What is the role of surrender charges in a Variable Life Insurance policy?

In a Variable Life Insurance policy, surrender charges serve a specific purpose: to reduce the cash value amount if the policy is surrendered early. These charges are designed to recoup some of the costs incurred by the insurance company when the policy is initiated. Since variable life insurance involves not only a death benefit but also an investment component, the insurer may have initial expenses such as underwriting, commissions, and administration that they aim to recover if the policyholder decides to terminate the policy before a certain period.

Surrender charges typically decrease over time, providing a disincentive for early withdrawal while also allowing the policyholder to retain more value as they continue to maintain the policy. By applying surrender charges, the insurance company balances the financial risks associated with early policy cessation and helps to ensure that the policy remains beneficial in the longer term for both the insurer and the policyholder.