What is surrender value, cash surrender value, and a surrender charge?

Surrender value is the value of an insurance policy if it were to be cancelled by the insured, terminated by the insurer, or if the insured requested to lower the death benefit in an effort to lower their premium. An insurance policy can be partially surrendered or fully surrendered. A partial surrender means the death benefit decreases. A full surrender means the death benefit decreases to zero.

With a traditional life insurance policy, the calculation of surrender value becomes more complex because the surrender value also includes the cash surrender value. Cash surrender value is the amount of cash value left after the insurance company deducts withdrawal penalties and fees from the savings account component of the life insurance policy. These withdrawal penalties and fees are known as surrender charges. A partial surrender and full surrender of a traditional life insurance policy will include withdrawals of cash value, and are therefore subject to such deductions.

In order to avoid the deduction of surrender charges, there is a free look period. The free look period is the required period of time an insurance company must provide a policyowner who wants to cancel an insurance policy without facing penalties and fees. If an insurance policy is cancelled after the free look period, the surrender charges may significantly reduce the cash value and can ultimately result in no remaining cash value.

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