Surrender Value vs. Cash Value Annuity

by Will Gish

All retirement plans come with their fair share of perplexing fine print items. Annuities, which provide regular payments for the duration of the annuitant’s life, are no exception to this rule. The surrender value and cash value of an annuity fall within the fine print of an account. Understanding these two terms requires examining the way in which annuities work, and how these terms relate to one another.

Cash Value

The cash value and surrender value of annuity are the same thing. Cash value, also known as cash surrender value or surrender value, equals the amount of an annuity you can access if you forgo your annuitized payments and cash your account. The cash value of an annuity differs from the accumulation, or actual, value of the account because you pay a fee for cashing the account. Because annuities exist to make regular payments over a long period of time, institutions providing annuities penalize you for cashing, or surrendering, an account. If an annuitant dies, the survivors receive the cash value of the account.

Surrender Charge

The surrender charge directly affects the cash value of an annuity account. This charge comprises the amount an institution charges you for surrendering, or cashing, your annuity account. Surrender charges constitute a form of penalty for reneging on the original contract of an annuity. The cash value of an account equals the accumulation value of the annuity, minus the surrender charge. The nature of a surrender charge depends upon the institution in question -- it may assume the form of a percentage of the account of a flat payment.


You can calculate the cash value of your annuity account if you know the account’s accumulation value and the surrender charge. Accumulation value constitutes the amount of cash you invested in the account, plus any capital earned from interest and investment. For instance, assume your annuity holds a current accumulation value of $350,000 with a 15 percent surrender charge. The cash value of your account equals 350,000 - (350,000 x .15), which is 350,000 - 52,500 = $297,500. To find the surrender charge on your account, check the annuity prospectus.

Commuted Cash Value

Commuted cash value differs significantly from cash or surrender value. The commuted cash value of an annuity constitutes the value of all future payments you should receive from your account. You only hold the option of receiving the commuted cash value of an account if your institution allows the inclusion of a commuted cash value clause in your annuity contract. This value differs from the accumulation value of an account because future payments may hinge on accrued interest from investments. Thus, the commuted cash value of an account may amount to more than the accumulation value of an account.

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