How Surrender Schedules Work
A surrender charge is the carrier mechanism for recovering the cost of issuing a contract when an owner exits early. It declines on a fixed schedule and eventually reaches zero. Knowing where you sit on that schedule is one of the most important facts about your position.
A surrender charge is a declining fee the carrier applies to withdrawals above the free withdrawal allowance during the surrender period. It steps down each contract year from the issue date and eventually reaches zero.
Key takeaways
- The schedule is one percentage per contract year, declining to zero.
- The charge applies only to amounts above the free withdrawal allowance.
- The clock runs from the contract issue date, not the calendar year.
- A market value adjustment is a separate provision that can add to or reduce the exit cost.
- Remaining years on the schedule are one of the most important facts about your position.
How is a surrender charge schedule structured?
A surrender schedule is a series of percentages, one per contract year, that step down over the surrender period until it reaches zero. The percentage applies only to amounts above the free withdrawal allowance, measured from the issue date.
A surrender schedule is expressed as a series of percentages, one per contract year, that step down over the surrender period. A seven-year schedule might begin in the high single digits in year one and decline each year until it reaches zero in year eight.
The percentage applies only to amounts withdrawn above the contract free withdrawal allowance, not to the entire account value. The clock runs from the contract issue date, not the calendar year.
What is a market value adjustment?
A market value adjustment is a separate provision that moves the withdrawal amount up or down based on how interest rates have moved since issue. Rising rates generally work against an early exit; falling rates can work in the owner favor.
Some contracts add a market value adjustment on top of the surrender charge. A market value adjustment moves the withdrawal amount up or down based on how interest rates have moved since issue. In a rising-rate environment it generally works against the owner on early exit; in a falling-rate environment it can work in their favor. It is a separate provision from the surrender charge and needs to be read separately.
Why do the remaining years on the schedule matter so much?
Timing decides the position. A contract with one year remaining has a near-term liquidity date, while a contract that recently reset its schedule has a long horizon before full liquidity returns.
Two identical contracts can sit in completely different positions purely because of timing. A contract with one year remaining on its schedule has a near-term liquidity date. A contract that recently reset its schedule - often after an exchange - has a long horizon before full liquidity returns.
This is why any conversation about changing contracts should start with the schedule. A contract that is nearly through its surrender period may be a poor candidate to restart the clock on.
- Contract issue date
- Length of the surrender period
- Current contract year and the percentage that applies to it
- Whether a market value adjustment applies
- The free withdrawal amount available this year
Frequently asked questions
How do I find my surrender charge?
The surrender schedule appears in the contract declarations pages and is usually summarized on the annual statement. The applicable percentage depends on the current contract year, measured from the issue date.
Do surrender charges ever go away?
Yes. The schedule declines to zero at the end of the surrender period, after which the account value is generally fully liquid, subject to any tax consequences.
Does a 1035 exchange avoid a surrender charge?
No. A 1035 exchange addresses the tax treatment of a transfer. Any surrender charge still in force under the original contract may still apply.