Why surrender charges exist
When you buy a 5-year MYGA, the carrier buys 5-year bonds to fund your guaranteed rate. If you walk away early, the carrier may have to sell those bonds at a loss to give you back your money. The surrender charge protects the carrier — and, indirectly, every other contract owner — from that risk.
Typical surrender charge schedules
| Year | 5-Year MYGA | 7-Year MYGA | 10-Year FIA |
|---|---|---|---|
| 1 | 9% | 9% | 10% |
| 2 | 8% | 8% | 10% |
| 3 | 7% | 7% | 9% |
| 4 | 6% | 6% | 8% |
| 5 | 5% | 5% | 7% |
| 6 | 0% | 4% | 6% |
| 7 | 0% | 3% | 5% |
| 8+ | 0% | 0% | declining to 0% |
Schedules vary by carrier and product. Always read the contract.
Built-in waivers — when you can withdraw penalty-free
- 10% annual free withdrawal: Most contracts allow withdrawal of up to 10% of the contract value each year (usually starting in year two) with no surrender charge.
- Nursing home / long-term care: Most contracts waive surrender charges if you're confined to a nursing home for 30–90+ days.
- Terminal illness: Diagnosis of a terminal illness (typically <12 months life expectancy) waives charges.
- Death: Death benefit is always paid free of surrender charges.
- Annuitization: Converting to lifetime income avoids the charge entirely.
How to think about surrender charges before buying
Match the annuity term to money you genuinely don't need for that period. The surrender charge isn't a fee you pay — it's a fee you'd only pay if you broke a promise. For retirees sleeving cash for long-horizon income, it's a feature, not a bug. For anyone considering an annuity with cash they may need in 1–2 years, it's a strong signal to choose a shorter term or a different product entirely.
Related: how a 1035 exchange interacts with surrender charges.
Frequently asked questions
- What is an annuity surrender charge?
- A surrender charge is a fee the insurance carrier charges if you withdraw more than the contract's penalty-free amount during the surrender period. It compensates the carrier for the long-term assets they bought to back your guaranteed rate. Charges typically start between 7% and 10% in year one and decline to 0% by the end of the surrender period.
- How long does a surrender period last?
- Surrender periods usually match the guaranteed-rate term: a 5-year MYGA has a 5-year surrender period, a 10-year FIA has a 10-year surrender period. Some bonus annuities extend the surrender period beyond the rate guarantee.
- Can I avoid surrender charges?
- Yes, in several ways: (1) wait until the surrender period ends, (2) use the annual penalty-free withdrawal provision (typically 10% per year after year one), (3) trigger a contract-level waiver such as nursing home or terminal illness, (4) annuitize the contract for lifetime income, or (5) 1035-exchange into a similar product (note: this transfers — doesn't eliminate — remaining charges if applicable).
- Do all annuities have surrender charges?
- Most do. A few products — typically newer income-rider-focused FIAs or short-term liquidity products — have no surrender charges, but they usually offer lower rates in exchange. Single premium immediate annuities (SPIAs) generally have no surrender charge because you've already converted to income.
- What's a typical surrender charge schedule?
- A representative 7-year MYGA might charge 9% in year one, 8% in year two, 7% in year three, declining by 1% per year until reaching 0% in year eight. FIAs often follow similar patterns over 5 to 10 years.
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