Surrender Charge
A declining fee applied to withdrawals above the free-withdrawal amount during the surrender period.
A surrender charge is a percentage the issuing carrier deducts when an owner withdraws more than the contract's free amount during the surrender period. The percentage declines each contract year until it reaches zero at the end of the schedule. It exists because the carrier pays distribution costs up front and invests premium in longer-dated bonds expecting the contract to stay in force.
- —The charge applies only to amounts above the free-withdrawal allowance in most contracts.
- —Schedules decline annually - a ten-year schedule commonly starts near 10% and falls about a point a year.
- —Some contracts apply the percentage to premium paid rather than current account value, which produces a different figure.
- —A market value adjustment, if the contract has one, is assessed in addition to the surrender charge.
The charge is expressed as a percentage that steps down each contract year until it reaches zero. It applies only to amounts withdrawn above the annual free withdrawal allowance.
The schedule runs from the contract issue date, not the calendar year. Some contracts add a market value adjustment on top, which is a separate provision and must be read separately.
How the charge is applied
The sequence matters. The carrier first determines the free-withdrawal amount for the contract year, subtracts it from the requested withdrawal, then applies the schedule percentage for the current contract year to whatever remains. Any market value adjustment is applied separately.
Contract year is measured from the issue date, not the calendar year, and the distinction determines which row of the schedule applies. Requesting a withdrawal a few weeks after an anniversary rather than a few weeks before can change the percentage by a full point.
| Contract year | 5-year schedule | 7-year schedule | 10-year schedule |
|---|---|---|---|
| 1 | 7% | 8% | 10% |
| 2 | 6% | 7% | 9% |
| 3 | 5% | 6% | 8% |
| 4 | 4% | 5% | 7% |
| 5 | 3% | 4% | 6% |
| 6 | 0% | 3% | 5% |
| 7 | 0% | 2% | 4% |
| 8 | 0% | 0% | 3% |
| 9 | 0% | 0% | 2% |
| 10 | 0% | 0% | 1% |
| 11+ | 0% | 0% | 0% |
Waivers that already exist in most contracts
Carriers routinely waive the surrender charge in defined circumstances. Owners often pay a charge they were contractually entitled to avoid simply because nobody read the waiver section.
- —Death of the owner or annuitant, with proceeds paid to the beneficiary.
- —Confinement to a nursing home or licensed care facility, usually after a waiting period.
- —Terminal illness diagnosis, typically defined by a stated life expectancy.
- —Annuitization over a stated minimum period.
- —Required minimum distributions attributable to the contract, in many qualified contracts.
Reading a surrender charge in an in-force review
In a five-pillar review, the surrender charge is a liquidity fact rather than a verdict. A high remaining charge does not mean a contract is bad; it means the exit cost is currently high and any decision should account for it. The date the schedule ends is often more useful than the current percentage, because it is the date the analysis changes.
Frequently asked questions
- How do I avoid a surrender charge?
- Stay within the annual free-withdrawal allowance, wait until the surrender period ends, or qualify for one of the contract's stated waivers such as confinement or terminal illness. Which options exist is contract-specific.
- Is the surrender charge calculated on my account value or my premium?
- Both structures exist. Charging against premium paid is common in bonus contracts and can produce a materially different figure from charging against current account value. The contract language is the only reliable source.
- Does the surrender charge apply after the period ends?
- No. At the end of the schedule the charge is zero and the account value is fully accessible under the contract terms. Automatic renewal into a new term, common in MYGAs, can start a fresh schedule.
- Is a surrender charge tax-deductible?
- Generally no. A surrender charge reduces the amount received rather than creating a deductible expense for most individual owners. Consult a qualified tax advisor about your own situation.