Surrender Value

Surrender Value Definition

Surrender value refers to the value of an annuity should the annuitant choose not to continue paying on the annuity through the contracted accumulation period. It is the specific amount the insurance company is willing to refund to the investor or consumer should the individual choose not to fulfill the obligation of the annuity and terminate the agreement early. The surrender value of an annuity takes into account any surrender charges or penalty fees that are built into the annuity contract in order to deter investors from choosing not to pay premiums.

Surrender Value vs Cash Value of an Annuity

Because an annuity is considered a retirement vehicle and is not designed to be cashed out prior to a specific age and certainly not prior to the commencement of the payout period, the surrender value of a life insurance taxable annuity will often be significantly less than the cash value of the annuity, regardless of the type of annuity in question. In order to be able to offer guaranteed payments for life to annuitants, insurance companies must protect themselves against the inherent risk involved in such offers by ensuring that it is costly to get out of an annuity, so there may be a significant difference between the surrender value and the cash value of an annuity.

The surrender charge will often be high enough to be a deterrent to withdrawing funds from an annuity. In many instances, insurance companies will structure the surrender value so that the longer the annuity is in place, the lower the surrender charge will be. In some cases, simply waiting for one more anniversary date to pass on an annuity before withdrawing funds can have a significant difference in the amount of the surrender charge. Since the surrender charge, along with other penalties, are subtracted from the cash value of the annuity, patience can literally pay off.

An annuity offers a person distinct advantages for tax deferred accumulation of wealth and reduced taxable income during the payout period, since a portion of the payout is not taxed as it is considered a return of the original investment. In order to take advantage of these opportunities, however, the annuitant must follow through on the annuity contract by making the required premium payments over the specified period of time. If that does not happen, or if the annuitant decides at some point to withdraw all that has been placed into the annuity, the insurance company will only release the surrender value of the annuity. When combined with rates of inflation and other factors, withdrawing the surrender value of an annuity rather than waiting for the accumulation period to end can be one of the most costly financial mistakes a person could possibly make.

The surrender value of the annuity will never be as valuable as the cash value, and the cash value of the annuity is only valuable if used for its intended purpose to provide secure monthly, quarterly, or annual payments to the annuitant from retirement through death.
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