What Are Surrender Charges?

Shawn Plummer

CEO, The Annuity Expert

Surrender charges for annuities are the penalty a contract owner will receive if they surrender (cancel) their deferred annuity contract before the agreed surrender charge period or withdraw a portion of their account balance above their allotted penalty-free withdrawal amount.

If you cancel your deferred annuity contract before the surrender period (full surrender or partial surrender) expires, you will incur surrender fees, aka a surrender charge.

If the requested annuity withdrawal is more than what you’re allowed in a given year, you will incur a penalty for every dollar above that allowed amount.

If you decide to surrender your contract early, you will have what’s called the Cash Surrender Value. The CSV is the current Accumulation Value minus surrender charges taken out.

A full surrender is canceling 100% of your contract, while a partial surrender is canceling only a portion of your contract (above your free withdrawal).

Surrender charges are standard in all deferred annuities, including the traditional fixed annuity, variable annuity, two-tiered annuity, and fixed indexed annuities.

Why are there surrender charges?

There are surrender charges to protect the insurance company from losing significant amounts of annuity funds at any given time. This is why there is a contract in place. In addition, surrender charge provisions help actuaries price their deferred annuity products efficiently by creating rules and boundaries. 

There are only 100 pennies in a dollar!

When do surrender charges stop?

When an owner completes your surrender charge period, also known as a surrender charge schedule or annuity period, your funds in the retirement plan are typically 100% liquid without an annuity penalty at that point.

How high do surrender charges go up to?

Annuity surrender charges vary dramatically by insurance company and product.

With that said, I’ve seen a high starting surrender charge as high as 20%. Don’t let that scare you. That particular deferred annuity has been around for over a decade when surrender charges were very high.

You can expect a first year’s surrender charge to be roughly 10% and a decline in percentage each year from there.

Annuity Surrender Charge Example

Example #1

You sign up for a deferred annuity with a 10-year surrender period for $100,000.

You decide you want to cancel your contract in year 5.

Your annuity is worth $150,000, and there’s a 7% penalty for year 5.

You’ll have a penalty of $10,500, and in return, you’ll pocket $139,500.

Example #2

Same scenario.

You sign up for a deferred annuity with a 10-year surrender period for $100,000.

You’re allowed to withdraw up to 10% of your account balance annually without penalty.

Your annuity is worth $150,000 in year 5, and you’re allowed to pocket up to $15,000 that year, penalty-free.

You withdrawal $17,000 that year, which is $2,000 over the penalty-free limit.

There’s a 7% penalty for year 5.

You’ll incur a penalty of 7% of the excess $2,000, which is $140.

What is a Surrender Charge Schedule?

A surrender charge schedule is simply the schedule of your annuity contract term and the applicable surrender charges in the given year of your retirement plan.

10 Year Surrender Charge Schedule Example

  • Year 1 = 10% penalty
  • Year 2 = 9% penalty
  • Year 3 = 8% penalty
  • Year 4 = 7% penalty
  • Year 5 =6% penalty
  • Year 6 = 5% penalty
  • Year 7 = 4% penalty
  • Year 8 = 3% penalty
  • Year 9 = 2% penalty
  • Year 10 = 1% penalty
  • Year 11 = 0% penalty

Surrender Charge Exemptions

Every annuity product varies, but the standard features for exemptions in the surrender clauses are:


The standard death benefit with deferred annuities is your account value passed onto the named beneficiaries in a lump-sum payment. In addition, all surrender fees from the insurance company are waived.

Assistance with Activities of Daily Living:

If at any time the annuity contract owner can not meet 2 out of the six activities of daily living (bathing, grooming, dressing, toilet hygiene, mobility, and self-feeding), the insurance company will waive the surrender fees to provide additional financial assistance.

Home Health Care

Home Health Care sometimes ties into the ADLs above. Still, if an annuity contract owner needs home health care for a specific amount of time, a Home Health Care waiver can kick in, and the insurance company will waive all surrender fees for additional financial assistance.

Nursing Home Care or Confinement

If the annuity contract owner has to enter a qualified facility for confinement such as a Nursing Home, a waiver canceling all surrender penalties can kick in after a certain period of time in the facility has gone by.

Assisted Living Facility

Like the Nursing Home surrender clauses, if an annuity owner enters an Assisted Living Facility for a certain period of consecutive days, a waiver from the insurance company can apply and waive all the surrender fees.

Terminal Illness

If a physician determines you will leave for 12 months or less, a Terminal Illness waiver can apply and waive all surrender charges for additional financial assistance.

Now, these types of waivers vary from one annuity product to the next, so please check your contract to find your options.

If you need assistance or have a question about surrender charges, ask me.

Surrender Charge Solutions

You can purchase an annuity with a shorter surrender period. Deferred annuity contracts start as short as a 3-year-contract.

You can purchase a deferred annuity with extra liquidity or a Return of Premium provision.

You can find a contract that offers a lower starting charge. We can help you with researching these contracts.

If you are already in an annuity contract, find out your annual penalty-free withdrawal provision and withdraw that amount each year until you complete the contract.

Tip* Check to see if your contract has an MVA. Your cash surrender value might reflect a policy value worth liquidating. I’ve seen in low-interest-rate environments where an owner can surrender the policy’s entire value without surrender penalties due to the Market Value Adjustment (MVA). This is rare but always worth checking.

If you need assistance or have a question about surrender charges, ask me.

Contact Us

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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