What is a "surrender charge" in a life insurance policy?

A surrender charge is a fee that is typically assessed when a policyholder decides to terminate their life insurance policy or withdraw funds from a cash value policy before a specified period. This charge is designed to protect the insurance company from the loss of anticipated revenue in the early years of the policy, particularly in products like whole life or universal life insurance that have cash value components. When a policy is surrendered in its early years, the insurer may incur costs that they offset through the surrender charge.

Understanding this concept is crucial for policyholders, as it can impact their decision to cash out or surrender a policy. The timing of when a policy is surrendered plays a significant role in the amount of the surrender charge, which often decreases over time as the policy matures. This fee is inherently tied to the contractual obligations and the financial structure of the life insurance product.