A client is comparing cash-value policies and asks about surrender charges. Under California law, surrender charges:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
California's policy disclosure rules require that surrender charges — the deduction from cash value if a policy is surrendered during the early years — and the surrender charge period be disclosed to the policyowner, typically in the policy or in sales materials. Surrender charges help the insurer recover acquisition costs and are common on cash-value contracts; they are not prohibited. They do not apply to term insurance, which has no cash value, and they are determined by the insurer's contract design, not set individually by the agent. Full disclosure protects consumers from the surprise of low early cash values.
Why the other options are wrong
- B) Surrender charges are lawful and common on cash-value policies; they help the insurer recover acquisition costs. California law requires disclosure, not a prohibition of these charges.
- C) Term insurance is pure protection with no cash value, so there is no cash value on which a surrender charge could be imposed during the policy years.
- D) Surrender charges are contract terms designed by the insurer and set out in the filed policy form. The selling agent does not set them, and they do not vary by individual customer.
Memory hook
Surrender charges: the early exit fee must be printed, not sprung.