What Are Surrender Charges?

A surrender charge is a fee you must pay if you withdraw funds or cancel a financial product like life insurance or annuity before the surrender period ends, typically six to eight years after the initial purchase. These charges will decrease the value and return on your investment.

By Nathan Paulus

Edited by Rae Osborn

Updated: October 25, 2024

Advertising & Editorial Disclosure

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.

KEY TAKEAWAYS ON SURRENDER CHARGES

Surrender charges in life insurance are fees for surrendering a policy and claiming the cash surrender value before the surrender period ends.
These charges are typically calculated as a percentage of the policy's cash value, decreasing over the surrender period — the older the policy, the lower the surrender fees.
Surrender charges can be waived or avoided by waiting for the surrender period to lapse, choosing policies without such charges or using provisions like crisis waivers.
Surrender charges are implemented to recoup some of the insurer's initial costs and discourage early policy termination, ensuring financial stability for the insurance company.

How Surrender Charges Work

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.

SURRENDER CHARGES: KEY TERMS

Surrender period is the timeframe during which charges apply for policy withdrawals.
Cash value represents the savings element in certain life insurance policies.
Cash surrender value is the cash amount available to the policyholder upon paying the surrender fee.

Sample Surrender Charge Schedule

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:

Policy Year	Surrender Charge
First Year	10%
Second Year	9%
Third Year	8%
Fourth Year	7%
Fifth Year	6%
Sixth Year	5%
Seventh Year	4%
Eighth Year	3%
Ninth Year	2%
Tenth Year	1%
Eleventh Year and Beyond	0%

Surrender Charge Example

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.

Avoiding Surrender Charges

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

Method	Description
“Free Look” Period	Insurers often allow for a "Free Look" period, typically 30 days from the policy issuance, for policyholders to cancel their purchase without incurring surrender charges.
1035 Exchange	Transferring your policy value to a new policy with the same company can circumvent surrender charges.
Crisis Waiver	Some insurance policies include a crisis waiver that waives surrender charges under specific circumstances, such as critical illness or disability.
Wait for the Surrender Period to Lapse	Surrender charges decrease over time, so waiting until the surrender period is over can result in a 0% surrender charge.

When Paying Surrender Charges May Make Sense

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.

1
You're Experiencing Financial Hardship
Surrendering your policy before the end of the surrender period should be a last resort, but if you need immediate funds and have no other way of obtaining them, it may be worth it to surrender your policy. Always consider the long-term consequences and explore other options first. For example, you may be able to borrow against your cash value instead of surrendering it entirely.
2
You No Longer Need Coverage
If you no longer need the coverage offered by your life insurance policy — if you have paid off all your debt obligations, for example — you may consider surrendering it. You will receive the cash surrender value and no longer need to pay premiums.
3
You Plan to Switch Policies
If you found a policy with a better rate or terms or have access to a better plan through a new employer, switching and surrendering your old policy may make sense in the long run. If you go this route, make sure you have your new policy set up before canceling your old one to avoid a gap in coverage.

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.

Surrender Charge FAQ

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

What is a surrender charge?

A surrender charge is a financial penalty imposed on policyholders who choose to withdraw funds or terminate their policy prematurely, typically within a predefined surrender charge period. This fee is designed to compensate the insurance company for the loss of administrative and acquisition costs incurred in setting up and maintaining the policy. The charge is commonly associated with life insurance policies and annuities.

What is surrender charge on life insurance?

The surrender charge on life insurance is a fee levied against the policyholder for withdrawing cash value or canceling the policy before the end of the surrender period. This charge discourages premature policy terminations and ensures the insurance company can recover a portion of its initial expenses. It's often a percentage of the cash value and decreases until it is phased out.

For example, indexed universal life (IUL) insurance policies, which blend the flexibility of adjustable life insurance premiums with the investment potential of market indices, often have IUL surrender charge structures to manage the risks associated with these investments. These charges start high and reduce over time, helping protect the financial strategy behind these policies.

What is the purpose of surrender charges?

Surrender charges are designed to recoup some of the insurance company's initial costs in setting up a life insurance policy and to discourage policyholders from canceling their policies early.

How long do surrender charges apply?

Surrender charges on life insurance policies apply throughout a specified period, typically up to 10 years, and decrease over time.

How are surrender charges calculated?

Surrender charges are calculated as a percentage of the policy's cash value, decreasing over the surrender period. The surrender fees no longer apply once the surrender period ends, typically after 10 years.

How are surrender charges deducted?

Surrender charges are deducted as a percentage of the accumulated cash value. This deduction occurs when the policyholder opts to withdraw funds or cancel the policy within the surrender period. The policy’s surrender charge schedule outlines the specific percentage and terms of how these charges reduce over time.

How are surrender charges deducted in a life policy?

Life insurance surrender charges are deducted from the cash surrender value when a policyholder decides to terminate the policy early or withdraw a portion of the cash value.

How does the surrender period affect policy value?

Surrender charges can reduce the cash surrender value in the policy's early years.

What is a crisis waiver?

A crisis waiver allows the policy to be surrendered without fees if you can prove eligibility. This usually involves providing a written request and medical statements indicating a disability or illness, typically after the policy's first year.