Surrender Free Annuity

Wouldn’t it be great if annuities came without surrender fees? Some people would bail early but most of the people I know would give it time. In the end it would all work out the same. Some would quit early and some would stay later and it would all average out. Most people who have bought annuities from me have kept them well after the surrender charges went to zero.

This brings up a specific question that many people have about what happens after the surrender charges disappear. Well it depends on the contract. I’m at the point where several annuities I have sold in the past are coming out of surrender so I’ve had many clients in the past couple of years ask the question.

The basic answer is that nothing changes. You still own the contract but there’s no penalty for taking the money elsewhere, whether it be to buy something or put it in another investment. But there are differences in each contract and that leads to different options you might have, depending on what type of contract you own. If you already have an annuity and don’t know this then pay attention. For others who are thinking about buying an annuity this is something you need to ask before you commit.

Early in my career I sold only fixed annuities. Most came with a multi-year guaranteed rate that would only reset to a higher or lower rate after the surrender charges were gone. Then the company would reset the rate, based on market conditions at the time, and you could choose to keep it or walk away. All of those annuities had a minimum rate for another term of years but the owners never entered a new surrender charge period, unless they switched annuities. That’s why I still have in-force contracts that I sold nearly 20 years ago. The owners are now in their 80s and have been surrender free for ten years or more but kept the annuities because the guarantee was so good.

Last year a guy called who had bought a similar fixed annuity sometime in the 1980s. After surrender charges were gone he had a guaranteed minimum interest rate of 5.5% so he kept it. He has owned the annuity for close to 40 years with no surrender charges for the about 30 years and has earned nothing less than five and a half percent.

These days, the multi-year guaranteed fixed annuities are most popular. These ones work a bit differently. After the initial surrender charge period is over, the company gives you 30 days to move the money. If you don’t move the money then you’ll get the offered renewal rate and enter a new surrender charge period. Before that happens you can transfer the money out or surrender the whole thing penalty free. 

This is where the source of funding makes a big difference. If you use an IRA to buy it then you have more options because the money can be transferred to any other IRA. For cash purchases there are tax considerations. The money can only be transferred tax-free to another annuity. If you surrender it then you’ll pay taxes on all the gains in the contract.

For this reason I know several people with highly-appreciated non-qualified annuities (purchased with cash) and have no choice but to keep it or get a new contract because they don’t want to pay the taxes.

This brings me to fixed indexed and variable annuities. These are much more like the fixed annuities that started my career. When the surrender charges go to zero, that’s the only thing that changes. You still own the contract and have all the investment options but it comes along with having full liquidity. You are not forced to make a quick decision and can hold the contract for the rest of your life, or until you find a more suitable option.

And now for my final point to reinforce everything. All deferred annuities have a maturity date. That is the date at which the contract comes to an end, at which point you are forced to annuitize or liquidate the contract. Relax, however, because that date is a long way off. Contract maturity dates happen on your birthday at age 95-115, depending on the company. It’s something you should know before you buy but nothing material until you get really really old.

It’s pretty simple really and certainly nothing you should be worried about. This qualifies as a good question that you should ask and any decent agent should be able to answer it. If you have any other questions about an annuity you own or are considering then feel free to reach out. I am here to help.


Podcast about Surrender Free Annuity

What You’ll Learn from This Episode:

[4:30] Bryan talks about surrender free Annuity 

[5:17] What happens to a surrender fee?

[5:40] Surrender period for annuity vs. a Maturity date for annuity

[7:35] For the next ten years, there will be a reset to the current rates subject to a guaranteed minimum

[10:17] You do not automatically enter a new surrender period

[13:34] Generally, a surrender-free means no surrender fee. The contract just stays the same.

[13:57] Surrender free annuity doesn’t end; it only continues 

Key Quotes: 

[5:20] “When it comes to a surrender free in most cases, it simply means that you don’t have surrender charges.”

[7:12] “With a contract like traditional fixed annuities, they would spell out your options.”

[10:34] “You can’t just blankly assume that they all work that way. You should know ahead of time what your options are.”

Further readings

Are Fixed Indexed Annuities a Good Investment?

Fixed Indexed Annuity Taxes

Who Shouldn’t Buy a Fixed Indexed Annuity

Last Updated on April 3, 2024 by Bryan Anderson