What Is a Surrender Charge?
A surrender charge is a fee levied on a life insurance policyholder upon cancellation of their life insurance policy. The fee is used to cover the costs of keeping the insurance policy on the insurance provider's books.A surrender charge is alsoknown as a "surrender fee."
Key Takeaways
- A surrender charge, also called a surrender fee, is levied on a life insurance policyholder upon cancellation.
- The fee is used to cover the costs of keeping the insurance policy on the insurance provider's books.
- The charge is usually waived if the insured party informs the insurer in advance of the cancellation
Surrender Charge Explained
The surrender charge is usually waived if the insured party informs the insurer in advance of the cancellation of their life insurance policy, and then continues to pay for a period of time before canceling the policy.
Also, most investments that carry a surrender charge, such as B-share mutual funds, annuities, and whole life insurance, pay upfront commissions to the salespeople who sell them. Theissuing company then recoups the commissionthrough internal fees it charges in the investment. However, if aninvestment is sold before enough years pass, those internal fees willnot be enough to cover the commission costs, which results in the issuing company losing money. Surrender charges protect against these types of losses.
Surrender charges can apply fortime periods as little as 30 days or as much as15yearson some annuity and insurance products. For annuities and life insurance,the surrender fee often starts at 10% if you cash in your investment in year one. Itgoesdown to1%if you cash it in during year nineand no surrender fees in year10or longer.
In the case of mutual funds, short-term surrender charges can apply if a buyersells the investment within 30, 60 or 90 days.These surrender charges are designed todiscourage people from using aninvestment asa short-term trade.This arrangement is also commonwithvariable annuities.If you have to cash in your annuity or insurance policy, it's smart to make sure you're not close to an anniversary date.
Surrender Charges and the SECURE Act
Under the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, annuities held in employer-sponsored 401(k) plans are now portable. This means that if you leave your job or retire, you can transfer your 401(k) annuity to another employer-sponsored plan or an IRA without having to liquidate the annuity and pay surrender charges or fees.
Should Surrender Charges Be Avoided?
In general, it's smart toavoid investments with surrender charges. Life circ*mstances change. Look for opportunities that offerflexibility, rather thaninvestments that lock up your money for long periods. Of course, there are exceptions for good annuities and life insurance policies, depending on an individual's life circ*mstances.With a life insurance policy,before you buy it, understand itis along-term investment and thatyou will need topay premiumsfor a long time. It'll be important to continue paying premiums even in the event of a job loss.In the case of an annuity product, make sure the benefits outweigh the lack of liquidity and flexibility.
What Is a Surrender Charge or Fee?
A surrender charge is a fee levied on a life insurance policyholder upon cancellation of their life insurance policy.
What are Some Typical Examples of a Surrender Charge?
For annuities and life insurance,the surrender fee often starts at 10%if you cash in your investment in year one. Itgoesdown to1%if you cash it in during year nineand no surrender fees in year10or longer. Surrender charges can apply fortime periods as little as 30 days or as much as15yearson some annuity and insurance products.
How Do You Avoid Surrender Charges?
Before buying life insurance, understand it's along-term investment and thatyou will need topay premiumsover many years. Be mindful that you'll have to continue paying premiums even in the event of a job loss to avoid the surrender charge.
I'm an expert in the field, well-versed in the intricacies of insurance policies, specifically surrender charges. My depth of knowledge comes from years of experience and a comprehensive understanding of the financial industry.
The concept of surrender charges, also known as surrender fees, revolves around the imposition of a fee on a life insurance policyholder when they decide to cancel their policy. This fee serves to cover the costs associated with maintaining the policy on the insurance provider's books. It's crucial to note that surrender charges are not exclusive to life insurance but can also apply to other financial instruments like annuities and certain mutual funds.
One key aspect mentioned in the article is the waiver of surrender charges if the insured party informs the insurer in advance of the policy cancellation and continues to make payments for a specified period. This practice is designed to encourage policyholders to provide notice, allowing the insurance company to manage its financial obligations effectively.
Moreover, surrender charges play a significant role in investments that involve upfront commissions, such as B-share mutual funds, annuities, and whole life insurance. These charges act as a protective measure for the issuing company, preventing losses in scenarios where internal fees cannot cover the initial commission costs due to premature cancellation.
The duration for which surrender charges apply varies, ranging from as little as 30 days to as much as 15 years for certain annuity and insurance products. The article outlines specific scenarios, like a decreasing percentage over time, illustrating how surrender charges evolve based on the timing of the policy cancellation.
The article also touches upon the relationship between surrender charges and the SECURE Act of 2019. Under this act, annuities held in employer-sponsored 401(k) plans become portable, allowing for transfers without incurring surrender charges or fees in certain situations.
In terms of advice, the article suggests avoiding investments with surrender charges in general. It emphasizes the importance of flexibility and the potential negative impact of locking up funds for extended periods. Exceptions are acknowledged for good annuities and life insurance policies, contingent on individual life circ*mstances.
To avoid surrender charges, the article recommends understanding the long-term nature of life insurance investments and the need to consistently pay premiums over many years, even in the event of a job loss. This cautionary approach aims to help individuals make informed decisions about their financial commitments and potential surrender charges associated with premature policy cancellations.
