What Is a Surrender Charge on a Whole Life Insurance Policy?

Insurance agents should disclose surrender charges when you buy a whole life policy

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A whole life insurance policy pays a death benefit, while directing a portion of your premium to a savings or investment account. You will earn a variable return on the account funds, which you can access either through a loan or through surrender of the policy. While you pay back any loan with interest, your insurance carrier may charge a fee for surrender.

Surrender Value

In whole life insurance, there's an important distinction between surrender charges and surrender value. The surrender value is the amount you will receive if you surrender the policy. It may only be a portion of the cash value. Read the fine print carefully -- the policy may not allow any distribution of cash value at all for several years after you begin paying for it.

Surrender Charges

A surrender charge is a fee -- a cost that the insurance company imposes for the cancellation of a policy, or for reducing the face amount of life insurance. The surrender charge is supposed to discourage policyholders from terminating or altering their contracts and directing their money to a different investment. You can't surrender a whole life policy and keep the investment account. The two sides of the contract must remain intact, otherwise the insurance company is acting simply as a financial broker. The insurance company may impose a surrender charge only in the early years of a policy, or on a sliding scale, with the charge lessening (or disappearing) as you keep the policy for a longer period.

Avoiding the Charge: Term Life

You can avoid surrender charges by avoiding whole life entirely and buying a term policy. These insurance contracts provide insurance coverage only, with no savings or investment accounts. The coverage continues as long as you pay the premiums and stops when you cease paying them or when the term expires. Since you make no financial investment with a term policy, the premium will generally be less for the same amount of life insurance.

Other Strategies

The current surrender value and surrender charge should appear on your annual statement of values from the insurance company. A whole life insurance policy may waive these charges if you give advance notice of cancellation. Alternatively, the insurance company may establish a yearly window of opportunity for additions, changes or a cancellation. This usually occurs around the anniversary date. Verify this information with the sales representative and in the life insurance contract itself before you sign.