Surrendering an Annuity: How to Surrender Annuities

You’ve likely heard of annuities as they pertain to retirement; these are known as ‘retirement annuities.’ Retirement annuities generally promise guaranteed income for a retiree until their death, and sometimes, they can act similarly to a typical life insurance policy, in that they can act as a death benefit to any surviving spouses or beneficiaries.

However, retirement annuities can differ from life insurance, and the terms of your retirement annuity depend on your specific contract. Consult with your financial advisor when making plans for retirement. In this annuity guide, we’ll discuss the process of surrendering annuities in general and compare ways to surrender any annuities on your life insurance policy.

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. While there may be many helpful guides online about surrendering, 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 on your annuities, you will have to pay them for the year you received them.

Additionally, depending on your annuity, you may have to pay a charge if you surrender within the surrender charge period. This surrender period typically begins at the start of your annuity’s contract. The length of this surrender period can vary, and the fee charged usually decreases over the course of the surrender period. Here’s a quick guide that can serve as an example of charges you may see if you surrender within the surrender period:

• Year one: 6% surrender charge
• Year three: 4% surrender charge
• Year five: 2% surrender charge
• Year seven: No surrender charge

Remember, this annuity surrender guide only serves as an example of what you may see in the terms of your contract. Always consult with your financial advisors, insurance agents, and other investor experts regarding the specific terms of your annuity.

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 surrender documentation for tax purposes.

You can opt for either a full or partial surrender of your annuities. 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.

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 surrender periods can range from a few years to many years long. Some face penalty charges for accessing their financial funds at the seven year mark, for example.

Surrender periods for annuities 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 financial 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 charges & fees typically decline, as well.

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

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

In some cases, your annuity’s cash value account is called the ‘account value.’ The account value grows during the financial accumulation phase. It differs from cash value accounts tied to life insurance in that it simply refers to the total accumulated value of the annuity contract prior to any charges or investment withdrawals. If you surrender funds from both your policy and annuity, 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 financial 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 financial factors, you may need to pause and consider surrendering your annuity in exchange for the cash value of the investment.

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 financial charges!

Before you go to make that withdrawal, though, you still need to be careful with annuities. If you wind up withdrawing more than your contract allows, you may be faced with a financial penalty even after the surrender period has ended. Additionally, if you make these financial 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 annuity's contract, like with a retirement investment. 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 with your investment.

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 financial charges.

Sometimes, you can set up automatic payments from your annuities. These automatic payments can occur with varying frequency–such as quarterly or annually–depending on the terms of your agreement. These payments may continue until you choose to stop them or the account exhausts its financial funding. Unlike typical annuity arrangements, systematic financial withdrawals can often be canceled. Additionally, your insurer isn’t guaranteeing that these financial payments will last for the rest of your life.

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 financial investment opportunities with potentially lower charges 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 or mortgage 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.

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.

For example, if you have an immediate or income annuity, you may be eligible to receive payout income within one year of your annuity’s purchase. A common type of immediate annuity is the single premium immediate annuity, which is typically designed to convert a lump sum payment into a consistent stream of income.

Another example includes deferred annuities. This is a type of annuity that delays financial payments for several years after it is purchased and is more common for retirement annuities. These annuities can generally begin anytime between two and forty years in the future from the time of purchase.