Discontinuance Charges (Surrender Charges)

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Definition:

Discontinuance charges or surrender charges is an amount levied on the policyholder which he has to pay on the cancellation of the policy.

Description:

This fee is the amount the insurance company charges to manage the insurance policy and keep it on the books of the insurance company. The discontinuance charge or the surrender charge is waived if the insured informs about cancelling the policy in advance.

For life insurance policies like annuity plans, the discontinuance charge (surrender charges) is about 10% of the funds that are contributed to the contract within the first year, it is effective. For the following years, the surrender fee drops down close to 1%.

Example:

Ajeet took a guaranteed annuity plan with an annual premium of Rs.1 lakh. He thought of surrendering the policy one year after the premium payment. The insurance company would levy surrender charges equal to 10% of the cash value the annuity plan gained.