What is the purpose of the surrender charge in a deferred annuity?

The purpose of the surrender charge in a deferred annuity is to compensate the insurance company for the loss of investment value that occurs when a policyholder withdraws funds from the annuity before a specified period. Deferred annuities are designed to encourage long-term savings, and the surrender charge serves as a financial deterrent to early withdrawals. This fee helps ensure that the insurance company can recoup some of the costs associated with issuing the annuity, particularly since they may have incurred expenses related to commissions, management, or the investment of the initial premium. By having a surrender charge, the company protects itself from significant losses if annuity holders withdraw their funds prematurely, which could disrupt their investment strategy and financial stability.