What happens to the surrender charges of UL/VUL policies over time?

In universal life (UL) and variable universal life (VUL) insurance policies, surrender charges typically decline over time. This decline is structured to protect the insurer from the costs associated with administering the policy and to compensate for the initial expenses that occur when a policy is issued. These expenses can include commissions and underwriting costs.

As the policyholder continues to hold the policy and the cash value increases, the financial burden on the insurer gradually diminishes. Consequently, the surrender charges are designed to decrease over the life of the contract, encouraging policyholders to keep their policies longer without incurring high penalties if they choose to surrender them later on.

This gradual reduction in surrender charges is a common feature intended to provide a fair treatment for policyholders and ultimately reflect the decreasing cost of providing insurance as time passes. It is important for policyholders to understand this feature as it can influence their decision on when to surrender the policy if ever necessary.