Surrender charge
Fee for canceling or withdrawing from a life policy early, common on permanent contracts.
Plain definition
Surrender charges decline over years and apply when you cancel the policy or take large withdrawals that exceed free amounts. They protect insurers from early lapse on policies with upfront acquisition costs.
Why it matters
Needing cash in year three of a whole life policy may return far less than total premiums paid because of surrender charges and loan balances.
Example
You surrender a universal life policy in year four. Cash value is $8,000 but a $3,000 surrender charge leaves $5,000 before tax considerations.
Common misunderstanding
Surrender charge is separate from income tax on gains—you may owe both depending on basis and contract status.
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