A “surrender charge” is a fee that an insurance policyholder may incur if they choose to cancel or surrender their life insurance policy or annuity contract before a specified period has elapsed. This charge is designed to recover the insurance company’s costs associated with issuing the policy, including administrative expenses, sales commissions, and the loss of the premium payments that the insurer anticipated receiving over the life of the policy. New deposits to segregated fund contracts can no longer be sold with a deferred sales charge.
Key aspects of surrender charges include:
Decreasing structure
Surrender charges typically decrease over time, following a schedule outlined in the policy or contract. They are usually highest in the early years of the policy and gradually reduce to zero after a certain number of years, known as the surrender charge period.
Calculation
The specific amount of the surrender charge can vary depending on the policy’s terms, the length of time the policy has been in force, and the amount of accumulated cash value at the time of surrender.
Impact on cash value
For policies with a cash value component, such as universal life insurance, the surrender charge is deducted from the cash value if the policyholder decides to surrender the policy. This reduces the amount that the policyholder receives upon cancellation.
Purpose
Surrender charges discourage policyholders from prematurely cancelling their policies, helping to ensure that the insurer can manage its financial reserves and risk pool effectively. It also allows the insurer to invest premiums over a longer period, contributing to the overall stability of the company.
Disclosure
Surrender charges and the surrender charge period are set out in the policy documentation, so you can see the financial implications of surrendering your policy early.