What is the purpose of the Contingent Deferred Sales Charge (CDSC) in insurance policies?

The Contingent Deferred Sales Charge (CDSC) is primarily designed to discourage policyholders from making early withdrawals or cashing in their policies too soon after purchase. By imposing a fee that decreases over time, the CDSC aims to ensure that the policyholder remains invested in the insurance product for a longer duration, which benefits both the insurer and the policyholder by allowing the investment to grow and the insurer to manage the risk more effectively.

When a policyholder withdraws funds or cancels the policy within a certain time frame, the CDSC is applied, making it less financially attractive to do so. This structure helps to stabilize the insurance company's cash flow, safeguard reserves, and encourage policyholders to take full advantage of the benefits and protections offered under the policy over a longer term, which aligns with the nature of many insurance products that may be designed for long-term investment.

The other options do not accurately reflect the role of the CDSC. It does not encourage early withdrawals, nor does it aim to increase premiums or provide tax benefits. Instead, its specific function is to create a financial incentive for policyholders to maintain their policies for a longer period, ultimately leading to better outcomes for both parties involved.