A surrender charge is a fee the insurance company applies if you withdraw more than the contract's penalty-free amount during the surrender period — commonly the first 5 to 10 years. The charge usually starts at a set percentage and declines each year until it reaches zero.
Surrender charges are why annuities are intended for money you won't need all at once in the near term. Most contracts allow a free-withdrawal amount each year so you can access some funds without the charge.
Example
A contract with a 7-year surrender schedule lets the owner take out 10% per year penalty-free; withdrawing 30% in year two would trigger a surrender charge on the excess.
This definition is for general educational purposes only and is not financial, tax, or legal advice. Tim Hartle is an independent insurance professional. Annuity guarantees are subject to the claims-paying ability of the issuing insurance company and are not FDIC insured. Rules and product features vary by situation and by state. Please consult a qualified advisor about your own circumstances.