Paid-up Policies

A further alternative is to make the policy paid-up, in which case no more premiums are payable and the company keeps the policy in force. However, there could be a taxable "chargeable event" on eventual claim. The sum assured is reduced, normally by the "proportionate" method. This means that the new sum assured bears roughly the same relation to the original one as the number of premiums actually paid bears to those payable under the original policy.

Thus, having paid five premiums on a policy requiring the payment of ten, Mr Drake should expect a paid-up value of about five-tenths of his £500,000 sum assured, while existing bonuses continue unreduced.

he surrender value is derived from the paid-up value by discounting the reduced sum assured over the remaining period of years until the original maturity date, and this will mean a lower figure than the paid-up value. The paid-up policy usually continues to participate in bonuses, but not all companies allow this.

Surrender Values

It is worth re-emphasising that the surrender value of the typical with-profit endowment policy over 20 or 25 years will be less than the total gross premiums paid for the first four or five years.

Such policies are designed to produce the expected benefit over the stated period, and if life insurance companies also had to guarantee surrender values in the early years at a rate that represented a better return on money invested, then those who stuck with their contracts would get less. Investment policy would be severely restricted, reducing the possibility of longer-term gains.

Low surrender values in the early years are a frequent cause of complaint against life insurance companies, but the only real answer is not to take out a long-term policy at all unless you are sure you can keep up the commitment. If you think you might not be able to, for purely financial reasons, then avoid such policies. (It is sometimes possible to provide that premiums will not be payable in a period of illness or disability through a "waiver of premiums" option, though the cost of this will obviously depend on age and health as well as on the size of the premium.)

As we shall see later, guaranteed surrender values are available on flexible endowment policies, usually from the tenth year onwards. But one group of life insurance companies - the Canadian life offices - does specifically write guaranteed surrender values into all its with-profit contracts. The surrender values guaranteed do not represent an attractive return on money invested in the early years, but they are often higher that those of companies which offer no such guarantee. However, such guarantees do have a cost, and the past and expected maturity results should be carefully compared.

Paid-up Policies

Policy Loans

The above example brings to us an important function of the with-profit policy. Mr Drake may well decide to launch himself in business before his policy matures. In this case, he can borrow from the life insurance company. The company will lend him 85-90% of the surrender value of the policy. Thus, if he started his own business five years after taking out the policy it may at that stage have a surrender value of £16,000. He could borrow £15,400 from the insurance company, which would charge him the interest rate applicable at the time and expect repayment of the capital out of the maturity... see: Policy Loans

Of interest