Definition
The surrender value is the amount an insurance company pays to the policyholder if they decide to terminate a life insurance policy before its maturity date. This value is usually less than the sum of the total premiums paid because it accounts for administration fees, costs, and charges related to life-assurance cover up to the time of cancellation. Note that certain policies, such as term assurance policies, do not offer any surrender value.
Examples
Example 1: Whole Life Insurance Policy
John has a whole life insurance policy for which he has been paying premiums for the last ten years. Due to financial difficulties, he decides to surrender his policy. The insurance company calculates the surrender value by deducting fees, administration costs, and life cover up to the date of cancellation from John’s total paid premiums. As a result, John receives $15,000 as the surrender value of his policy.
Example 2: Term Assurance Policy
Emma has a term assurance policy that provides coverage for 20 years. After paying premiums for 5 years, she decides to cancel her policy. Since term assurance policies typically do not carry surrender value, Emma receives no payout from the insurance company.
Frequently Asked Questions
Q: How is the surrender value calculated?
A: The surrender value is calculated by subtracting fees, administration expenses, and life-assurance cover charges from the total premiums paid by the policyholder up to the date of cancellation.
Q: Do all life insurance policies have a surrender value?
A: No, not all life insurance policies have a surrender value. For instance, term assurance policies generally do not offer any surrender value.
Q: Is the surrender value available immediately after purchasing an insurance policy?
A: Generally, there is little or no surrender value in the early years of a life insurance policy. It typically takes a few years for a policy to build up a significant surrender value.
Q: Can a policyholder withdraw only part of the surrender value?
A: Some insurance policies may allow partial withdrawals. It’s important to check the specific terms and conditions of the policy.
Q: Are there any tax implications upon surrendering a life insurance policy?
A: Potential tax implications depend on jurisdiction and personal circumstances. It’s advisable to consult a tax advisor for detailed guidance.
Life-Assurance
Life-Assurance refers to a financial product offered by insurance companies where the beneficiary receives a sum of money either on the death of the insured person or after a specified period.
Premium
Premium is the amount paid periodically by the policyholder to the insurance company in exchange for the coverage provided by the insurance policy.
Cash Value
Cash Value is the amount of money a life insurance policyholder can receive if they cancel their policy before it matures.
Surrender Charge
Surrender Charge is a fee charged when a policyholder terminates a life insurance policy before a certain period; this fee reduces the surrender value.
Online References
- Investopedia: Surrender Value
- The Balance: What is Surrender Value in Life Insurance?
- NerdWallet: Understanding Life Insurance: Surrender Value
Suggested Books for Further Studies
- “Life Insurance Explained” by John L. Person
- “The Complete Guide to Life Insurance” by Jim Anderson
- “Life Insurance: The History, The Future, The Myths” by David R. Helms
Accounting Basics: “Surrender Value” Fundamentals Quiz
### What is the surrender value in an insurance policy?
- [x] The sum of money given by an insurance company to the insured when a policy is canceled before maturity.
- [ ] The total of all premiums paid by the policyholder.
- [ ] The total policy value minus outstanding loans.
- [ ] The payout sum received by a beneficiary after the insured's death.
> **Explanation:** The surrender value is the amount given by the insurance company to the policyholder when the policy is terminated before its maturity. The amount is less than the total premiums paid due to deductions for expenses and life cover up to the cancellation date.
### Do term assurance policies generally have a surrender value?
- [ ] Yes, they have a significant surrender value.
- [ ] Sometimes, depending on the policy conditions.
- [x] No, they do not provide any surrender value.
- [ ] Only if the policyholder is over 65 years old.
> **Explanation:** Term assurance policies typically do not have a surrender value. These policies provide coverage for a specific term and do not build cash value.
### Which of the following directly affects the surrender value calculation?
- [ ] The current stock market performance
- [x] Administration expenses
- [ ] The policyholder's credit score
- [ ] The geographical location of the insured
> **Explanation:** The administration expenses are one of the key factors deducted from the total premiums paid by the policyholder, affecting the calculation of the surrender value.
### By surrendering a policy early, the insured usually:
- [x] Receives less money than the total premiums paid
- [ ] Receives more than the total premiums paid
- [ ] Gets back the entire amount paid in premiums
- [ ] Causes the policy to continue with reduced premiums
> **Explanation:** When a policy is surrendered early, the insured usually receives less than the total premiums paid due to deductions for administration costs, fees, and life cover charges.
### How does the duration of the policy affect its surrender value?
- [ ] The longer the duration, the smaller the surrender value.
- [ ] The duration has no impact on surrender value.
- [x] The surrender value typically increases with the duration.
- [ ] Policies of longer duration provide no surrender value.
> **Explanation:** Generally, the surrender value increases with the length of time the policy has been active because the policy accrues more value over time.
### Can the surrender value be taken as a loan against the policy?
- [x] Yes, some life insurance policies allow loans against the surrendered value.
- [ ] No, surrender value cannot be borrowed against.
- [ ] Only for term assurance policies
- [ ] Only if no premiums are overdue
> **Explanation:** Some life insurance policies allow the policyholder to take out a loan against the surrender value instead of fully surrendering the policy.
### What happens to the life-assurance cover if a policy is surrendered?
- [ ] It scales down proportionally.
- [x] It terminates immediately.
- [ ] It continues with lower premiums.
- [ ] It increases due to fewer claims.
> **Explanation:** When a life insurance policy is surrendered, the life-assurance cover terminates immediately.
### What is a strictly necessary condition for calculating surrender value?
- [ ] Policyholder's age of over 50
- [ ] At least 5 years of premium payment
- [x] Effective policy cancellation
- [ ] Policy pledge as collateral
> **Explanation:** The surrender value is only calculated when a policy is effectively canceled before it has run its full term.
### Who generally provides a formal quote for the surrender value?
- [ ] The insured person's accountant.
- [x] The insurance company.
- [ ] Independent financial auditors.
- [ ] Government tax authorities.
> **Explanation:** The insurance company provides a formal quote for the surrender value since they handle the administration and processing of the policy.
### When is a policyholder eligible to surrender their life insurance policy?
- [ ] Only on special occasions
- [x] At any time subject to policy terms
- [ ] Only after 10 years of holding the policy
- [ ] Only after a claim has been made
> **Explanation:** A policyholder can generally surrender their life insurance policy at any time; however, the exact terms and conditions of the surrender depend on the specific life insurance policy.
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