What is the effect of surrender charges in the first years of a whole life policy?

Surrender charges in the context of a whole life insurance policy are typically designed to protect the insurer against early policy cancellations. In the early years of the policy, these charges tend to be higher. This is because the insurer has upfront costs related to issuing the policy, such as commissions to agents and administrative expenses, which they need to recover.

As time goes on, the surrender charges generally decrease, often reaching zero after a specified period. This structure serves to discourage policyholders from surrendering their policies too soon, thereby ensuring that the insurer retains profitability and that policyholders maintain coverage long enough for the insurance to be beneficial.

The other options do not accurately describe the nature of surrender charges in whole life policies. Surrender charges being lower initially would contradict their purpose of recouping early costs. Immediate elimination of surrender charges is not typical for whole life policies, as they are meant to encourage policy retention. Lastly, the idea that surrender charges are constant throughout the policy's term is inaccurate, as they usually vary by year. Thus, the correct understanding of surrender charges in this context is that they are indeed higher in the initial years.