What is a "surrender charge" in life insurance?

A "surrender charge" in life insurance refers specifically to a fee that is imposed on policyholders who choose to withdraw their cash value from the policy before a designated period, often associated with the early years of ownership. This charge is designed to recover the costs that insurance companies incur when issuing life insurance policies, such as commissions and administrative expenses.

The purpose of the surrender charge is to discourage policyholders from withdrawing funds early, as it can impact the insurer's ability to manage its financial obligations. In many cases, surrender charges decrease over time and may eventually vanish after a certain number of years, encouraging policyholders to maintain their policies for longer durations.

Understanding surrender charges is crucial for consumers considering cash value life insurance, as it directly affects their access to the funds they build within their policies.