What Happens to Cash Surrender Values After the Final Premium Payment?

by Eric Bank, studioD Google

An annuity is a way to receive periodic cash payments for a set period or for the rest of your life. You buy an annuity contract from an insurance company and make one or more premium payments to fund the policy. The cash value of the contract equals the premiums paid plus the earnings on those premiums. You can surrender a contract until the annuity payments begin.

Annuity Phases

You build up your annuity’s cash value during the accumulation phase. In an immediate annuity, you pay a lump-sum premium and begin receiving payments right away. If you buy a deferred annuity, you can make multiple premium payments and invest the premiums at a fixed interest rate or in variable investments, such as mutual funds, stocks and bonds. On the annuity date -- the start of the distribution phase -- you must decide whether to begin receiving periodic payments or withdraw the cash value. Removing the cash value before the annuity date is called a surrender.


You make your final premium payment on or before the annuity date. If you decide you want out of your contract before the annuity date, you can surrender the policy and receive the surrender value -- the cash value minus the surrender charge. The insurance company tacks on this charge to ensure it doesn't take a loss on the contract. Normally, the surrender charge declines over time. On or before the annuity date, the surrender charge disappears. Normally, by the time you pay your last premium, your contract’s surrender value is equal to its cash value. In other words, you surrender value increases after the final premium payment.

Guaranteed Payments

Life annuities make payments until you die. You might fear that you’ll pass away soon after annuity payments begin. To allay these fears, insurance companies offer guaranteed payment contracts that pay out for a period certain, even if you die before the period ends. The post-mortem payments go to your beneficiary. The contract may also offer a death benefit equal to or greater than the remaining cash value. Your beneficiary can take the death benefit as a lump sum or may convert the amount into an annuity to stretch out the payments and the tax on those payments.


The part of each annuity payment that stems from your cost basis is tax-free. You have to include the remainder of each payment in your taxable income. If you have a qualified annuity -- one that resides in an individual retirement account or employer plan -- you generally have no cost basis and the payments are fully taxable to you and your beneficiary. A non-qualified annuity’s cost basis is the total of the premiums you paid in less any loans or withdrawals. You and your beneficiary can figure the taxable portion using the IRS General Rule. Payments from a Roth annuity are tax-free. If you surrender a non-qualified policy, any surrender charge reduces the profit or increases the loss on the contract. This lowers your tax bill. The profit or loss is the cost basis minus the surrender value. You can’t deduct a loss when you surrender a qualified annuity.

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