Surrender charges on insurance contracts

[Guest TortoraG]

Does anyone know of a way to avoid paying horrendous surrender charges on insurance contracts when plans are merged due to acquisitions? Most of these contracts do not consider a plan merger to be a benefit payment and impose a charge anywhere from 6% to 2% for withdrawal. This ends up as an extra cost to the acquiring company to make employees whole. Most of the companies I have dealt with will not negotiate and impose the fee. Any ideas on getting surrender charges waived?

[Guest Dook]

Not unless you have mastered silver coated speech which will allow you to explain to the insurance company how the premature liquidation of the contract is somehow to their benefit. In most cases the insurance company does not begin to turn a profit until after the fourth or fifth year of the contract depending upon their actual start up costs (commissions, underwriting, etc.). The surrender charge is there to help recoup these start up costs, it is not pure profit from the spoils of doing business.

I am no fan of insurance companies, they sell commission products which many times are not the best choice for the plan. But don't blame the insurance companies in the end, blame the owners of the company who made the decision to fund the plan with insurance products and then sold the company shortly thereafter.

[Guest TortoraG]

Agree with your comments, but in one case we are in 7th year of 9 year contract and insurance company charges 3% surrender charge. Don't think we can blame the company for not seeing a sale down the road. Any other ideas, anyone?

[Larry M]

Perhaps you can maintain the insurance company contracts as one of the investments in the new plan until the end of the surrender charge period.

Before deciding upon this route, check to see if the projected investment yield under this scenario makes it a sensible decision when comapred to surrendering the contracts and investing in other items.

[Guest Robert Collins]

Check to make sure that the insurance contract was approved by the state insurance department at the time it was sold to the client, just in case the insurance company jumped the gun. Some contracts allow for a fixed period annuity -- check to see the minimum annuity period. Also check for a 10% annual withdrawal that is load free, this may let you move some of the money.

[Guest LARRY]

In several PLR's the IRS views the deferred sales charge as a reasonable plan expense to be charged against all participants. If a compamy makes a restoration payment to each employee's account to make up for the charge ,it is considered a company contribution subject to all the normal limitations.

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