Syndicated Financial Columnist, Host of the weekly talk show Steve Savant's Money, the Name of the Game, Scottsdale Arizona
Cash value life insurance generally has two accounts: the cash value account and the surrender values account. The two accounts are generally displayed in your annual policy statement. The surrender value account is the termination cash values as well as a determining factoring in borrowing from your life insurance policy.
The surrender charge is an amortized (i.e. spread out over time) accounting of the costs incurred by the insurer to place the policy in force. They can be thought of similarly to contingency deferred sales charges.
The surrender charge is deducted from your cash value if you surrender the policy during the surrender period (generally the first 10-20 years of the life insurance policy).
Most life insurance contracts will explicitly tell you the policy value and the surrender value. The surrender value is the contract value net of the surrender charge.
Surrender charges on cash value life insurance policies are very similar to surrender charges on annuities. This is a charge or penalty for an early cancellation or surrender on the policy. The fees are built in for the life insurance carrier to recoop losses incurred due to this early cancellation. When a policy is issued actuarially the profits are calculated in the latter years. When a policy is cancelled before those years, the carrier has the right to cover these losses. The best move is to borrow against cash value to avoid these surrender charges.
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The surrender charge is deducted from your cash value if you surrender the policy during the surrender period (generally the first 10-20 years of the life insurance policy).
Most life insurance contracts will explicitly tell you the policy value and the surrender value. The surrender value is the contract value net of the surrender charge.