What You Need to Know About Surrender Charges

What You Need to Know About Surrender Charges

When you purchase an annuity policy to supplement your retirement income, you agree to have your money “locked” for your future yearly payments. But, sometimes, certain circumstances can change your mind and make you cancel the contract. A hospital emergency may require you to pay hefty medical expenses. Or, a family member may need your assistance with their college tuition. No matter the reason, ending the contract and withdrawing your funds result in steep surrender charges. Learn more about how thesefines work by reading on.

What Surrender Charges Are

Also called a back-end load or contingent deferred sales charge, a surrender fee is a penalty you incur when you rescind a particular investment contract. It’s also levied when you cash in your invested funds before the surrender period or the pre-set time frame you aren’t allowed to withdraw them. This can be over a short span of 30 days or a longer one, like 10 years, based on the terms.

How much a surrendering policyholder must pay depends on the financial product, the company issuing it, and how long it has been effective. For annuities and life insurance plans, the charges are typically 7% of the amount of the withdrawal made during the first year of ownership. These may decrease by 1% annually.

Types of Financial Products That Have Them

Surrender charges are often imposed on deferred annuities, where the policyholder receives their payments at a later period, usuallyupon retirement. These fees are also set in other forms of investments, such as whole life insurance plans and B-share mutual funds.

In sum, surrender charges mostlyapply topolices that accrue cash value. So, other financial products,liketerm-life insurance and immediate annuities, generally don’t have these terms.

Why Penalty Fees Are Imposed

Companies issuing these investment contracts impose surrender charges for certain reasons:

  • To cover theirexpenses.These companies pay various expenses, including the upfront commissions for the agents selling their products. These are all offset by the premiums you pay. But, if you end the contract, the issuer can incur losses. To prevent this, charges are levied.
  • To discourage the short-term use of long-term products.Their products are designed for retirement and other long-term financial goals, not for short-term ones like emergency expenses. With the penalty rules, the insured or investor is less likely to liquidize their money for the latter purpose.
  • To help the policyholder maximize their returns.By cashing in the policy right away, you don’t allow the money to grow and accumulate interest sufficiently. So, issuers impose charges to hinder policyholders from withdrawing.

If you think you need to rescind your annuity contract now, talk to your financial advisor. They’ll explain the best options for you to recover financially, including selling your policy to a structured settlement funding company.


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