges, that is a red flag. A trustworthy advisor will discuss them openly and help you plan around them.
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This article is for educational and informational purposes only and does not constitute financial, tax, or legal advice. Annuity products involve risks including potential surrender charges and the financial strength of the issuing carrier. Consult a licensed insurance professional and/or tax advisor before making any financial decisions. Guarantees are subject to the claims-paying ability of the issuing insurance company.