What Are Surrender Rights?

Surrender rights refer t𒁏o the ability to cancel an annuity or life insurance policy in exchange for its cash value. You end the contract and no longer owe future premium payments. Surrendering a contract early may result in additional fees plus income tax liabilities.

Understanding Surrender Rights

Surrender rights allow the owners of annuity and 澳洲幸运5官方开奖结果体彩网:life insurance contracts to exchange a policy for its cash value. Most insurers levy a 澳洲幸运5官方开奖结果体彩网:surrender charge (also known as a surrender fee) for early surrenders. These fees are typically larger in the early years of a contract and decline gradually over a number of years. Surrender charges are designed to allow the insurance company to recover its upfront expenses for setting up the contract. These charges discourage investors from using policies as short-term investments.

Before exercising a contract's surrender rights, contract holders should determine the contract's total cash value, what fees and taxes will be incurred upon surrender, and how much cash they'll ultimately receive from canceling the contract.

Implications of Surrendering a Contract

If you surrender a life insurance or annuity contract, for example, the insurer pays you the surrender value. However, part of this sum may be taxable, thus affecting your 澳洲幸运5官方开奖结果体彩网:taxable income♓. In general, the return of premiums you paid into the contract are n๊ot taxable. However, you would owe income tax on any earnings from your life insurance cash value or annuity investments.

If you surrender an annuity and are younger than 59 1/2, you could also owe a 10% early withdrawal penalty to the IRS on your annuity earnings. This is because annuities are meant to save money for retirement. If you bought an annuity with pre-tax money from a retirement plan, you would owe income tax on the entire balance after a surrender, plus the possible early withdrawal penalty.

Surrendering a life insurance policy will end your protection. Your heir would no longer receive a death benefit after you pass away.

Surrender Fees

Another element policyholders should consider before surrendering a contract is whether such an action would carry a 澳洲幸运5官方开奖结果体彩网:surrender fee. Surrender fees can apply for a decade or longer, depending on your contract terms. Surrender fees vary 👍among insurance compa⛎nies and among annuity and insurance contracts.

For example, a surrender fee of 10% could be charged for withdrawals in the first year. For each successive year of the contract, the surrender fee might drop by one percentage point. This effectively provides the 澳洲幸运5官方开奖结果体彩网:annuitant a no-penalty withdrawal after 10 years in the contract. This period of time during which surrender charges may be levied is called the surrender period.

Even though surrender fees typically decline over time, a decreasing surrender fee could still result in a larger penalty if the investment has grown over time. For example, a 10% fee applied to $100 is only $10, but if that $100 grows to $1,000 a🌺nd tꦇhe fee falls to 5%, the surrender fee would rise to $50.

Example of Surrender Rights

T💞om has a 10-year $100,000 cash value life insurance policy with annual premiums of $5,000. After two years of premium payments, Tom loses his job and decides to surrender his policy. He stops paying his premiums and calls the insurance company to inform them that he has decided to cancel the policy. They send him a surrender form. He completes the form and sends it back.

The insurance company charges him a 10% surrender fee and refunds the premiums he has paid into the account along with any returns generated from his cash value account. His policy earnings are taxed at ordinary income rates but the premiums refunded are not.

Alternatives to a Surrender

In the case of life insurance, getting a 澳洲幸运5官方开奖结果体彩网:life settlement in exchange for the life insurance contract may be a🍬 more lucrative option than surrendering the policy. You could get 🧸more money from selling your policy versus surrendering for the cash value.

Life insurance policyholders could also withdraw their cash value or take out a 澳洲幸运5官方开奖结果体彩网:cash value loan. This maintains some life insurance protection for your heirs. If you surrender your policy, you lose your life insurance. To get insured again, you would need to pass medical 澳洲幸运5官方开奖结果体彩网:underwriting, which is not guaranteed.

With annuities, many companies offer a free withdrawal provision. This allows you to pull out a set percentage of the annuity's value (typically up to 10%) each year without a surrender charge. (However, even free withdrawals of earnings are still subject to government taxation). Annuity companies could let you take out larger lump sum withdrawals for special circumstances, like if you need long-term care in a nursing home. This way, you get the cash you need without canceling the annuity altogether and owing the surrender charge.

The Bottom Line

Surrender rights allow the owner of an annuity or life insurance policy to surrender the contract in exchange for its current cash value. Most insurers will levy a surrender charge if you turn in your contract during its early years. There may also be tax consequences for exercising your surrender rights. Make sure you unไderstand the financial impact of these fees and taxes before deciding to surrender your annuity or life insurance policy.