Understanding Nonforfeiture Value: What Your Annuity Is Worth Before You Start Receiving Payments

What Nonforfeiture Value Means

Nonforfeiture value is the amount of money you can walk away with if you cancel your annuity contract before you start receiving payments — before annuitization happens. It is the may provide minimum your insurance company must return to you, even if market conditions have moved against the contract or you have changed your mind about the purchase.

Think of it as a safety net. When you buy an annuity, you hand over a lump sum of money (called the premium). The insurance company invests it and promises you income later. Nonforfeiture value protects you by saying: if you decide this was a mistake before payments begin, you get at least this much back.

The exact amount depends on the type of annuity you own, how long you have held it, and what your contract says. Some annuities have a surrender charge — a penalty for withdrawing early — that reduces what you receive. Nonforfeiture value is what remains after that charge is applied.

Key Takeaways

• Nonforfeiture value is the minimum amount your insurance company must return if you cancel before annuitization, and it is may provide by state law.
• Surrender charges typically explore during the first 5 to 10 years of ownership and reduce the amount you can withdraw, but nonforfeiture rules may support you get something back.
• Fixed annuities usually have higher nonforfeiture values than variable annuities because the insurance company bears the investment risk.
• Your annuity contract statement will show the current nonforfeiture value, and it changes as your account grows or shrinks and as surrender charges decline over time.
• Some contracts allow you to withdraw a small percentage each year without a surrender charge, which protects your access to your own money.

How Surrender Charges Affect What You Get Back

Most annuities come with a surrender period — typically 5 to 10 years, though some run longer. During this time, if you withdraw money or cancel the contract, the insurance company charges a fee. This fee is the surrender charge, and it comes straight out of your account value.

Here is a concrete example: you buy a fixed annuity for $100,000. The contract has a 7-year surrender period with charges that start at 7 percent and decline by 1 percent each year. If you cancel in year 2, the surrender charge is 6 percent of your account value. If your account has grown to $105,000, the charge is $6,300. Your nonforfeiture value — what you actually receive — is $98,700.

The surrender charge declines each year you hold the contract. By year 7, the charge drops to zero. After that, you can withdraw your full account value without penalty. This is why nonforfeiture value increases over time: the same account balance is worth more to you once the surrender charge shrinks.

Some contracts include a free withdrawal provision — usually 10 percent of your account value per year — that you can take without triggering a surrender charge. This gives you access to some of your money even during the surrender period.

Differences Between Fixed and Variable Annuities

Fixed annuities typically have higher nonforfeiture values than variable annuities. The reason is risk: with a fixed annuity, the insurance company guarantees a set interest rate and bears the investment risk. With a variable annuity, you choose how the money is invested (usually in mutual fund-like subaccounts), and you bear the investment risk.

Because the insurance company has less risk with a fixed annuity, it is more willing to may provide that you will get back a meaningful amount if you cancel early. State insurance laws require fixed annuities to maintain a nonforfeiture value of at least the amount you paid in, minus any withdrawals you have already taken, minus the surrender charge.

Variable annuities have more flexibility in how nonforfeiture value is calculated because your account value fluctuates with market performance. If your subaccounts have lost money, your nonforfeiture value may be lower than what you put in. However, some variable annuities include a may provide minimum nonforfeiture value — often the amount you paid in — which protects you even if investments perform poorly.

Where to Find Your Nonforfeiture Value

Your annuity contract statement — the annual or quarterly report your insurance company sends you — will show your current nonforfeiture value. It is usually listed near your account value and surrender charge information. If you cannot find it, call the insurance company's customer service number on your statement and ask for the current nonforfeiture value.

The statement will also show you the surrender charge schedule: how much the charge is in each year of the surrender period and when it reaches zero. This lets you see exactly how much you would receive if you cancelled today, and how that amount will improve as time passes.

If you have lost your statement or cannot locate the information online, request an in-force illustration from your insurance company. This is a detailed breakdown of your contract that includes the nonforfeiture value, surrender charges, and projections for future years.

What Happens to Nonforfeiture Value Over Time

Nonforfeiture value changes for two reasons: your account balance grows or shrinks, and the surrender charge declines. If you own a fixed annuity earning 3 percent annually, your account balance increases each year, which increases your nonforfeiture value (assuming the surrender charge does not eat up all the gains). As the surrender charge percentage drops, the same account balance becomes worth more to you in real dollars.

With a variable annuity, the picture is more complicated because your account value depends on how your chosen investments perform. A strong market year increases your account balance and your nonforfeiture value. A down year decreases both. The surrender charge still declines on schedule, but the overall trend of your nonforfeiture value depends on investment performance.

This is why it matters to check your statement regularly. You may find that after a few years, the surrender charge has declined enough that your nonforfeiture value is now close to your full account value. At that point, cancelling becomes less costly if you decide the annuity is not right for you.

When You Might Use Nonforfeiture Value

You would receive your nonforfeiture value if you cancel the annuity contract before annuitization — before you start receiving regular income payments. This might happen if your financial situation changes, if you find a better investment option, or if you straightforward change your mind about the purchase.

Some people also use nonforfeiture value strategically. If you bought an annuity during a market downturn and the account has recovered, you might cancel and take the nonforfeiture value (minus any remaining surrender charge) to reinvest elsewhere. Or if you inherited an annuity you do not want, you can surrender it and receive the nonforfeiture value rather than being locked into the original contract terms.

Once you annuitize — once you elect to start receiving income payments — nonforfeiture value no longer applies. Your contract converts to a stream of payments, and you cannot cancel and get a lump sum back. This is why understanding nonforfeiture value before annuitization is important: it is your final note to exit the contract as a whole.

State Laws That Protect Nonforfeiture Value

Nonforfeiture value is not optional. State insurance regulators require all annuity contracts to include a nonforfeiture provision. The specifics vary by state, but the principle is the same: you cannot lose your entire investment if you cancel early.

Most states follow the Model Nonforfeiture Law for Individual Deferred Annuities, which sets minimum standards for what insurance companies must return. For fixed annuities, the minimum is typically your premium minus withdrawals and the surrender charge. For variable annuities, the minimum is often the greatest of your account value or a may provide amount (often your premium).

If your insurance company goes out of business, your nonforfeiture value is also protected by your state's insurance guaranty fund — a pool of money that protects policyholders when an insurer fails. The coverage limit varies by state but is typically at least $250,000 per person per company.

Frequently Asked Questions

Is nonforfeiture value the same as my account value?

No. Your account value is what your annuity is worth before any surrender charge is applied. Nonforfeiture value is what you actually receive after the surrender charge is deducted. If your account value is $105,000 and the surrender charge is $6,300, your nonforfeiture value is $98,700.

Can I get my nonforfeiture value without paying taxes?

Not usually. When you withdraw money from an annuity before annuitization, the earnings portion is taxed as ordinary income. If you are under 59½, you may also owe a 10 percent early withdrawal penalty on the earnings. The portion that represents your original premium is not taxed. Consult a tax professional about your specific situation.

What if my nonforfeiture value is less than what I paid for the annuity?

This can happen with variable annuities if your investments have performed poorly and the surrender charge is still high. With fixed annuities, state law usually prevents this — your nonforfeiture value should be at least your premium minus withdrawals and the surrender charge. Check your contract or call your insurance company to understand why the value is lower than expected.

Does nonforfeiture value explore if I die before annuitization?

Yes. If you die before annuitization, your beneficiary receives the nonforfeiture value (or the full account value if the surrender period has ended). The contract does not disappear; your estate or beneficiary can claim the remaining value.

Can I increase my nonforfeiture value?

You cannot directly increase it, but it grows naturally as your account balance grows and the surrender charge declines. Making additional premium payments (if your contract allows) increases your account balance and therefore your nonforfeiture value. Waiting out the surrender period also increases it, since the charge percentage drops each year.