The non-forfeiture period and Surrender Value

With policies that have acquired a surrender value, the procedure is different. The normal practice is to use the surrender value of the policy to pay the premiums as they fall due, thus maintaining the policy in force for the policyholder, for a period of 12 months, or more in some cases. This is known as the non-forfeiture period. If the policyholder then wishes to revive the policy, the overdue premiums plus interest have to be paid and a declaration of health made.

If the option of reviving the policy is not taken up, then many companies will automatically make the policy paid-up. The paid-up value is often proportionate: e.g. if five years' premiums have been paid on a 25-year policy, the paid-up sum assured is about one-fifth of the original sum assured, and cover continues at this level with no further premiums to be paid. In some cases, the reduced sum assured is allowed to continue to participate in bonuses; in others not. Other companies, however, maintain the policy in force until the surrender value has been completely used up in paying the premiums.

If the policyholder wishes not merely to stop paying premiums but to encash his policy, then he receives the surrender value. This will be lower than the paid-up value. In the case of unit-linked policies the surrender value will be the bid value of units less a deduction to cover the company's expenses.

The surrender value is also the relevant figure for loans. A life insurance policy is assignable (the benefits payable under it may be transferred at the policyholder's option to someone else) and a policy may even be sold. Raising a loan against a policy is in essence no different from raising a loan on a house. The life insurance company itself will usually lend against its own policies up to a stated percentage (80 90%) of the surrender value. A charge will be registered against the policy, just as a charge is registered against the deeds of a house. Such loans are normally without restriction of term; they may be repaid by the policyholder when he likes but will otherwise be repaid out of the claim proceeds of the policy. An additional benefit is that interest can in some cases be added to the amount of the loan so long as the total indebtedness does not exceed the surrender value.

The non-forfeiture period and Surrender Value

Payment of Premiums

The policyholder can often choose whether to pay premiums annually, or at six-monthly, quarterly or monthly intervals. Premiums are normally calculated on the basis that they are paid annually in advance, so that the payment at shorter intervals means the company receives less interest and incurs more expenses than on the annual basis. Monthly premiums therefore carry a loading of 2-6% over annual premiums.

Monthly premiums may be on a "true" or an "instalment" basis. In the latter case, if the assured dies between two policy anniversaries the balance of a year's premiums will be deducted... see: Payment of Premiums

Of interest