What is a surrender period on an annuity?

A surrender period is the window of time, usually at the beginning of an annuity contract, during which the insurance company will charge you a penalty if you withdraw more than a small allowed amount. The penalty is called a surrender charge, and it can be steep — often starting at 7% to 10% of the withdrawal in year one, and stepping down by roughly a percentage point each year until it disappears.

Why surrender periods exist

When you buy an annuity, the insurance company pays the agent a commission up front — sometimes 5% to 8% of the contract value. They also invest your money in long-duration bonds to fund the future payments they promised. If you walk away early, they lose money. The surrender charge protects them from that loss.

How long surrender periods last

Most annuities have surrender periods of 5 to 10 years. Some go as long as 15. The longer the surrender period, the higher the commission paid to the agent — which is why agents often steer clients toward longer-surrender products without explaining the tradeoff clearly.

The free withdrawal allowance

Most annuities allow you to withdraw a small percentage — usually 10% of the contract value — each year during the surrender period without penalty. Anything above that triggers the surrender charge on the excess amount.

Exceptions that waive the surrender charge

• Death of the contract owner — the death benefit pays out without surrender charges
• Terminal illness — most contracts waive charges if you are diagnosed with a qualifying illness
• Long-term care confinement — many contracts waive charges after a set period in a nursing home
• Annuitization — converting the contract into a guaranteed income stream usually avoids the charge

Before you surrender, consider a 1035 exchange

If you are unhappy with your current annuity, you may be able to do a 1035 exchange — moving the money to a new annuity or life insurance contract without triggering taxes. But a 1035 exchange does not waive the surrender charge on the old contract. Run the math carefully before making the move.

Whatever annuities you own, keep the surrender schedule in your EverKeep vault next to the contract itself. When the year comes that the surrender charge expires, you want to know — not your agent.