Buying an annuity is a long-term decision, but circumstances change. Sometimes exiting an annuity is the right financial move. These are the six most legitimate reasons to sell or exit an annuity — and the best strategy for each.
Reason 1: Fees Are Too High and Eroding Your Returns
Variable annuities in particular can carry total annual fees of 2.0%–3.5%+ when you stack mortality and expense (M&E) charges, rider fees, and sub-account expenses. Over 20 years, 2.5% in annual fees on a $300,000 account costs roughly $265,000 compared to a low-cost index fund portfolio.
Exit strategy: 1035 exchange to a commission-free variable annuity (Fidelity, Vanguard, Schwab) with lower all-in fees. This preserves tax deferral and carries over your cost basis without triggering a taxable event.
Reason 2: Your Financial Situation Has Changed
You bought the annuity expecting a certain retirement income plan. Then something changed: a divorce, an inheritance, a job loss, a pension, or a health change that altered your longevity outlook.
Example situations:
- You inherited a pension and no longer need the annuity’s guaranteed income feature
- Your spouse died and the joint-life annuity payout option is now unnecessarily generous
- You developed a serious illness and a life-only SPIA no longer makes sense
Exit strategy: Full surrender (if outside surrender period) or use free withdrawal provision to systematically access the funds. If within surrender period, weigh the charge against the ongoing cost of staying in the wrong product.
Reason 3: Better Alternatives Are Available
Annuity markets change. MYGA rates in 2026 are significantly higher than 2021 rates. If you purchased a MYGA or fixed annuity at a low rate and the surrender period has ended, rolling into a new product with a higher guaranteed rate may make sense.
Example: You bought a 5-year MYGA at 2.5% in 2021. The surrender period expired in 2026. Current 5-year MYGA rates are 5.00–5.75%. A 1035 exchange to a new MYGA at a higher rate adds significant value.
Exit strategy: 1035 exchange at end of surrender period. No tax, no charge. Straightforward upgrade.
Reason 4: Insurer Rating Has Deteriorated
If the insurance company’s AM Best rating drops below A-, you face elevated insolvency risk. While state guaranty associations provide some protection (typically $250,000), a deteriorating insurer is a legitimate reason to exit.
Exit strategy: 1035 exchange to an A-rated or better insurer. Check if the deteriorating insurer has any surrender charge waivers for rating downgrades (uncommon but worth checking). Otherwise, pay the surrender charge if necessary — an insolvency could cost more.
Reason 5: You Need Liquidity You Did Not Anticipate
Unexpected medical bills, a family emergency, or a business opportunity may require access to capital that the annuity’s surrender schedule is blocking.
Before surrendering, exhaust these options in order:
- Free withdrawal provision — most contracts allow 10%/year penalty-free
- Hardship waiver — many contracts waive surrender charges for nursing home admission, terminal illness, or disability
- Partial surrender — surrender only what you need, not the full contract
- Annuity loan — rare but some contracts allow borrowing against value
- Full surrender — last resort; pay the charge, owe taxes on gains
Reason 6: The Annuity Does Not Match Your Retirement Plan
Sometimes an annuity was sold based on a projection that was unrealistic, or the product’s actual performance diverged from what was illustrated. A fixed index annuity that illustrated 8% average annual growth and delivered 2% actual credited interest over 5 years may not be serving its intended purpose.
Exit strategy: After the surrender period, do a full account review with a fee-only advisor. If the annuity is not projected to deliver the income or growth you need, 1035 exchange to a better product or surrender and reinvest in lower-cost alternatives.
The Cost of Exiting: Full Calculation
Before exiting any annuity, calculate the total cost:
- Surrender charge (if within surrender period): e.g., 5% of $200,000 = $10,000
- Income tax on gains (non-qualified): if $60,000 in gains taxed at 22% = $13,200
- Early withdrawal penalty (if under 59½): 10% on gains = $6,000
- Total exit cost in this example: $29,200
Compare that to the ongoing annual cost of staying: if fees are 2.5%/year on $200,000 = $5,000/year. In this example, the exit cost equals 5.8 years of fee savings — so exiting only makes sense if you plan to hold the replacement for at least 6 years.
Valid reasons to exit a contract are explored in the annuities hub. Once you decide to exit, follow the steps in how to get out of an annuity, and understand the mechanics with selling an annuity: how to do it.
The content on Wealthvieu is for informational purposes only and should not be considered financial, tax, or investment advice. Consult a qualified professional before making financial decisions. Full disclaimer · Editorial policy