A surrender charge is the insurer's way of saying: we paid commissions and invested your money long-term, so if you leave early, you pay a fee. The charge shrinks each year until it disappears.

An illustrative schedule (each contract sets its own): 7% in year 1, 6% in year 2, 5%, 4%, 3%, 2%, 1% in year 7, and 0% from year 8.

Surrender value = premiums paid + credited interest - surrender charge. Example: $700 paid + $35 interest - $70 surrender charge = $665.

This is why clients must understand liquidity limits before buying, and why California's annuity rules require the agent to explain the surrender period and surrender charge.

Death during the accumulation period: the contract pays a death benefit to the beneficiary. Many deferred annuities guarantee at least the greater of the account value or the premiums paid (less withdrawals), but the exact formula is set by the contract. If no beneficiary is living or named, the money is paid as the contract directs, usually to the estate.

Tax: any unpaid annuity benefits paid to a beneficiary after the annuitant's death are taxable to the extent they exceed the cost basis.