How are surrender charges typically applied in a life policy with a rear-end loaded provision?

In a life insurance policy with a rear-end loaded provision, surrender charges are typically deducted when the policy is discontinued. This type of charge is designed to recover costs associated with issuing the policy if the policyholder decides to terminate it early. Unlike front-loaded fees, where the charges are taken out at the beginning or annually, rear-end loaded charges provide a structure that allows the policy to initially seem less expensive, with costs deferred until the policy is surrendered.

When a policyholder decides to discontinue their policy—often during the first several years—the surrender charge becomes applicable. This is intended to discourage early termination and compensate the insurer for the initial costs incurred in setting up the policy, such as commissions and administrative fees. Therefore, when a policyholder surrenders the life insurance policy, they would see a deduction of the surrender charge from the cash value or benefits available at that time, making the correct choice evident.