Surrender Period

What Is a Surrender Period?

The surrender period is the amount of time an investor must hold on until they can pull out funds from a annuity without facing a penalty. Surrender periods can be numerous years long, and pulling out money before the finish of the surrender period can result in a surrender charge, which is basically a deferred sales fee. Generally, but not consistently, the longer the surrender period, the better the annuity's different terms.

Grasping Surrender Periods

Surrender periods are intended to deter investors from dropping, commonly long-term contracts. However this could stop an investor from making an emotional, rushed decision in a recurrent market, it might likewise limit the investor's flexibility to move money out on the off chance that assets aren't performing great. On the other hand, surrender periods are generally not a problem for investors who don't require cash rapidly or liquidity or the people who are getting above-market returns.

After the surrender period has passed, the investor is free to pull out the funds without being subject to a fee. Ordinarily, surrender fees are a percentage of the withdrawal amount. Generally speaking, the surrender fee declines over the long haul. A few annuities have no surrender period and hence no surrender fees. A regular annuity could have a surrender period of six years, and a surrender fee that beginnings at 6% and diminishes by 1% every year.

Illustration of Surrender Periods

As a speculative model, expect you purchased a $10,000 annuity in 2010 with a surrender period that has a 6% surrender fee in the main year, declining by 1% consistently later. In the event that you closed your annuity in 2013, which is during the third year of the surrender period, you would pay a fee of 4% of the $10,000, or $400. The surrender period would end in 2017, at which point you could pull out your $10,000 without paying a surrender fee. To keep away from possible surrender fees, you shouldn't put money into an annuity that you could have to pull out during the surrender period.

In the event that you make extra investments or premium payments to the annuity, there could be a separate surrender period for every investment. Assume you paid $5,000 into an annuity in 2012 and another $5,000 in 2013. Once more, expect a six-year surrender period with a 6% fee that declines by 1% every year. On the off chance that you pulled out the whole $10,000 in 2014, you would be in year 2 of the surrender period on your first $5,000 investment, so your fee would be 5%, or $250, but you would just be in year 1 of the surrender period on your second $5,000 investment, so your surrender fee would be 6%, or $300, for a total surrender fee of $550 to pull out your $10,000.

Features

The surrender period can run several years, and annuitants can cause critical punishments assuming invested funds are removed before that period has expired.
Other financial products likewise contain a surrender period, for example, B-share mutual funds and whole life insurance policies.
The surrender period is the time span in which an investor can't pull out funds from an annuity without paying a surrender fee.