Surrender charge is a fee imposed by an insurer when a policyowner partially or fully surrenders a life insurance or annuity contract during its surrender charge period. This declining schedule of charges is designed to allow the carrier to recover up-front acquisition costs, commissions, and bonuses if the contract is terminated early. Surrender charges are usually expressed as a percentage of the amount withdrawn or the contract value and decrease over a fixed number of years. While they do not change the underlying account value, surrender charges reduce the amount the client actually receives if they exit the product before the surrender period ends. Understanding surrender charges is critical to evaluating liquidity, suitability, and the true cost of exchanging or replacing existing contracts.

Advisors discuss surrender charges when comparing annuity products, recommending replacements, or addressing policy loans and withdrawals. They explain the surrender charge schedule, free-withdrawal amounts, and how market value adjustments or bonus recapture provisions interact with surrender fees. In suitability and best-interest reviews, regulators and carriers expect clear documentation that the client understands how long their money will be subject to surrender charges and what happens if they need funds early. Advisors use surrender charge analysis to determine whether a proposed 1035 exchange or surrender is in the client's best interest, taking into account age, time horizon, liquidity needs, and benefits that might be lost by exiting the current contract.