As we mentioned in previous articles, UL plans are unbundled, the various components of the plan such as insurance charges and earned interest can each be isolated and quantified. Consequently, they are much easier to understand and explain than traditional bundle permanent life insurance products. In this article, we will discuss the surrender charge in the universal life policy.
The surrender charge is the difference between the accumulating fund and the cash value accumulated in the insurance policy that the policy holder can access at any time, often called cash surrender value.
Surrender charge schedules are difference between insurers and between the UL plans available from each insurer. Some plans contain a very heavy level of surrender charges that apply for a lengthy period of time of more than 10 years. These charges serve to artificially suppress the cash values of the policy. Other plans have low or no surrender charges at all.
Therefore, if policyholders who may want to access the cash values of the policy early in the contract will prefer to have lower surrender charges in their plan.
Higher surrender charges are not necessarily a negative for all policyholders. Heavy surrender charges are ideal for those policyholders using their UL plan as a means of sheltering funds from tax because:
1. Using low early cash values provides the means for the pricing actuary to inflate future cash values through investment bonuses, thereby enabling much larger cash values in later years.
2. Surrender charges are used to suppress cash values and cash values are usually compared to a test policy during exempt testing. Therefore, the policyholder can deposit larger amounts into the UL plan in the early years and shelter more funds for a longer period of time. For more details, see the Rules and Regulation section later in this course.
I hope this information will help. If you need more information, you can read the complete series of the above subject at my home page:
http://lifeanddisabitityinsuranceunderwriter.blogspot.com/
http://life-insurance16.blogspot.com
http://lifeinsurancexiii.blogspot.com
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