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Question 22.6 Chp Alterations

E

Ekta Mehta

Member
Hi, I was solving the question 22.6 from chapter 22 from the 2022 version of the SP2 notes.

The question mentions 120 as the surrender/alteration fee. I just had a thought, as per the solution of part ii, shouldn't 120 get deducted in the second part? We deduct it as a cashflow int he first when calculating surrender value; but shouldn't the same be done when checking for alterations?

Thanks!
 
Ekta Mehta said:
Hi, I was solving the question 22.6 from chapter 22 from the 2022 version of the SP2 notes.

The question mentions 120 as the surrender/alteration fee. I just had a thought, as per the solution of part ii, shouldn't 120 get deducted in the second part? We deduct it as a cashflow int he first when calculating surrender value; but shouldn't the same be done when checking for alterations?

Thanks!
Click to expand...
Hi Ekta

Yes we should allow for the alteration expense of 120 in part (ii). However, the solution has done this already as it gives the value of the policy as the surrender value of 120,911, which already has the 120 deducted from it. To allow for the 120 again in part (ii) would be double counting.

You can think of the equating policy values method like this. The left hand side of the equation is the money we have. And the right hand side of the equation is the money we need for the new altered policy. The money we have is the value of the old policy (before alteration) of 121,031 less the alteration expense of 120.

Best wishes

Mark
 
Thanks for helping me out here Mark.
I read the question again and understood that we're not surrendering but only altering the policy. Hence, the 120 which is deducted before is the alteration charge instead of surrender.
 
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