Why are surrender charges imposed on annuities?

Surrender charges are imposed on annuities primarily to discourage early withdrawals. Annuities are designed as long-term investment products, so surrender charges serve to protect the insurance company from the financial risk associated with policyholders withdrawing their funds before a certain period, typically referred to as the surrender period. This period is often several years and reflects the time it takes for the insurance company to recover its costs and ensure that the product is financially viable.

These charges help maintain the stability of the annuity contract, ensuring that the insurer can meet its obligations to all policyholders. The intention behind these charges is not only to foster a longer-term commitment from the investor but also to help finance the upfront costs that the insurer incurs when issuing the annuity, such as marketing, commissions, and administrative expenses. Thus, the design of surrender charges promotes a long-term investment horizon, benefiting both the insurer and the annuity holder when the funds remain invested over time.