Updated on July 18, 2023
A surrender charge is a fee imposed on a policyholder when they choose to surrender or terminate a life insurance policy or annuity before its maturity date and receive the cash value of the policy. It serves as a mechanism for insurance companies to recover certain costs associated with issuing and maintaining the policy.
Explain a few concepts related to a surrender charge.
Purpose – Surrender charges discourage policyholders from terminating life insurance policies or annuities early and help insurance companies recover costs.
Life Insurance Policy Surrender – Policyholders can surrender their life insurance policy for its cash value, but a surrender charge is deducted from the cash value as a penalty for early termination.
Annuity Surrender – Annuity holders can surrender their annuity before the agreed payout period, but a surrender charge is applied to the cash value before it is returned.
Calculation of Surrender Charges – Surrender charges are typically a percentage of the cash value or account value, gradually decreasing each year until reaching zero after a set surrender period.
Impact on Policyholders – Surrender charges reduce the amount of cash value or accumulated value received, impacting the financial outcome for policyholders or annuity holders.
Surrender Charge Exceptions – Some policies or contracts may exempt policyholders from surrender charges in specific situations, such as death, disability, or a free-look period.
Disclosure and Transparency – Insurance companies are obligated to disclose surrender charge details in the policy or annuity contract, allowing policyholders to understand the charges involved.