Surrender Charges

In variable annuities, surrender charges are often used in place of front-end sales loads and, in effect, compensate the insurance company for the expenses of starting up a contract. Usually, the surrender charge is expressed as a percentage of the amount of the money that is either withdrawn or surrendered, and is generally imposed on the premiums paid and not the gains. Because the surrender charge usually declines over time, it typically reaches 0% after a number of years. For example, a variable annuity might have a 7% surrender charge that declines one percentage point annually. Thus, an investor who surrenders the account in year three will pay a 5% penalty, while one who cashes out in year eight can withdraw the investment free of surrender charges. The manner in which the surrender charge declines is detailed in parentheses next to the percentage figure. A variable-annuity surrender-charge description followed by /R signifies that the insurance company levies a rolling back-end load, meaning that the surrender charge is assessed on each additional payment.

In a variable-life policy, full surrender charges are exacted only if the variable life is redeemed prematurely (including cases in which the maximum partial-surrender charge has been exceeded), or if the insured fails to make the premium payments necessary to maintain the policy. Virtually no two full-surrender charges in the Morningstar variable-life universe are the same. Many policies may include fees based on the first-year target or guideline premium, yet there are many other options. In such cases, the charge is typically expressed as a percentage figure, whereas a charge dependent on the face value is often expressed as a dollar amount per $10,000 of face amount.

The maximum charge that can be levied by the insurance company when an investor withdraws his or her money before an account's maturity date (or annuitization date).