What is a "surrender charge"?

A "surrender charge" specifically refers to a fee that is incurred when a policyholder chooses to withdraw cash value from their life insurance policy or decides to cancel the policy before the end of a specified period. This charge is typically applied to protect the insurer’s financial interests, as it helps to recoup some of the expenses associated with issuing the policy and managing the account, including commissions paid to agents and administrative costs.

The surrender charge usually decreases over time, reflecting the idea that as the policy matures, the insurer's financial obligation decreases. This structure encourages policyholders to maintain their policies for a longer duration. Understanding this concept is crucial for policyholders as it impacts financial planning and the decision to access funds from a life insurance policy.