What is a surrender charge?
A surrender charge is a fee imposed when you cancel or withdraw cash value from a life insurance policy before the end of a specified period, typically the early years of the contract.
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Why insurers apply surrender charges
Insurers use surrender charges to recoup the costs of issuing the policy and to discourage short‑term ownership that can undermine the policy's financial assumptions.
How surrender charges are calculated
Charges are usually expressed as a percentage of the cash value withdrawn and decrease over time, often following a schedule such as 7% in year 1, 6% in year 2, down to 0% after a set term (commonly 10–15 years).
Typical surrender charge schedule
| Policy Year | Surrender Charge |
|---|---|
| 1 | 7% |
| 2 | 6% |
| 3 | 5% |
| 4 | 4% |
| 5 | 3% |
| 6‑10 | 2%‑0% |
How to reduce or avoid the charge
Consider the policy's surrender schedule before making withdrawals, keep the policy for at least the surrender period, or explore policy loans that don't trigger a surrender fee.