When a person pursues an untimely withdrawal from a contract, insurance, annuity, or other investments alike, a surrender charge is imposed. Say, in a corporation or an investment setting, a surrender charge refers is inflicted 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.
A surrender charge is also applied in insurance. This represents 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 charge, or sometimes called as “surrender fee”, is considered as the insurance company’s cost resulting to a correct charge amount 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 In most cases, it is automatically deducted as a percentage from the amount withdrawn.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 covered in 5-8 years. 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On the other hand, the time period in which the insured should wait awaiting the right time to which funds can be withdrawn without any charges is called the surrender period. A longer surrender period denotes better insurance terms. The typical annuity period is 5-10 years. Some annuities do not take in surrender periods.
Better benefits can be acquired from extended surrender periods. This means that because the company is confident that their clients are eager to keep their finances with them, they can work out a lot of things from it that are out of sight. Higher rates for guaranteed interest, or guarantees which last for long, are some of the benefits that can be obtained.
However, products with highest surrender periods may not benefit insured persons at all. Abuse and large commissions usually accompany this type of surrender periods. If the surrender period has arrived to 7 years, one must start to act skeptically, asking details and further schedules.
Most insurance companies allow policyholders to collect at least 10% from the insurance account’s accumulated value annually throughout the surrender period. A surrender charge is forced as soon as the value exceeds the 10% ceiling.
Surrender periods can guarantee insurance companies that insured persons are willing to retain their money with their respective insurers. It is viewed as similar to Certificate of Deposit (CD) penalties, in which one assures to keep their funds in the bank given that the CD is still around.
It is more advisable to consider a surrender period one is comfortable with, since he/she is more likely to lose a lot of funds when an unfavorable time is chosen.