What does a surrender charge in Variable Life Insurance refer to?

In Variable Life Insurance, a surrender charge refers specifically to the penalty assessed when a policyholder decides to withdraw cash value or cancels the policy before a certain period. This charge is designed to protect the insurer’s investment in the policy, especially during the early years when the expenses associated with the policy are recouped.

When a policyholder surrenders the policy or withdraws cash value, the surrender charge helps offset the costs incurred by the insurer in establishing and maintaining the policy. Typically, these charges may decrease over time, reflecting the insurer's recoupment of its initial investment. This feature ensures that the policyholder is aware of the potential penalties that may apply when accessing their funds or terminating the policy, thereby encouraging long-term holding of the policy.

Understanding this aspect of Variable Life Insurance is crucial for a policyholder, as it affects decisions regarding cash withdrawals and the timing of policy cancellations.