What are surrender charges?

Definition and Examples

Surrender charges are fees imposed on insurance products. If you sell, withdraw, or cancel your insurance early, you will have to pay a surrender charge. For example, if you purchased insurance with an eight-year surrender period, you will not be able to withdraw funds before the period ends without paying a fee. These charges exist to discourage you from withdrawing funds, as most financial products you buy with surrender periods use the money you give them for investments.

How Do Surrender Charges Work?

Surrender charges are imposed as a fee when you withdraw the insurance early. You will receive the amount you withdraw minus the surrender charge. The surrender period for these products varies, but typically ranges from six to eight years. After that time, you no longer have to pay surrender charges. Some companies may waive these fees if the interest offered on the contract drops to a certain level.

Why Do Companies Impose Early Surrender Charges?

Companies that sell financial products pass these costs onto the people who purchase their products for several reasons:

• Recover operating costs: Companies need to recover their administrative, operational, and sales costs by charging standard fees, but they lose these fees if you give up the product quickly.
• Discourage short-term use: Insurances are designed for long-term financial goals, such as retirement, rather than short-term purposes, like cash for unexpected expenses.
• Maximize returns: Companies want to be able to invest your money long-term to achieve higher returns.

What Does This Mean for You?

If you’re unsure how or whether you should invest in an insurance product that imposes surrender charges, work with a financial planner who works solely on a fee basis. They are not paid to sell products or receive commissions, so you can be somewhat confident that the products they recommend are in your best interest.

You Can Avoid Surrender Charges

There are three main ways to avoid these fees:

• Keep the insurance after the surrender period ends.
• Withdraw smaller amounts.
• Take advantage of fee waivers.

Surrender charges are only imposed if you give up the product before the surrender period, meaning you can avoid the fees by keeping it after that period. You can find the exact date of the surrender period in your contract. Look for the fee schedule listed in the contract when you first purchased it.

Most insurance contracts have a free withdrawal provision that allows you to withdraw a certain percentage of the contract’s value, such as 10%, each year without paying a surrender charge.

You may also be able to obtain a waiver for the surrender charges in some cases, such as when:

• Your spouse passes away and you collect death benefits for the insurance survivors.
• You retire and take the minimum required distributions.

These may appear in your contract as “crisis waivers,” or they may be in a section about internal revenue rules. Read the terms of your contract to learn the details of the waiver and the steps you need to take to get a waiver from the fees.

Source: https://www.thebalancemoney.com/what-are-surrender-charges-2389029