PAID-UP POLICY, SURRENDER AND LOAN
If the policyholder at some time cannot afford to
continue paying the premiums he has various options.
- He could stop paying premiums and convert the policy to what is known as
a 'paid-up' policy. Simply this means that a reduces sum assured would be
paid in the event of a claim. The reduced amount being calculated by
multiplying the original sum assured by the number of premiums actually
paid and dividing by the total number of premiums that would have been
paid over the term of the contract.
For example, in the case of a 10-year policy with a sum
assured of ₤1,000 and five years premiums paid, the paid up policy sum
assured would be
5 ÷ 10 ₤1,000 =
Appropriate calculations take account of bonus additions
on 'with profits' policies and on 'whole life' contracts which do not have
- He could stop paying premiums and cancel the policy by accepting its
current value in cash-the 'surrender value'. The surrender value is a part
of the reserve built up under the policy. It is very low in the early
years of a policy but increases steadily as the policy nears maturity.
He could have a loan from the insurance
company using the policy as security and assigning it to the insurance
company. The amount of loan available is a proportion (usually 90 per
cent) of the current surrender value of the policy. Interest will be
payable on the loan, and the amount of the loan deducted by the
insurance will deducted by the insurance company before the policy
proceeds are paid.