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What Are Life Insurance Surrender Charges?

Normally the idea of life insurance is to keep it for as long as you can. This is especially true of whole life insurance and universal life insurance, which are the two types of permanent life insurance, meaning you don’t have to renew it. However, what happens if you just cannot keep the policy in force by paying your premiums? Or you simply don’t have the desire to? That’s where life insurance surrender charges kick in. Below we’ll look at what they are and what you can expect from them.

What Are Life Insurance Surrender Charges?

Life insurance surrender charges are fees that the insurance company takes out of your cash value if you cancel the policy. These charges start higher in the first few years and then may reduce to zero over time, often over 10 years. Since those fees are taken from cash value account of the policy, surrender charges are only a thing in permanent life insurance policies only.

Because permanent life is meant to be carried the longest, you may often find the highest fees through universal life insurance surrender charges, except guaranteed universal life insurance since there is almost no cash value in these policies. Whole life usually has smaller surrender charges and term life has no surrender charge because there is no cash value.  

How Are Life Insurance Surrender Charges Calculated?

These charges are usually calculated by a percentage of the cash value. At the highest, you might see 10 to 12 percent. You may see 5 to 7 percent at the lower end.  

So if your cash value on a variable universal life insurance policy was $11,097 in the fifth year of the policy, and you decide to cancel, your universal life insurance surrender charges would be $776.79 if you had a 7 percent fee.  

Surrender Value Vs. Life Insurance Surrender Charges

You might also see the term surrender value. This might be easy to confuse with life insurance surrender charges.  

While surrender charges are what you pay if you cancel the policy, the surrender value is the amount of money a policy may pay out if you cancel at a certain time. For instance, we have a sample illustration of a policy for a 45-year-old man who signed up for a guaranteed universal life insurance plan. His total surrender value is $0 for the majority of his plan. However, in some years, he has a surrender value amount.  

Specifically, the surrender value for our sample $150,000 death benefit plan is: 

  • $10,397 in his 15th year 
  • $27,725 in his 20th year 
  • $34,656 in his 25th year  

That means he can cancel the policy and get that much back. These amounts are often calculated with life insurance surrender charges and administrative costs in mind. Any outstanding loans must also be repaid. 

Is It Wise to Cancel a Life Insurance Policy?

There are a number of common reasons to cancel a life insurance policy:

  • You no longer need the coverage in cases where your policy’s beneficiary passes away before you, you get a divorce or your children become financially independent.
  • If you have access to the surrender value, you may choose to access that cash while still alive.
  • You may find that you can get a new policy with lower premiums; this situation is common if your health improved so you can find a policy with better coverage.
  • The premiums are too expensive for your current situation.
  • You want a different policy that meets your current needs better, such as if you decide you want to invest your cash value because markets are performing better, so you switch to a variable universal life insurance plan.

Depending on the situation, it could make sense to cancel your policy, even if you incur life insurance surrender charges.

Final Thoughts

Life insurance surrender charges are simply fees that you pay when you cancel your policy. They typically come as a percentage of your cash value, and 5 to 12 percent can be common. Canceling a policy can make sense for a wide variety of life circumstances, especially if you have access to a surrender value.

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