Indexed Annuities and Surrender Periods – Why?

We frequently get asked these kinds of questions when addressing indexed annuities as part of what we call the “bucket strategy” of retirement planning:

  • Why does an annuity make sense in my retirement portfolio?
  • What are the fees associated with these sorts of products?
  • What is a surrender period, and why is it part of the fine print when it comes to annuities?

According to Investopedia, the surrender period is the time frame in which an investor cannot withdraw funds from an annuity without paying a surrender fee.

In this SRS Short, Lou Aarons explains the necessity of a surrender period, and why, when part of a well planned financial strategy, the inability of withdrawing your funds becomes less of a burden, and more of a bolster to your long-term portfolio outcomes.


Hi, Lou Aarons here, a partner at Secure Retirement Strategies. I want to talk about surrender periods. Why does an index annuity have a surrender period?

The insurance company with an index annuity has use of your money. Unlike a variable annuity where you’re actually invested in the mutual fund that it holds, here the insurance company has use of your money, and they are, yes, making money on your money. In exchange for that, they are paying you some form of benefit from the index that you’re using and they are guaranteeing that you don’t lose any money if that index is ever negative. Since they’re making money on your money, the longer that they have it, the more money they make and the more money and more protection you make. Therefore, they establish a surrender period.

Those surrender periods run the range from five years to seven to 10 and longer. It depends on the product and the benefits. All part of the information that you need to understand when you are looking at an indexed annuity and deciding if it is right for you. At our next episode, we’re going to be talking about the tax deferral benefits of an annuity contract.