What is the main function of a surrender charge in many life insurance policies?

The primary function of a surrender charge in many life insurance policies is to compensate the insurer for early withdrawals. When policyholders choose to terminate their policies or withdraw funds from the cash value, surrender charges are often applied. These charges serve to cover the administrative costs and potential financial losses that the insurer incurs due to the early termination. Insurance companies invest the premiums collected from policyholders, and an early withdrawal can disrupt their expected financial planning. Therefore, surrender charges act as a financial deterrent against early policy cancellations, ensuring that the insurer can recover some of their expenditures related to the policy.

The rationale behind the other options is less aligned with the purpose of surrender charges. While some policy features may encourage policyholders to maintain their policies, this is not the primary role of a surrender charge. Additionally, surrender charges do not enhance the cash value of the policy nor do they provide tax benefits for cash distributions; instead, they are linked to the costs associated with early termination and withdrawal of cash value.