Chelsey Tucker graduated with a Bachelor of History degree from Metropolitan State University in 2019. She now writes about insurance with her specialty being life insurance and has been quoted on Help Smart Phone and MEL Magazine.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like

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Reviewed by Daniel Walker
Licensed Auto Insurance Agent Daniel Walker

UPDATED: Apr 3, 2022

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An annuity surrender charge is the fee that your insurance company charges you if you surrender (close) your annuity before the agreed upon date for cashing in your annuity arrives.

In most cases you will have to pay a surrender charge if you surrender your annuity before 10 years have passed, but this time span can range from one year to 50 years, depending on your age when you invest in the annuity and the insurance company that you choose.

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You can expect the insurance company to apply a surrender charge of between 10% and 1%. This amount will depend on when in your contract you surrender your annuity. If it is in the first year or two of your annuity, then you will pay the maximum fee.

Things to Know About Surrender Charges

Each year after the percentage rate will lower, how quickly depends on the terms of your contract with the insurance company. You should also be aware of the following:

  • Surrender charges will vary depending on whether you have a fixed annuity or a variable annuity. All of the fees are higher with a variable annuity. This is because the insurance company has assumed a higher risk when writing a variable annuity contract because the value of a variable annuity will fluctuate with the stock market.
  • Be aware of a market value adjustment fee if you surrender your annuity. Simply put, your insurance company bases your surrender fee on the current interest rate they are receiving from the investments that they make on your behalf. If the insurance rates are higher than when you initially invested, they can raise your surrender fee by that percentage rate to recoup some of their costs.
  • An annuity surrender charge isn’t the only charge you will receive if you close your account early. The IRS will tack an additional 10% to your tax bill if you collect on your annuity before you are 59 and 1/2 years old. This means that you will be taxed at your normal tax bracket and then have to additionally pay 10% more.

This 10% can add up quickly, especially if you didn’t use after tax funds to start your annuity. After tax money is money that you have already paid taxes on, such as from a savings account. Before tax money is money that you reinvest from other investments, such as an IRA or a 401K. The government allows you to defer your taxes from such investments if you invest it in an annuity.

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What is an annuity?

Simply put, an annuity refers to making an investment that pays out in installments over a specified period of time. In truth, this is a very simplified explanation because there is more than one type of annuity. In addition, some annuities pay out forever while others may pay out less than you hope.
Choosing among the various types of annuities is an important decision. There are immediate annuities, deferred annuities, and fixed and variable annuities. Only a fixed deferred annuity pays out a specific amount of money over a specified amount of time.

  • A fixed immediate annuity is an annuity that pays out a guaranteed amount of money for life. This is an investment that begins to pay out immediately and requires a large one time premium to begin the investment. This option is excellent for those of you who have a large sum of money in the bank but aren’t sure that it will last for the rest of your life. You can invest that in an immediate annuity and receive a monthly payment for the rest of your life.
  • A variable immediate annuity, however, doesn’t guarantee your monthly payout. Although you will still receive payments for the rest of your life, a variable annuity will fluctuate based on the stock market or the mutual funds the insurance company chooses to invest the money into.
  • A fixed deferred annuity guarantees a certain return on your investment and guarantees the safety of your principle as well. After your investment period is over, you can choose a lump sum payment from your annuity or you can receive monthly, quarterly or annual payments based depending on your agreement with your insurance company.
  • A variable deferred annuity doesn’t offer the same guarantees as a fixed annuity. Because the investment depends on the day to day fluctuations in the stock market, you can win or lose just as you would if you were investing in the stock market yourself. While there can be higher gains, there can be significant losses as well.

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What are some of the fees associated with annuities?

The fees are essentially the same between immediate annuities and deferred annuities. The biggest difference you will see in fees is between fixed annuities and variable annuities.

The bottom line is that variable annuities have more up-front fees because the risk is higher to the insurance company who is writing the annuity. What’s more, variable annuities always have maintenance fees, usually about $50 a year, which fixed annuities don’t have.

Both fixed and variable annuities are subject to early withdrawal fees, which are different from annuity surrender charges. In most cases, you can withdraw up to 10% of your total each year without paying any fees.

Your insurance company may not allow you to cash out or surrender an immediate annuity. If they do, however, the penalties are much higher than they are for other types of annuities.

Some insurance companies also charge a mortality and expense fee. This is a fee associated with the risk involved in writing you an annuity. Basically, it is based on your age, gender, and the total amount of money you are investing. They assess how soon you are likely to die and how much they will benefit from the long-term annuity.

Who should invest in an annuity?

Annuity investing isn’t for everyone and you need to understand the process thoroughly before you invest in one. A fixed immediate annuity is a great investment opportunity for those of you who have a large lump sum of cash to invest and want to get a guaranteed amount of money for life.

Fixed deferred annuities are ideal for individuals under the age of 40 who have time to invest for their retirement. However, there are methods of earning higher interest rates on your money if you understand other types of investments. Again, this is a guaranteed return, however, something that very few investments offer.

There aren’t many experts that actually recommend variable annuities, especially in a volatile market. If you invest in a variable annuity, you need to ensure that you have the money to lose if things shouldn’t go the way that you plan. Yet, even this type of investment is considered more stable that other like stocks.

An annuity isn’t a great investment for those of you who find that from time to time you have to clean out your bank accounts to handle an emergency. In other words, if you can’t maintain another savings account for unexpected situations, then an annuity may not be the right investment for you.

Before you purchase an annuity, you need to take the time to compare the different options. An easy way to do this is by using our free quote/comparison tool. Not only will you see what you will need to start an annuity, but you can see that information from multiple companies all in one place.

Try the online annuity quotes tool and start planning for your future now!