Surrendering an Annuity

Key Takeaway

Surrendering an annuity means you are canceling your contract with your issuing insurance company prior to the end of the contract term. Depending on how long you have owned your annuity, you may have to pay a surrender charge, but the cost of this surrender charge can decrease the longer you’ve had the annuity. 

Surrender Annuity Graph

What Does Surrendering an Annuity Mean? 

When you surrender your annuity, this means you are canceling your contract with the issuing insurance company prior to the end of the term. You can typically contact the insurance company to walk you through the surrendering process. The details of your surrender process will depend on your specific contract.

However, surrendering an annuity can be expensive. When you surrender your annuity, you may have to pay surrender charges and potentially income tax that was deferred up until your cancellation. When tax season comes around, if taxes are due, you will have to pay them for the year you received them.

Surrendering your annuity all boils down to a four-step process:

  1. Contact your issuing insurance company
  2. Complete all relevant paperwork
  3. Pay any surrender charges 
  4. Keep track of all this documentation for tax purposes

You can opt for either a full or partial surrender. A full annuity surrender occurs when you cancel the annuity contract completely. With a partial annuity surrender, you can withdraw only a portion of your contract’s financial value and may be able to reduce the amount you could pay in surrender charges.

What Is a Surrender Period?

You may have heard the term ‘surrender period.’ A surrender period is the amount of time you must wait before you can start withdrawing funds from your annuity without paying penalty fees. These structured periods can range from a few years to many years long. Some face penalty charges for accessing their funds at the seven year mark, for example.

Surrender periods typically exist to discourage you from canceling your long-term contract–but this can be helpful, especially if you tend to get anxious during cyclical downturns in the market or make hasty decisions with your financial investments. This surrender period can encourage you to wait it out and give you time to see the market improve. However, they can also limit your flexibility if you want to review or make changes to ill-performing assets.

Once the surrender period is over, you are generally free to withdraw funds from the annuity without financial fees or penalties. Surrender fees are typically a percentage of the withdrawal amount, and as time passes, the surrender fees typically decline, as well.

It’s important to note that not all annuities have surrender periods or fees. You can talk to insurance agents to help you understand the surrender period and any potential fees.

Can Financial Annuities Be Surrendered in Exchange for Cash Value?

Yes–with both full and partial surrenders, you are essentially exchanging your annuity for immediate cash value. With life insurance policies that have a cash value or investment component in particular, you can usually surrender the policy and annuity. However, you may run the risk of losing your policy coverage.

For example, if you have an annuity, your surrender value may be significantly lower than your original purchase price. You may lose your guaranteed lifelong income, or deal with a loss of value as your surrender value paid is lower than the purchase price to get the plan.

In some situations, if your annuity is tied to a term plan with a single premium, limited premium, or return of premium, you may lose your life insurance coverage. With a loss in coverage, you may have to pay higher premium rates due to your increase in age or risk not qualifying for a new policy depending on your health conditions or lifestyle habits.

Because of these factors, you may need to pause and consider surrendering your annuity in exchange for the cash value.

Can Withdrawals Be Made During the Surrender Period?

There are insurance companies that allow annuity owners to withdraw from their account value during the surrender period. In some instances, you may not even need to pay surrender fees or charges!

Before you go to make that withdrawal, though, you still need to be careful. If you wind up withdrawing more than your contract allows, you may be faced with a penalty even after the surrender period has ended. Additionally, if you make these withdrawals before you turn fifty-nine and a half years old, you could face tax consequences.

You may be in luck depending on your specific contract. There are annuity contracts that can include crisis waivers for emergencies or special situations. This can range from terminal illness diagnoses to nursing home confinement. Ask about your options for waivers when you are in the process of buying your annuity, these waivers may be able to grant you some flexibility.

What Are the Alternatives to Surrendering Annuity Payments Early?

There may be ways to avoid surrender charges or gain strategic access to cash without surrendering your annuity. For example, some annuities allow policyholders to make partial withdrawals while keeping the annuity intact, but you may be subject to taxes or other fees.

There is also the IRS Code Section 1035, which can allow you to exchange your current annuity for another one without immediate tax consequences. This way, you can explore other investment opportunities with potentially lower fees and improved benefits without surrendering your annuity altogether.

Another option is to explore your opportunities with loans, such as for a mortgage. There are some annuities that allow policyholders to take out a loan against their annuity’s cash value. You may have to pay interest on this loan, and while it’s not a direct alternative to surrendering the annuity, it can grant you that flexibility and access to financial funds when you need them.

How Long Does It Take to Get Paid Out?

After you’ve submitted all of the paperwork for your surrendered annuity, the amount of time it takes to get paid out can depend on the type of annuity you have. This selling process can range from a few business days to three months, depending on your annuity.

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The information above is for educational use only and does not represent insurance, tax or legal advice. It is not a recommendation or solicitation to buy insurance. Please talk to your licensed insurance agent for more information about life insurance and your needs. Please consult with the appropriate professional for tax or legal advice. Guarantees are backed by the claims-paying ability of the issuing insurance company.

Article Author: Meredith Bell
Author Bio: Meredith joined Everly in 2022 and has 20+ years of experience in the life insurance industry. She has held various roles in advertising, marketing, communications, sales and distribution support, and product development. Outside of the office, Meredith lives with her daughter Kennedy and their dog Mavis. Meredith enjoys cooking, camping, gardening, hiking, and bourbon (though not always at the same time). She is a live music enthusiast and an avid reader. Her favorite quote is by Thomas Jefferson: "I cannot live without books." Meredith agrees, but would add cheese, movies, and dogs to that list.

Policies are issued by Everly Life Insurance Company (“Everly Life”), Topeka, KS. Everly Life is not licensed in the state of New York and does not solicit or transact business in New York.

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