Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Surrender Period

What it is:

The surrender period is the time an investor of annuity must wait until they may take a withdrawal from their annuity without paying a penalty or surrender fee.

How it works (Example):

The surrender period is usually stated in the contractual agreement of the annuity an investor has purchased. The contract informs the investor of the length of time (surrender period) he or she must wait before withdrawing funds from the annuity. If the agreement is broken and funds are withdrawn before the surrender period has ended, the investor will usually have to pay a surrender fee.

Let's look at an example:

Assume you purchase a $100,000, 10-year annuity with a seven-year surrender period and a 10% surrender fee. This means the institution that sold you the annuity gets to keep and invest your money for the next 10 years, and after the surrender period you will begin receiving regular payments from the institution.

Now, let's assume that two years after to purchase the annuity, you need $50,000 of your principal back. Because the surrender period on the annuity has not expired yet, you may withdraw the funds, but you must pay a 10% fee (in this case, $50,000 x 10% = $5,000) to get your money.

If you make additional contributions to the annuity, those funds might have their own surrender periods attached, making some of the principal subject to surrender fees at different periods.

Why it Matters:

Surrender periods discourage investors from canceling what are generally long-term contracts. Though this can prevent an investor from making an emotional, hasty decision in a cyclical market, it may also limit the investor's flexibility to move money out if an annuity that isn't performing as well as its peers. Conversely, surrender periods are generally not a problem for investors who don't need liquidity and/or are receiving above-market returns.

Typically, surrender fees are a percentage of the withdrawal amount. In many cases, the surrender fee declines over time, meaning that in the first year of the surrender period the fee might be 10%, then 9% the next year, 8% the next year, and so on. Many annuity companies allow investors to withdraw a small portion of their principal every year even if the surrender period has not expired, so it is important for investors to study the disclosures provided with their annuities.

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