From the construction of an internationally-acknowledged (if not fully understood or widely spoken) auxiliary language devised in 1887 called Esperanto, to the Unwinese language first founded by Professor Stanley, and possibly inspired (in part at least) by Lewis Carroll’s 1871 poem, Jabberwocky; certain everyday words or popular phrases just don’t sound right in the context they sometimes find themselves in.
To our mind the term ‘surrender value’ – in conjunction with life insurance – fits this very bill perfectly (or not, as the case may yet be), as it just seems so, well, out of place. Admittedly if you surrender something then you give it up (which remains the gist of a surrender value as we’ll get to in a paragraph or so), yet something surrendered of free will might imply that it’s of no potential worth in the first place; otherwise the previous owner would be putting a price on said item’s head and selling it, surely? And the perceived value of an untouched life insurance policy paid into handsomely over the years is rightly worth a few bob.
The thing is we could sit here and procrastinate about whether the word ‘surrender’ is apt in this instance or not (and exacerbate this tenuous intro still further), but we have got to get to the point sooner or later. The question, rather than the point, being: ‘what does surrender value mean with direct regards to life insurance policies?’ So here goes our explanation…
According to the HMRC (although not Gospel, as close as it sometimes gets), the definition of a surrender policy is ‘the amount the insurance company is prepared to pay at a particular point in time if the policyholder wishes to cancel the policy’.
The Government department also goes on to add words to the effect that neither a ‘short term life insurance policy’ nor a ‘term’ alternative product will ever offer a surrender value (although may well having a market value), due to the underlying fact that the passage of time is deemed too short; and ultimately the policyholder won’t have normally accumulated that much at the halfway point (or before) of such a distinctively short-term agreement.
The HMRC also suggest that life policies are often sold at price in excess of their surrender value, so the latter doesn’t necessarily reflect the open market valuation of the policy at that specific juncture, which is true.
The HMRC are of course right, as a surrender value IS the amount of money your life insurance policy provider will stump up on the policy if it’s voluntarily surrender prior to the event that it’s typically insuring you against (i.e, your own demise, and the subsequent pay-outs afforded the insured party’s nearest and dearests/named dependents).
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And again, it’s a phrase more commonly referred to when the conversation turns to life insurance, as opposed to any other forms, and especially so in relation to whole of life packages.
The best – and simplest – way to look at it is a surrender value being equal to the savings component of an individual’s life insurance plan, which effectively increases over a period of time as premium payments accrue. Also worth observing that in addition to surrendering a policy, the majority of life insurers allow the policyholder to borrow against it, at least to an amount no greater than the agreement’s surrender value, obviously. Like a personal loan in some ways. It goes without saying (but it’s our job, and you’re here) – and way before cashing in on a policy (OR borrowing against a sum) – the insured party needs to think long and hard about it. By far and away the biggest concern should be the overall effect it might have on the death benefit aspect (e.g, what your loved ones will receive once you/the policyholder pops their clogs), which will either be, A) significantly reduced or, B) negated, dependent on the scenario.
So just how much are we talking about, figure-wise? Whilst it’s virtually impossible to determine who is entitled to how much and when (for logistical reasons) we can give you a rough idea, percentage-wise and based on a bit of history that may help at this stage.
Sources insist that the average surrender value entitlement – of the typical ‘with profit’ endowment policy; which to those out of the loop is a prominent feature of orthodox life insurance policies designed to pay a lump sum after a specific term (on its ‘maturity’) or on death (with maturities usually tending to fall on either ten, fifteen or twenty years up to a certain age limit) – over 20 to 25 years will be less than the total gross premium paid during the initial 4 to 5 years.
Although seemingly unfair, there is method in the madness of the life insurance providers, in as much as such policies are geared up to give the policyholder the expected levels of benefit over the pre-agreed period, and should companies be made to guarantee surrender values in the first few years at a rate that clearly represented a greater return on the amount originally invested by the insured party, then those who adhered to their contracts to the bitter end would receive less in real terms. Which would immediately cause rifts. Conversely an investment policy would be severely restricted, minimising the potential for longer-term gains.
As it stands, one of the most frequent causes for complaints levelled against life insurance providers are indeed these talked about low surrender values representative of the early years, yet the solution to this frustration is not to arrange a long-term policy unless you are committed to keeping up the payments, and if you believe for one minute that your ability to do this may be compromised in the short or medium term then the best advice would be to avoid such policies altogether.
Guaranteed surrender values are normally available on flexible endowment policies, which can be triggered from around the 10 year in mark, although there are a few life insurance providers out there which factor in guaranteed surrender values into all its ‘with profits’ agreements. While this additional feature doesn’t promote anything akin to an appealing financial return on monies invested during those early years, they still remain a more attractive proposition than those similar policies which offer no such guarantee. But as with anything, such guarantees come at a cost somewhere down the line, and in acknowledgement of this any past and forecast maturity results should be carefully scrutinised by the would-be policyholder beforehand.