What does a surrender charge refer to?

A surrender charge refers specifically to a fee that is imposed when an annuity holder withdraws funds from their annuity before a specified period, often known as the surrender period. This period is typically several years, during which the contract may impose penalties to discourage early withdrawals. The primary purpose of this charge is to protect the insurance company and ensure that they can recoup some of the costs associated with issuing the annuity.

Understanding surrender charges is critical for consumers, as these fees can significantly impact the overall return on the investment if funds are withdrawn early. Annuities are designed to be long-term investment vehicles, and the surrender charge serves as a deterrent against premature access to funds. This feature emphasizes the importance of careful planning and consideration of an investor's liquidity needs before committing to an annuity.