What Are Surrender Charges?

ByNathan Paulus
Edited byRae Osborn

Updated: June 1, 2024

ByNathan Paulus
Edited byRae Osborn

Updated: June 1, 2024

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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%

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?
What is surrender charge on life insurance?
What is the purpose of surrender charges?
How long do surrender charges apply?
How are surrender charges calculated?
How are surrender charges deducted?
How are surrender charges deducted in a life policy?
How does the surrender period affect policy value?
What is a crisis waiver?

Related Content

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.

About Nathan Paulus


Nathan Paulus headshot

Nathan Paulus is the Head of Content Marketing at MoneyGeek, with nearly 10 years of experience researching and creating content related to personal finance and financial literacy.

Paulus has a bachelor's degree in English from the University of St. Thomas, Houston. He enjoys helping people from all walks of life build stronger financial foundations.