What Is a Surrender Period?
The surrender period is the time period an investor must wait until they are able to withdraw funds from an annuity without coping with a penalty. Surrender categories can be a couple of years long, and chickening out money forward of the highest of the surrender period can result in a surrender value, which is principally a deferred product sales fee. Usually, alternatively now not all the time, the longer the surrender period, the easier the annuity’s other words.
Key Takeaways
- The surrender period is the time period through which an investor cannot withdraw funds from an annuity without paying a surrender fee.
- The surrender period can run quite a lot of years, and annuitants can incur important penalties if invested funds are withdrawn forward of that period has expired.
- Other financial products moreover come with a surrender period, very similar to B-share mutual funds and whole life insurance policy insurance coverage insurance policies.
Understanding Surrender Categories
Surrender categories are meant to discourage patrons from canceling, maximum frequently long-term contracts. Despite the fact that this will likely stop an investor from making an emotional, hasty resolution in a cyclical market, it may also limit the investor’s flexibility to move money out if assets are not showing smartly. Conversely, surrender categories are most often now not a subject for patrons who don’t seem to be searching for cash in short or liquidity or those who are receiving above-market returns.
After the surrender period has passed, the investor is free to withdraw the funds without being subject to a fee. Most often, surrender fees​​​ are a percentage of the withdrawal amount. In numerous circumstances, the surrender fee declines through the years. Some annuities have no surrender period and therefore no surrender fees. A standard annuity could have a surrender period of six years, and a surrender fee that starts at 6% and decreases via 1% each and every 12 months.
Example of Surrender Categories
As a hypothetical example, think you purchased a $10,000 annuity in 2022 with a surrender period that has a 6% surrender fee throughout the first 12 months, declining via 1% every year after. Must you closed your annuity in 2025, which is right through the third 12 months of the surrender period, it is advisable to pay a fee of 4% of the $10,000, or $400. The surrender period would lead to 2029, at which degree you could need to withdraw your $10,000 without paying a surrender fee. To avoid imaginable surrender fees, you’ll have to now not put money into an annuity that likelihood is that you will want to withdraw right through the surrender period.
If you are making additional investments or most sensible magnificence expenses to the annuity, there typically is a separate surrender period for each and every investment. Suppose you paid $5,000 into an annuity in 2022 and every other $5,000 in 2023. Yet again, think a six-year surrender period with a 6% fee that declines via 1%Â each and every 12 months. Must you withdrew the entire $10,000 in 2024, it is advisable to be in 12 months 2 of the surrender period in your first $5,000 investment, so your fee may also be 5%, or $250, alternatively it is advisable to most straightforward be in 12 months 1 of the surrender period in your 2nd $5,000 investment, so your surrender fee may also be 6%, or $300, for an entire surrender fee of $550 to withdraw your $10,000.
