What is meant by a "surrender charge"?

A "surrender charge" refers specifically to a fee that is incurred when a policyholder decides to terminate an insurance policy or withdraw funds from it before a specified period has elapsed. This often applies to cash value life insurance policies, such as whole life or universal life insurance, where the insurance company imposes this charge to recover some of the costs associated with issuing the policy and funding its cash value.

When a policyholder withdraws money or surrenders the policy early, the insurer may assess a surrender charge to help mitigate its financial exposure, given that these policies have costs associated with their establishment and maintenance. This is particularly relevant during the early years of a policy, when the surrender charge is typically the highest, reflecting the initial costs involved in setting up the policy.

Understanding a surrender charge is essential for policyholders considering their options regarding policy termination or partial withdrawals, as it can impact the amount of money they ultimately receive.