Washington Life and Disability Producer Practice Exam

When an insurance policy is cancelled early, it often results in the payment of surrender charges. These charges are fees that the insurer takes when a policyholder cancels a policy before its term is completed, especially if it is a cash value policy, like whole life insurance. Surrender charges exist to help the insurance company recoup costs associated with issuing the policy and any fees related to the policy's management during its early years. They can significantly reduce the amount of any refund due to the policyholder.

In contrast, a full refund of premiums paid is unlikely, as not all policies offer this feature upon cancellation, and typically, the refund would be reduced by any applicable charges. The establishment of new policy terms does not occur as a result of cancellation; new terms would typically require the issuance of a new policy instead. Lastly, automatic renewal is not applicable in this context, as cancellation indicates a desire to terminate the policy rather than continuing coverage. Thus, the consequences of cancelling an insurance policy early can often lead to financial penalties like surrender charges.