What Are Surrender Charges?

Surrender charges, also known as surrender fees, are fees charged to a policyholder when they cancel specific types of life insurance policies or annuities before the end of the surrender period, typically between 10 and 15 years. The surrender charge amount is usually a percentage of the policy’s cash value and decreases yearly.

Surrender charges usually apply to permanent life insurance policies, which accumulate cash value, and annuities. They are included in the policy terms and are designed to recoup some of the insurance company's initial costs in setting up the policy. The surrender fee is deducted from the policy's cash value, leaving you with the cash surrender value.

Surrender fees are usually imposed 30 days after the policy is issued and are calculated based on a percentage of the policy’s cash value. A surrender charge schedule outlines the fees for early withdrawal from a life insurance policy. Surrender charges typically start at a high percentage of the cash value and gradually decrease over time. This structured decline ensures that the insurance company can recover some of its initial expenses involved with administering a policy and discourages policyholders from using their policies as short-term financial solutions.

Life insurance surrender charges are usually implemented for cash value life insurance policies, such as whole life, universal life insurance and variable universal life (VUL) policies. These policies blend insurance with investment components, making early withdrawal more complex and costly. You may also encounter surrender charges with annuities.

A surrender charge typically starts high in the first few years of the policy. It gradually decreases each year until it reaches zero — marking the end of the surrender period — usually in the 10th year of the policy and beyond. A surrender charge schedule may look as follows:

Suppose you purchase a universal life insurance policy, with a cash value component. The policy has a 10-year surrender period with a schedule similar to the table above.

If your policy's cash value is $50,000 and you decide to surrender — meaning withdraw all your money from — the policy in the sixth year, the surrender charge would be 5% of the cash value, or $2,500.

If you withdraw your cash value in the sixth year, you will pay a $2,500 surrender charge and receive a cash surrender value of $47,500 ($50,000 - $2,500) from your policy.

There are several ways to avoid surrender charges, but the method depends on your financial situation or goal.

While it's generally advisable to avoid early withdrawal of your policy, there are certain scenarios where you may consider doing so and paying the surrender fees.

Before deciding to surrender your policy, it's wise to consult a financial advisor who can provide guidance based on your situation and help you understand the implications of early withdrawal. It would be best to keep in mind that you may be taxed on the amount you withdraw depending on your policy and local regulations.

Explore frequently asked questions about surrender charges to understand how they are calculated and their impact on a life insurance policy's cash value.

Explore these related resources to deepen your understanding of surrender charges and how you might use them to make the most of your life insurance policy:

Cash Surrender Value — Cash value accumulates in a life insurance policy. When you surrender a policy, it has implications for its accumulated cash value.

Life Insurance as a Retirement Plan — Discover how to use life insurance as a retirement planning tool, a scenario where understanding surrender charges becomes crucial for financial strategy.

Using Life Insurance as an Investment — Some people treat life insurance as an investment strategy. This page highlights the role of surrender charges in financial planning and policy management.