In a corporation or an investment setting, a surrender charge refers to a fee to be paid for the selling of shares or towards a mutual fund. If a shareholder sells his/her share during the first year of ownership, he/she is obliged to pay the surrender charge. In a mutual fund, it serves as a factor to stabilize ownership, thereby discouraging fund speculation from traders.
In general, surrender charge refers to the penalty or fine charge for one who does untimely withdrawal from a contract, insurance, annuity, or other investments alike.
Thus, in insurance, a surrender charge depicts a fee for a person who cancels a life insurance policy, whether it is universal, variable universal, or whole life insurance policy. It is purposely done to encourage policyholders to stay with the insurance company or any other insurance carrier. These penalties are deemed legal and should be organized with a state’s insurance department.
Surrender charges are present in every life insurance policy or annuity. These can last from 5-8 years. Other surrender charges are already attached to premium deposits, thus, it is vital to understand the type of life insurance coverage you avail. Some people also lack awareness regarding surrender charges; this is why obtaining the right knowledge of coverage details is necessary. Soliciting advice from an insurance professional is ideal for determining the type of coverage applicable to a person.
Positively, surrender charges can be avoided. This can be done by immediately withdrawing a penalty-free amount in case the insurance company permits a withdrawal that is penalty-free. Typically, this is offered once a year for every policy. Therefore, it is likewise significant to understand the policy.
Prevention could likewise be accomplished through informing the insurance company in advance or on time, usually form one to two months before the cancellation of the policy. Most insurance companies prefer this type of termination and as a result, tolerate the suspension of the surrender charges. In this case, the insured person still needs to pay the premiums after such notification until the arrival of the policy termination period.
However, on annuities classified as qualified or non-qualified, a penalty of 10% is usually charged by the IRS once one is below the age 59 and a half. Exceptions are applied to disability and higher education payments in accordance with the IRS guidelines.
Surrender charge is sometimes called as “surrender fee”. It is considered as the insurance company’s cost and as a result, a correct charge amount is seized to cover the company’s losses and the costs in keeping the policy on the books of the insurance company. In most cases, it is automatically deducted as a percentage from the amount withdrawn.
The period wherein the fee is charged is termed as the surrender charge period, usually 5-8 years, as mentioned earlier. When one opts to withdraw the funds after the close of the surrender charge period, then such extraction is free of charge.
On the other hand, the time period in which the insured should wait awaiting the right time to which funds can be withdrawn without any charges is called the surrender period.