An annuity provides a trade-off: You contribute money, and later you withdraw your contributions and any money they've earned either as a lump sum or a stream of payments. The payment stream can continue for a fixed period or for the rest of your life. You begin withdrawing money on the annuity date but can surrender the contract before this date.
Surrendering Your Annuity
Upon surrender, you receive the net cash value, or surrender value, of your annuity contract. This value is equal to your contributions and earnings minus fees, previous withdrawals, outstanding loans and interest and surrender charges. Insurance companies, which issue annuities, periodically subtract fees for contract administration, investment charges and the costs of any life insurance coverage the contract includes. Unless the annuity resides in an individual retirement account, you can borrow part of the cash value before the annuity date. You pay interest on the loan, but your payments replenish your cash value. Qualified annuities, issued by employer plans, have strict repayment schedules, but a nonqualified plan held directly with the issuer may have more lax repayment rules.
You may have to pay a surrender charge to the annuity issuer when terminating the contract before the annuity date. Often the surrender charges are high in the early years of the contract -- sometimes 15 percent or more -- and slowly decline as the annuity date approaches. These charges decrease your contract's surrender value.