Surrender Fee

A surrender fee is a fee charged to an investor for early withdrawal or cancellation of funds from an insurance or annuity contract. Surrender fees encourage investors to keep their contracts and reduce the frequency of early withdrawals. Other products, such as mutual funds, may impose surrender fees on investors.

How a Surrender Fee Works

Surrender fees differ between insurance companies that provide annuities and insurance contracts. A typical annuity surrender fee is 10% of the funds contributed to the contract during its first year of operation. The surrender fee may decrease by 1% for each year of the contract. In this case, the annuitant would effectively have the option of no-penalty withdrawals ten years after the contract was signed.

Surrender fees may apply to some annuity and insurance products for periods as short as 30 days or as long as 15 years. A short-term surrender fee may apply to mutual funds. This usually penalizes the investor if they sell their shares within 30 to 90 days of purchasing them. The fees are intended to discourage people from trading investment shares in the short term. Variable annuities are also commonly used in this manner. If you must cash in an annuity or insurance policy, make sure you understand how much of the balance you will lose.

Reasons for Surrender Fees

Most investments with a surrender fee pay a commission to the salesperson who sells them. The commission is repaid by the issuing company through the fees it charges for the investment. The fees collected will not cover the commission costs if the investment is sold soon after it is purchased. Surrender fees protect the issuer against such losses.

Should You Avoid Surrender Fees?

In general, it's best to avoid investments with surrender fees, but life happens and emergencies occur. If you want to be flexible, look for investments that don't tie up your money for an extended period of time. When purchasing a life insurance policy, keep in mind that it is a long-term investment that will require you to pay premiums for a long time, even if you lose your job. When purchasing an annuity, ensure that the benefits outweigh the lack of liquidity and flexibility.