What financial products have surrender charges?
Several financial products have surrender charges attached to them. They're typically applied to investments that are intended to be used long-term and help the issuer offset the cost of selling and managing the investment.
So, for example, a cash-value life insurance policy likely has a surrender charge, as do most types of annuities. Some mutual funds also have surrender charges, but they typically only apply for months, not years. Always read all the documents that come with your financial investments before you agree to invest your money so you can be certain about the fees involved and how to minimize them.
How do surrender charges work?
With most annuities, surrender charges tend to shrink over time. This is really helpful since the period during which a surrender fee applies can last for many years or even a decade in some cases.
Let's say you have an annuity that has an 8% surrender fee. However, it decreases by 1% each year that you hold the investment.
So, during the first year, you'd give up 8% of your investment if you needed to divest, but as soon as you hit that first anniversary and rolled into the second year, you'd only have to shell out 7%, and so forth, as follows:
Year 1 (initial investment year): 8%
Year 2: 7%
Year 3: 6%
…
Year 7: 2%
Year 8: 1%
Year 9: 0%
In this example, if you made it to your investment's eighth anniversary and waited until the start of year nine to divest, you'd have no surrender charge. Different types of investments do this differently, which is why it's important to read the documentation for your investment carefully.