A surrender charge is a fee the contract subtracts if you take money out, or cancel, during a stated period. It is the main reason a fixed indexed annuity is not a substitute for a checking account. The SEC’s July 31, 2020 bulletin says the surrender period on an indexed annuity is often six to ten years, and it can be longer. That is the SEC’s description of the span, not a table of what every insurer charges this year.

You can get back less than you paid

FINRA and the SEC both say the same practical result: after a surrender charge, you may receive less than the premium you paid. A positive index credit does not automatically cover the charge. A minimum guaranteed value does not automatically mean the check you receive on day one equals the deposit. The SEC notes that even with a specified minimum, it can take years for the contract to break even if you cancel early. “Can take years” is not a promise that it will break even on a date this site can name.

The NAIC Buyer’s Guide says the charge usually declines each year. A schedule might start higher and step down until it reaches zero. “Usually” is the guide’s word. Your schedule is the one printed in the contract. Ask for the year-by-year percentages, not a single phrase like “it gets smaller.” If a producer cannot show the schedule, you do not have the fact you need.

Free withdrawals, with the NAIC’s example and no survey

The NAIC guide says some contracts do not charge surrender on small withdrawals, for example 10 percent or less, and it describes that feature as usually up to 10 percent. That is an example of a contract feature, not a finding that most contracts offer 10 percent, and not a finding that yours does. A “free” withdrawal can still be taxable. It can still forfeit index interest that has not been credited yet if you take it during a term. And a withdrawal that is free of a surrender charge can still be too large for an income rider and can cut the future income that rider was illustrating. Those are different rules stacked on one check.

Market-value adjustment

Some contracts, not all, include a market-value adjustment, or MVA. The NAIC guide explains that an MVA can increase or decrease the amount you receive when interest rates at withdrawal differ from rates around the time you bought. It is not a second index credit. It is an adjustment tied to rate changes, and it can move against you or for you. If the contract has no MVA, this paragraph does not apply. If it has one, the formula is in the contract and is not something to approximate in your head.

Free look

After you receive a contract you generally have a free-look period during which you can cancel. The NAIC and FINRA describe that window as often 10 to 30 days. The refund might be the premium, or it might be the account value, and which one you get can depend on the state. Ten days is not a national minimum this page is declaring, and thirty days is not a national maximum. Look at the cover letter that came with the policy and at your state’s rule. The free look is the cheapest time to decide the contract is wrong. After it ends, the surrender schedule is in force.

New York’s maximum charge table is New York’s

The New York Department of Financial Services publishes a maximum withdrawal charge for equity indexed annuities: 10 percent in years 1 through 3, then 9, 8, 7, 6, 5, 4, and 3 percent, and 0 percent from year 11. That table is a legal maximum in New York, not a description of a typical contract in New York, and not a national schedule. A contract issued for another state can have a different maximum or a different shape. Do not tell someone in another state that “the law caps it at New York’s table.”

On that same New York consumer page, the department says a death benefit is not a surrender. That statement is about New York. It means, in New York’s explanation, that the death benefit is not treated as the kind of withdrawal that triggers the withdrawal charge. It does not tell you the size of the death benefit. Other states write their own rules. If you are buying outside New York, ask the producer what the contract pays at death during the surrender period and whether a charge is subtracted.

Replacement starts the clock again

Moving from one annuity to another can be a taxable event or, in the right form, a tax-free 1035 exchange. Either way, FINRA warns that a replacement can start a new surrender-charge period. You can give up a contract that had two years of charges left and buy one with a new multi-year schedule. The new contract’s bonus, if it has one, does not erase that fact. Read taxes for the 1035 rule: the exchange can be tax-free when it goes from insurer to insurer, and it is not a 1035 if the owner receives the check. Revenue Ruling 2007-24 is the IRS statement of that second point.

What to compare before you accept a charge schedule

Write down the last year a charge applies, the percentage in year one, and the percentage in the year you think you might need the money. Write down any free-withdrawal percentage and whether it is “of premium” or “of account value,” because those bases differ and the contract picks one. Write down whether an MVA applies. Then compare that liquidity story with the reason you are considering the annuity. If the reason is an expense you might have in year three, a schedule that still charges in year three is part of the cost of the idea, not a footnote.

Nothing here says a surrender charge is improper. It is how many deferred annuities are designed. The question is whether the design matches money you can leave alone. The questions page turns this section into a list you can read aloud.

Sources

Not advice. IndexedAnnuity.com is not an insurance company, agency, broker-dealer, or tax advisor. Nothing here is a recommendation to buy, hold, or replace a contract. Guarantees exist only in a specific contract and depend on the insurer’s ability to pay. Products and state laws differ. Read the contract.
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