Surrender Fee: What It Is, How It Works, Reasons

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Julia Kagan
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Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.

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Updated July 01, 2024
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An insurance agent explaing the surrender fee for insurance policy with a couple before they sign the documents.

PhotoAlto/Frederic Cirou / Getty Images

What Is a Surrender Fee?

A surrender fee is a penalty charged to an investor for withdrawing funds from an insurance or annuity contract early or canceling the contract. Surrender fees act as an incentive for investors to maintain their contracts and reduce the frequency of early withdrawals. Investors may run into surrender fees for other products, such as mutual funds.

Key Takeaways

  • A surrender fee is a penalty for taking an early withdrawal from an annuity or canceling it altogether.
  • A surrender fee might apply to a mutual fund, too, but it will usually be short term.
  • The fee can be steep, so avoid such products if you foresee the need for liquidity in your investments.
  • A surrender fee is also referred to as a surrender charge. If you cancel your life insurance policy, for example, you will be hit with a surrender charge.

How a Surrender Fee Works

Surrender fees vary among insurance companies that offer annuity and insurance contracts. A typical annuity surrender fee could be 10% of the funds contributed to the contract within the first year it is effective. For each successive year of the contract, the surrender fee might drop by 1%. Thus, the annuitant, in this case, would effectively have the option of no-penalty withdrawals 10 years after the contract was signed.

Surrender fees can apply for periods as short as 30 days or as long as 15 years on some annuity and insurance products. In the case of mutual funds, a short-term surrender fee may apply. This usually penalizes the investor for selling shares within 30 and 90 days of its purchase. The charges are designed to discourage people from using investment shares as short-term trades. This arrangement is also common with variable annuities. If you have to cash in an annuity or insurance policy, make sure to check how much of the balance you'll be losing.

Some mutual funds impose a surrender fee to discourage short-term trading.

Reasons for Surrender Fees

Most investments that carry a surrender fee pay an upfront commission to the salespeople who sell them. The issuing company recoups the commission through the fees it charges for the investment. If the investment is sold soon after it's purchased, the fees collected will not cover the commission costs. Surrender fees protect the issuer against these types of losses.

Should You Avoid Surrender Fees?

In general, it's smart to avoid investments with surrender charges, but life circumstances change and emergencies happen. If you crave flexibility, look for investments that don't lock up your money for long periods of time. If you're buying a life insurance policy, understand that it is a long-term investment and that you will need to pay premiums for a long time, even in the event of a job loss. In the case of an annuity product, make sure the benefits outweigh the lack of liquidity and flexibility.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

  1. MassMutual. “Annuities: Understanding Surrender Charges.”

  2. Charles Schwab. "Mutual Fund Fees and Costs."

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