What is an annuity surrender charge? And, how will it affect my investment? You should ask these questions when shopping for an investment product. An annuity surrender charge is the amount the insurance company charges an annuitant if he or she withdraws more than the specified amount during a given time period. Or, in other words, it’s a penalty for making an early withdrawal above the free withdrawal amount. Most annuity contracts allow the annuitant to withdraw earnings or an amount worth up to 15% of the premium without a surrender charge.
The amount of the surrender charge differs among life insurance companies and usually decreases over time. Note that rates and schedules of surrender charges vary among insurance companies, but typically the charges are as follows: Surrender in the first year results in a charge of 8%; surrender in the second year results in a charge of 7%. The percentage usually drops 1% a year until year six, when it may drop to 0%. This is referred to as level-load annuities, no-surrender annuities do not charge a fee if more than 15% is withdrawn or it the contract is surrendered.
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For the investor who may need spur-of-the-moment access to their money, he or she may want to invest in an annuity without surrender charges (no surrender or level-load annuities). These annuities have no penalty or charge for early withdrawal. However, be aware that even with a no-surrender annuity investors under the age of 59 1/2 are subject to a 10% federal excise tax as well as ordinary income taxes on any gains. You can avoid any taxes and penalties by making a 1035 Tax-Free Exchange to another annuity regardless of age.
There are a few other things to be aware of when exploring no-surrender annuities. First, no-surrender annuities typically pay the broker a lower upfront commission - a broker or agent may not volunteer that no-surrender annuities are available to you, so ask! Second, be certain to compare the annual fees and track record of the fund compared with the company’s standard product with the surrender charge.