annuity surrender charge definition
The cash surrender value of an annuity is equal to the total of your premiums and any investment income that's accumulated to that date, minus any withdrawals or loans you've already taken. Depending how long you've held the annuity, there might also be a substantial surrender charge. Fundamentally they resemble a whole-life policy that's been recalibrated to provide a retirement income, instead of a lump sum at death. At any point after the purchase date but before you begin drawing your retirement income, you can choose to surrender the annuity and retrieve its accumulated cash value. DEFINITION of 'Surrender Period'. The amount of time an investor must wait until he or she can withdraw funds from an annuity without facing a penalty. Surrender periods can be many years long, and withdrawing money before the end of the surrender period can result in a surrender charge, which is essentially a deferred sales fee. After the surrender period has passed, the investor is free to withdraw the funds without being subject to a fee. Some annuities have no surrender period and therefore no surrender fees. A typical annuity might have a surrender period of six years, and a surrender fee that starts at 6% and decreases by 1% each year. Most annuities charge surrender fees. These are basically deferred sales fees that are charged when you sell, rather than when you buy, an investment. There are a few vendors that offer annuities with minimal or no surrender fees. More typically, annuities have a surrender schedule that lasts six or seven years. Annuity A bases its surrender period on the date of the policy. It has a seven-year surrender period starting at 7% and dropping one percentage each year. If you purchase the annuity in 2013, you are free of surrender charges by 2020. Annuity B charges surrender fees based on the date of each premium payment. Variable Annuity Surrender Charges. A surrender charge is a type of sales charge you must pay if you sell or withdraw money from a variable annuity during the surrender period-a set period of time that typically lasts six to eight years after you purchase the annuity. Surrender charges will reduce the value of-and the return on-your investment. Surrender Charges. Annuities are more expensive to administer than other types of investment. The insurer pays fees to investment managers to handle the funds, and it pays fees to underwriters to calculate your potential for longevity. It also pays a substantial up-front commission to the broker, in most cases. This type of immediate annuity pays the annuitant for a designated number of years (i.e., a period certain) and is used to fund a need that will end when the period is up (for example, it might be used to fund the premiums for a term life insurance policy). For other uses, see Annuity (disambiguation). In the United States, an annuity is a contractually executed, relatively low-risk investment product, where the insured (usually, an individual) pays a life insurance company a lump-sum premium at the start of the contract.
A type of sales charge you must pay if you sell or withdraw money from a variable annuity during the surrender period-a set period of time that typically lasts six to eight years after you purchase the annuity.