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Methods of Calculating Surrender Value

Methods of Calculating Surrender Value

Methods of Calculating Surrender Value

Surrender value the amount the policyholder will get from the life insurance company if he decides to exit the policy before maturity. The surrender value of a life insurance policy is the amount of money you receive if you decide that you no longer wish to continue with the policy. It is the amount the policyholder will get from the life insurance company if he decides to exit the policy before maturity.

There are two bases of calculating surrender values. Such as –

  • Accumulation Approach,
  • Saving Approach.

Accumulation Approach: Under this approach, surrender value is the accumulation of overcharges in the net premium, which upon the surrender of the policy is no longer required to Pay the number of claims, therefore, theoretically he should pay all the accumulated reserve but if it is allowed the insurer will be left a very small amount for meeting other obligations because a huge expenses are involved at the time of surrender.

The accumulation approach is very scientific because it allows surrender values to all types of policies whereas in practice surrender values on. The term policies and pure endowment policies are not allowed because there the question of payment may or may not arise.

Saving Approach: An insurer is responsible for payment of claims whenever it may arise but if a policy is surrendered, the insurer is, relieved of its obligation for payment of the assured sum. He is in a position to return some amounts to the insured. But where he may not be required to pay the claims, he is not relieved of the responsibility and no surrender value can be given to the policyholders.

The savings approach is more scientific because it reveals the reason for payment of surrender value. Thus it forbids payment of surrender values on the term and pure endowment policies and agrees to pay the surrender amount on whole life and endowment policies.