What Are Life Insurance Surrender Charges?

Thang Truong
Thang Truong
Updated on:

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.

Thang Truong

Thang Truong covers small business insurance and small business success at BravoPolicy. He is a licensed P&C insurance agent. Previously, he held product leadership positions at realtor.com, Capital One, NerdWallet, and Mulberry Technology. He holds a MBA degree from UC Berkeley - Haas School of Business.

More Stories

6 Best Indexed Universal Life Insurance (IUL) for 2023

Are you looking for a way to set aside some extra money for your senior years, and maybe a little extra for loved ones to inherit? Most people opt for indexed universal life insurance because it offers the greatest cash value growth tied to the performance of S&P 500 index with the least risk thanks […]

Best Self-Directed Roth IRA Companies for 2023

A self-directed Roth IRA is much like a regular Roth IRA, but offers more flexibility as far as what you can invest in. Whereas a regular Roth will only let you invest in stocks, bonds, mutual funds, ETFs, and real-estate investment trusts, a self-directed Roth lets you invest in a greater variety of investment options.  […]

The 5 Best Hybrid Long-Term Care Insurance Companies for 2023

If you’ve decided to plan for every eventuality, you’d be smart to include a plan to cover long-term care. Someone turning 65 this year has an almost 70% chance of needing some type of long-term care, and about 13% of those will need it for five years or more. Long-term care is expensive and can […]

The 3 Best Traditional Long-Term Care Insurance Companies for 2023

Long term care is something that no one likes to think about, but unfortunately, many people will eventually need. Health care costs are skyrocketing, and a lengthy stay at a long-term care facility can easily bankrupt most people’s nest eggs. Long-term care insurance is one way to protect both yourself and your retirement savings. Out […]

The Best Long-Term Care Insurance Companies in California for 2023

California residents who are keen to protect themselves and their families against the worst events in life may be considering long-term care insurance. However, you might not know much about LTC insurance or how it is handled in California. Let’s take a look: What is Long-Term Care Insurance? Long-term care insurance helps pay for long-term […]

The Best Long-Term Care Insurance Companies in Arizona for 2023

Arizona is a great place to retire. It’s warm, there’s no snow to shovel, and Arizona improves the quality of life for anyone with allergies or asthma. When you pack your bags and retire to Arizona, you’re probably not thinking about long-term care. But the sad reality is that 47% of men and 58% of […]

The Best Long-Term Care Insurance Companies in Florida for 2023

There’s a lot of good reasons to retire in Florida. The weather is warm, the beaches are beautiful, and there are lots of other retirees to socialize with. Also, Florida has no state income taxes, no inheritance taxes, and no estate taxes. When you pack up your things and move to Florida, you’re probably not […]

Private Placement Life Insurance: Everything You Need to Know

If you haven’t heard of private placement life insurance, you probably don’t qualify to buy it. Private placement life insurance is typically for investors with millions in liquid cash that they need to invest for tax reasons.  What is Private Placement Life Insurance? Who Qualifies for Private Placement Life Insurance? Benefits of Private Placement Life […]

Nationwide IUL – A Strong Product With Great Features and Excellent Ratings

The Nationwide IUL product can help you either supplement your retirement income or ensure your beneficiaries future by leaving them a nice tax-free death benefit. Obviously, you have many options when it comes to IUL policies, so you want to know how does Nationwide’s policy stack up against the competition? Let’s take a look. Pros […]

Transamerica IUL – A Solid Product but High Consumer Complaint Score & Law Suits

Consumers looking to supplement their retirement income often settle on an indexed life insurance policy. These policies build cash value based on market performance and allow your heirs to enjoy a tax-free death benefit. Let’s take a look at Transamerica’s indexed universal life insurance policy and see what makes it stand apart from other such […]