What is a Surrender Charge?

Does Your Life Insurance Policy Have a Surrender Charge?

If you have a whole life policy, the chances are high that your policy is subjected to a surrender charge or fee if one were to decide to end their policy early but still want to receive some cash value that the policy has accrued. While determining if your whole life policy is suitable for your situation is entirely subjective, it is important to remember that surrendering the policy is not as easy as simply discontinuing payments.

Why Your Insurance Provider Charges You

Simply put, your investment in life insurance is also an investment in the individual whom you purchased life insurance from. When individuals purchase a life insurance policy, the company typically pays out an insurance agent in the form of a commission for the policy’s sale. This cost is built into the price of the life insurance contract no matter where or who you purchase the contract from. Now, if you decide that you no longer want the policy, yet still want the cash value accrued while the policy was active, there will be charges regarding the surrendering of the policy to ensure the company will not lose money on the agent’s upfront commission.  

The Difference Between a Surrender Charge And Surrender Value

The difference between the surrender charge and surrender value is not as clear as one would think. The surrender value is the amount of money one receives after surrendering the policy, which may only be a small amount of the payments on has been making. For this reason, we highly recommend that our guests speak in depth with their trusted financial advisor before terminating a whole life contract. In some cases, for the first few years after the policy has been issued, the surrender charge might be equivalent to the cash value of the policy thus making the surrender value zero.

Another way whole life insurance company’s attempt to dissuade guests from getting rid of their policies is by implementing expensive surrender fees to discourage redirecting the money into different investment portfolios. Although there is more of a purpose to surrender fees than simply to discourage guests, according to Zacks Finance, “You can’t surrender a whole life policy and keep the investment account. The two sides of the contract must remain intact, otherwise, the insurance company is acting simply as a financial broker.” Like anything else, insurance companies are in the business of providing insurance, not other additional services, and for this reason, they reserve the right to impose fees on guests who do not hold up their end of the conditions of their contracts.

It is important to remember that when investing in life insurance products, that the risk associated with surrender value and fees goes down as time goes by. According to The Balance, “These surrender charges will be reduced over the term of the contract and will usually be eliminated over 10 to 15 years, depending on the product being used.” While you have less of a risk of having surrender charges and fees imposed on your policy with time, other outstanding factors such as loans on the policy, the condition of the stock market, etc. all play a vital role in your investment.

While not every policy necessarily is subjected to surrender fees and surrender values, it is important to speak with an expert regarding your policy and what the future of the policy, whether staying active or discontinuing your policy, will affect your years of investing. There may be ways to make the policy work for your personal financial goals in order to avoid the risks associated with surrender fees and surrender values, which is why it is important to understand the differences and losses associated with each.