Kim Borwick, Financial Editor for
  • Written By
    Kim Borwick

    Kim Borwick

    Financial Editor

    Kim Borwick is a writer and editor who studies financial literacy and retirement annuities. She has extensive experience with editing educational content and financial topics for

    Read More
  • Edited By
    Emily Miller
    Emily Miller, Managing Editor for

    Emily Miller

    Managing Editor

    Managing editor Emily Miller is an award-winning journalist with more than 10 years of experience as a researcher, writer and editor. Throughout her professional career, Emily has covered education, government, health care, crime and breaking news for media organizations in Florida, Washington, D.C. and Texas. She joined the team in 2016.

    Read More
  • Financially Reviewed By
    Janet Berry-Johnson, CPA
    Janet Berry-Johnson, CPA

    Janet Berry-Johnson, CPA

    Certified Public Accountant

    Janet Berry-Johnson is a certified public accountant and freelance writer with a background in accounting and income tax planning and preparation. Janet was named one of the Top 100 Must-Follow Tax Twitter Accounts for 2020 by Forbes.

    Read More
  • Updated: January 31, 2023
  • 14 min read time
  • This page features 11 Cited Research Articles
Fact Checked
Fact Checked partners with outside experts to ensure we are providing accurate financial content.

These reviewers are industry leaders and professional writers who regularly contribute to reputable publications such as the Wall Street Journal and The New York Times.

Our expert reviewers review our articles and recommend changes to ensure we are upholding our high standards for accuracy and professionalism.

Our expert reviewers hold advanced degrees and certifications and have years of experience with personal finances, retirement planning and investments.

Cite Us
How to Cite's Article

APA Borwick, K. (2023, January 31). Annuity Surrender Charges. Retrieved March 31, 2023, from

MLA Borwick, Kim. "Annuity Surrender Charges.", 31 Jan 2023,

Chicago Borwick, Kim. "Annuity Surrender Charges." Last modified January 31, 2023.

Why Trust
Why You Can Trust has been providing reliable, accurate financial information to consumers since 2013. We adhere to ethical journalism practices, including presenting honest, unbiased information that follows Associated Press style guidelines and reporting facts from reliable, attributed sources. Our objective is to deliver the most comprehensive explanation of annuities, structured settlements and financial literacy topics using plain, straightforward language.

Our Partnerships, Vision and Goals

We partner with CBC Settlement Funding, a market leader with over 15 years of experience in the settlement purchasing space. Our relationship with CBC allows us to facilitate the purchase of annuities and structured settlements from consumers who are looking to get a lump sum of cash immediately for their stream of monthly payments. When we produce legitimate inquiries, we get compensated, in turn, making stronger for our audience. Readers are in no way obligated to use our partners’ services to access resources for free.

CBC and share a common goal of educating consumers and helping them make the best possible decision with their money. CBC is a Better Business Bureau-accredited company with an A+ rating and a member of the National Association of Settlement Purchasers (NASP), a national trade association that promotes fair, competitive and transparent standards across the secondary market. Additionally, operates independently of its partners and has complete editorial control over the information we publish.

Our vision is to provide users with the highest quality information possible about their financial options and empower them to make informed decisions based on their unique needs.
Key Takeaways
  • A surrender charge is a penalty you have to pay if you sell or withdraw money from an annuity before it matures.
  • The time before an annuity’s maturity is called the surrender period and usually lasts six to eight years after purchase.
  • Surrender charges reduce the value of your annuity and its returns.

Surrender charges are inherent to most annuity contracts. They exist to protect the interests of the insurer who, by issuing an annuity contract, assumes the longevity risk of the annuity owner — that is, the risk that the owner will outlive their retirement savings.

The Corporate Finance Institute defines risk transfer as “a risk management technique in which risk is transferred to a third party.” In the case of annuities, the contract holder’s risk of outliving their retirement savings is transferred to the insurance company.

When an annuity owner treats the asset as the insurance product it was designed to be, the insurer stands to profit from investing the premium it collected when it sold the annuity. In return, the annuity owner can rest easy in the knowledge that they will receive a guaranteed income stream in retirement.

But when an annuity owner withdraws funds or terminates the contract prematurely, the insurance company loses the potential profit it would have made by investing the annuity owner’s principal investment.

Because we’re dealing with an insurance product, the “principal investment” in this case refers to the premium the annuity owner paid for the contractual rights to future payments.

Another important note in regard to annuity terminology: Because variable annuities, unlike fixed annuities, are considered securities and regulated by the Securities and Exchange Commission, the surrender charge is sometimes called a “contingent deferred sales charge.”

Surrendering an Annuity

Surrendering an annuity is the equivalent of canceling your contract.

Insurance companies offer a variety of annuity products and additional provisions, called riders. The terms of your contract will dictate your surrender charge and other requirements, such as who must sign the request for surrender and how the money will be distributed upon termination of the contract.

To surrender an annuity, simply contact the issuing insurance company. They will guide you through the process, including directing you to the proper forms and explaining any additional documentation or actions required by the company.

Remember that surrendering an annuity can be a very expensive process. According to the Financial Industry Regulatory Authority, it may not be wise to do so if you have immediate or short-term expenses.

On top of potential surrender charges, you will also trigger the income tax that has been deferred up until that point. You’ll be expected to pay the taxes on these funds in the year you receive them, so it’s important that you fully understand the tax consequences of surrendering your annuity before doing so.

How to surrender an annuity

Surrender Period

When you purchased your annuity, you agreed to a surrender period. This is the period of time that your funds are inaccessible. The surrender period can be as long as 10 years and, in many cases, as short as three years.

With each year that passes, the surrender charge decreases until it eventually reaches 0%.

Full Surrender vs. Partial Surrender

A full surrender represents the termination of your annuity policy.

You can also opt for a partial surrender of your annuity. A partial surrender refers to the withdrawal of only a portion of your contract value and allows you to retain the benefits of the annuity’s tax-deferred growth while accessing some cash immediately.

A partial surrender will also limit the amount you’ll pay in surrender charges.

Multiethnic couple handshake with consultant at home
Interested in Selling Structured Settlement Payments?
Turn your future payments into cash you can use right now.

Example of How a Surrender Charge Reduces the Cash Value of Your Annuity

The value of your annuity is essentially the amount of money you would receive if you were to liquidate the asset. In other words, it’s the dollar amount you would get for surrendering your right to your future payments under your annuity contract. And it will always be less than you would get if you waited to take income payments from your annuity in its distribution stage.

This example illustrates the cash value of an annuity when a surrender charge is assessed.

Let’s say you paid a single lump-sum premium of $50,000 for a qualified annuity eighteen months ago. The surrender charge is 7% of your withdrawal amount during the first year and decreases by one percentage point each year after. Your contract states that you may withdraw up to 10% of the annuity’s current value without paying a surrender charge.

You were recently injured in a car accident and need $30,000 to pay your medical bills. But you have only $10,000 in your emergency savings. You decide to take the additional $20,000 from your annuity.

You’ve owned your annuity for a year and a half, so your current surrender fee is 6%.

This means that $5,000 of your withdrawal is penalty-free, and the insurer will assess the 6% surrender charge for the other $15,000.

Your surrender charge will be $15,000 × 0.06 = $900. In other words, you’ll pay $900 to get access to $20,000.

In this example, the surrender charge is calculated as a percentage of your withdrawal amount, but according to the National Association of Insurance Commissioners, an insurance company “may figure the charge as a percentage of the value of the contract, of the premiums you’ve paid or of the amount you’re withdrawing.”

So make sure you know how your surrender charge will be calculated to avoid any surprises.

How to Find the Present Value of an Annuity

Tax Obligations vs. Surrender Charges

When you surrender an annuity, you will owe, at minimum, income taxes on the taxable amount you receive. These will be due in the year in which you realize the income.

In addition to ordinary income tax, you may owe additional taxes imposed by the IRS. The IRS enforces strict rules on retirement plans to discourage the use of these funds for anything other than “normal retirement,” and qualified annuities are no exception.

The agency will assess a 10% penalty on annuity owners who surrender their contracts prior to the age of 59 ½.

Don’t confuse or conflate this tax with the insurer’s surrender charge. These are two separate charges. So, in our example above, in addition to the $900 surrender charge from the insurer, you would owe ordinary income tax on the $20,000 and another $2,000 to the IRS.

Tips for Avoiding Surrender Charges

Insurance companies typically offer what is known as a free look period for annuities. This feature allows annuity buyers to get out of their contract without incurring a surrender charge. A free look period can last anywhere from 10 to 30 days depending on the contract and the state in which the annuity is issued. If the agent selling you the annuity doesn’t mention the free look provision, make sure you ask about it.

You may still be able to avoid surrender charges after the free look period has elapsed.

Possible exceptions for annuity surrender charges include:
  • Death benefit
  • Nursing home admission
  • Terminal illness
  • Disability
  • 1035 exchange
  • Bail-out option

The first thing you’ll want to do is carefully review your contract to determine if you have a rider or other provision that requires the insurer to waive your surrender charge.

1035 Annuity Exchange

Not all annuities are eligible for a 1035 exchange, and those that are may still incur surrender charges.

The purpose of a 1035 annuity exchange has to do with taxes, not surrender charges. So, although a 1035 exchange might be an effective strategy for moving into an annuity that better suits your goals without having to pay taxes on the funds you move, it will not necessarily allow you to avoid surrender charges.

Selling Your Payments

Although many annuities have no-surrender clauses and high surrender fees, you can still get out of your annuity.

An alternative to surrendering your annuity is to sell your annuity payments to a third-party purchasing company, or factoring company.

You can choose to sell the annuity in its entirety or only a portion. In addition, when you sell an annuity or structured settlement, you have some flexibility in how you want to structure your sale. You may sell a number of payments during a specified timeframe, or you can sell a precise dollar amount. The freedom to decide between a partial and a lump-sum sale offers benefits beyond the ability to avoid a surrender charge.

Note, however, that your sale will not be without its costs. Factoring companies apply what is called a discount rate to the sale amount. The discount varies from company to company, but it is based on the present-value formula and the concept of time value of money.

Discount factors include:
  • Payment due dates
  • Remaining amount in your annuity
  • Amount of money you need right away
  • What the company can competitively arrange to pay

Some companies will charge legal fees without disclosing this information. Make sure you know the net cost before you make a decision.

If you sell only a portion of your payments in exchange for an immediate lump sum, you are still the owner of your annuity. The annuity payments you sold will go to the purchaser, and you will retain the rights to all remaining payments.

Reasons for Selling Your Structured Settlement

Surrendering vs. Selling

The list of things you must consider before surrendering or selling your annuity is long. Ultimately, you want to minimize your costs while maximizing your cash on hand.

The only way to do that is to confirm that you have all the information you need — in terms of tax liabilities, your annuity contract terms and the terms of the buyer’s offer — and determine the solution in which the benefits outweigh the costs.

To accurately assess your situation, consider the following questions:
  • How old is your annuity?
  • What is the surrender charge?
  • Will your heirs have to pay a surrender charge?
  • Are there exceptional circumstances that would require the insurer to waive the surrender charge?
  • What are your reasons for selling or surrendering?
  • How much money do you need?
  • How urgent is your need for cash?
  • What other retirement savings do you have?

These questions are only a starting point. Annuity contracts contain so many variables that it’s impossible for anyone other than you and your own financial advisor to account for them all. That’s why it’s so important to review your contract carefully, ask questions about things that are unclear and avoid liquidating this retirement asset if possible.

Structured Settlement Calculator
How much are your payments worth?

Frequently Asked Questions Regarding Surrendering an Annuity

Although surrender charges and tax penalties have been implemented to discourage the short-term use of annuities and to minimize the risk to the insurer, the federal government and the annuity owner, sometimes cashing out an annuity is the only viable way to overcome a financial obstacle or take advantage of a better investment opportunity.

If this is the situation you’re in, consider the answers to some of the most commonly asked questions about surrendering an annuity.

Do all annuities have surrender charges?
No, some companies offer no-surrender annuities. And some contracts include bail-out provisions that take effect under specific, predetermined circumstances.
Can I transfer my annuity to another annuity?
Yes, the IRS allows 1035 annuity transfers, but you must follow strict rules to avoid tax penalties. Consult the company that issued your annuity regarding surrender charges for transfers.
What’s the process for selling my annuity payments?
You can sell your annuity payments to a factoring company that will pay you a lump sum in exchange for the rights to your future payments. The factoring company you select will walk you through the process of selling payments.
Please seek the advice of a qualified professional before making financial decisions.
Last Modified: January 31, 2023

11 Cited Research Articles writers adhere to strict sourcing guidelines and use only credible sources of information, including authoritative financial publications, academic organizations, peer-reviewed journals, highly regarded nonprofit organizations, government reports, court records and interviews with qualified experts. You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines.

  1. Cornell Law School. (n.d.). 26 U.S. Code § 402. Taxability of beneficiary of employees’ trust. Retrieved from
  2. Corporate Finance Institute. (n.d.). What is Risk Transfer? Retrieved from
  3. Financial Industry Regulatory Authority. (2022, May 24). Should You Exchange Your Variable Annuity? Retrieved from
  4. National Association of Insurance Commissioners. (2007). Buyer’s Guide to: Fixed Deferred Annuities. Retrieved from
  5. National Association of Securities Dealers. (1999, December). NASD Notice to Members 99-103. Retrieved from
  6. U.S. Internal Revenue Service. (2019). Publication 575: Pension and Annuity Income. Retrieved from
  7. U.S. Internal Revenue Service. (2020, June 3). Retirement Plans FAQs regarding Substantially Equal Periodic Payments. Retrieved from
  8. U.S. Internal Revenue Service. (n.d.). Rollover Chart. Retrieved from
  9. U.S. Securities and Exchange Commission. (2011, April 18). Variable Annuities: What You Should Know. Retrieved from
  10. U.S. Securities and Exchange Commission. (2011, April 6). Annuities. Retrieved from
  11. U.S. Securities and Exchange Commission. (2018, October 30). Updated Investor Bulletin: Variable Annuities. Retrieved from