What is Life Insurance Surrender Charge and How to Avoid?
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So much has changed in the life insurance industry and how everything is done. Many companies have tried as much as possible to diversify their services. The main goal behind this for many insurance companies is to provide people with more services in relation to money.
As a result, there are so many things you can do through and insurance company other than just getting a life insurance cover. There are now more opportunities, and you can invest in your life insurance company. Such options have helped many people.
One way through which is done is through the cash value on your insurance policy. In this case, as you continue to pay the part of your premium of that money is deducted and used to make an investment program on your behalf.
Through this, you have a cash investment growing in terms of savings that you can use at a specific time. Some of the means of accessing this cash can be by withdrawing through an interest-free loan.
What is Life Insurance Surrender Charge?
A surrender charge is a fee that is charged by an insurance company and deducted from your cash value in case you cancel a policy with the company before the due time for the policy to mature.
When life insurance companies operate, they are required to pay their agents a lot of money on varies deals or policy signed with them. However, the question they are left with is how they can recover anything in case a policy is canceled.
As a result, having a surrender charge is the only way they can leverage something once a policyholder decided to cancel a policy. The surrender charges are imposed explicitly in case you choose to cancel a policy early. That means that the early you cancel a contract or policy the higher the surrender charge you are faced with.
For many companies, surrender charges may be imposed on as many as ten years before they are over. However, in many cases, this depends on the type of insurance you have taken.
Surrender Charge Varies with the Type of Policy
Due to the nature of surrender charges, one may be wondering whether there is a difference based on the type of life insurance. Since different life policies come with different values and weights, then there is a difference in the surrender charges for each case.
The universal type of life insurance and variable universal are known to have the highest surrender charges. This is because they are the policies with the highest risks when insuring a policyholder. At the same time, the above policy comes with the longest time before surrender charges are over.
Whole life insurance on the other side, they have the lowest surrender charges and have a short period before the surrender charges are completely gone. When you are working with term life insurance, you are not faced with any surrender charges, and that is because a term life insurance does not have any cash value.
For annuities, some products may not have any surrender charge while others may have of as long as ten years.
Are Surrender Charges Expensive?
The question of whether surrender charges are expensive or not depends on the time at which you want to do the cash-out or wish to cancel the contract.
For all types of insurance policies, surrender charges are always high during the beginning.
Since the cash value is also very low towards the beginning, this means that the surrender charge is not a good idea at this point.
However, as time goes, the amount of surrender charge drops with time until it is zero. At the same time, the cash value will be increasing. This means that in case you have to surrender charge at a later time of your insurance policy, the amount of money you will be losing is lower than doing it towards the beginning.
Surrender charges are not charged in terms of cash. Instead, it is the percentage value of your cash value. In many cases, they will go to as high as 12%, especially towards the beginning.
However, the good thing is that they do not go past this level. As time goes the percentage drops to as low as 5% and eventually 1% of your cash value and 0%.
What is the Surrender Value?
Every contract with surrender charge will always have a surrender value. Surrender value is considered as the amount of cash value less than the surrender charge. Whenever you decide to cancel your contract for some reason and the company has to impose a surrender charge, then the remaining amount of the cash value is the surrender value.
The surrender value is usually the amount of money available for you once the surrender charge has been deducted.
Here is How to Avoid Surrender Charge
As much as the surrender charge percent keeps on decreasing with time, if you consider the amount in terms of cash, it can be a huge one depending on the cash value you have. If there is a way of avoiding surrender charges, then it means that you can save a lot of money. If you also want to cancel the contract early, it will come in handy.
· Waiting for the Surrender-Period Lapse
Waiting may not be the best thing someone would like to hear about avoiding the surrender charge, but it is a method that can work. Surrender charges keep on dropping with time. As a result, you will find many companies announcing a new rate after every anniversary.
In cases, you are in a possible to wait, it is advisable to and you will get very low rates of surrender charge. The next surrender charge will be lower and will help you save a lot of money from your cash.
In case you are patient enough, you can also wait until the surrender period is over, which leaves you with just a 0% percent surrender charge on your cash value.
· Look for Alternative Contracts
The need to avoid surrender charges does not only come when you have already agreed. You may be interested in taking an insurance policy, and you would like to know how to avoid the surrender charges before you can take the policy. There are other options one can work with that does not come with any surrender charges.
Consider checking for some annuities that do not attract any surrender charges at all. Such annuities instead will come with slightly higher expenses annually. By doing your calculations, you can quickly settle on which one is better for you.
There are also life insurance policies that offer better channels to avoid surrender charges by allowing you to withdraw. Certain contracts and policies offer you a chance to withdraw money to a certain amount per year without any surrender charges.
· Annuitize Your Annuity
It is a smart and simple option you can work with and get rid of any surrender charges. This is a case where all you have to do is annuitize your annuity, and in return, you will have to make regular payments every year. And, you do not suffer any surrender charges.
However, you have to be ready to make the payments for the rest of your life. It is essential to consult your company to enable you to understand how the process is carried out and the right steps to follow.
· Take a Loan
Insurance companies allow you to access your cash value through a loan. In cases where you want money too early and would like to get rid of any surrender charges, then taking a loan is a good idea.
Although you may not be able to take the entire money, you will not suffer any surrender charges. Life Insurance companies always have stipulated terms of loans on the contract. You can quickly request a loan according to the terms of the contract.
The loan you get from the life insurance company can always go to as high as 80% of the available cash value and you will not suffer any taxes or surrender charges. Always make sure that you talk with your life insurance company and understand the right procedures to follow before taking this step.
· Do a 1035 Exchange
Every insurance company has a 1035 exchange system that can help you avoid any surrender charges. It is a simple system in which you can transfer the rights or value of your policy to another new policy but must be within the same company.
Upon surrendering your policy value to another policy within the company, then you do not suffer any surrender charges. However, in cases where you want to do a transfer between different companies, the case might be different.
When doing a 1035 exchange within the same company, you have to make sure that you are moving to a policy that does not have a lower charge than the previous one. In case you want to do this process ensure you talk to your company to know the terms that you should follow.
· Pay Until Termination
It is a situation in which a policyholder pays the premiums until the policy is canceled, and in that case, there are no surrender charges.
However, this happens if you announce to the company that you are discontinuing the contract. Then you will continue to pay the premiums until the company itself decides to terminate the agreement. At that point, there will be no fees or surrender charges at all.
· Use the Window of Cancellation
Many policyholders do not know about this. A window of cancellation is an opportunity offered by a life insurance company to the policyholders to cancel their policies without suffering any surrender charge.
However, the window of cancellation is mostly offered by many companies during the anniversary of the policy. This means that in case this window is closed, then you cannot avoid the surrender charge other than finding other means. All you have to do to make use of this opportunity is to request termination of the policy within the time given.
· Get a Term Life Insurance
Getting a term life insurance is almost the most straightforward method you can use to avoid any surrender charges. Term life insurance does not have any savings accumulated or any form of investment. As a result, when you take the policy, you will never suffer any surrender charge.
However, the downside is that it is difficult for someone interested in whole life insurance to take a term life insurance for the sake of avoiding surrender charges.
The Bottom Line
Many policyholders do not know about surrender charges and do not understand how they work. As a result, they end up knowing about them when it is too late. Before you take any life insurance policy always make sure that you discuss with your agent about surrender charges.