Will some one please explain what do these paras mean, especially the second and the third one ? If expenses and mortality could be ignored, and if the arrears/surplus were accumulated on the premium basis, then consistency could be achieved with surrender values and paid-up values if these also followed the premium basis In practice, because expenses – such as commission – vary with term, such consistency is unlikely to be achieved for substantial reductions or extensions in term. Moreover, the premium basis may change and hence, quite apart from expenses and mortality considerations, a substantial extension of term would probably not be consistent with current premium scales. Regards,
Hi Let's consider an example. Suppose that 2 years ago, a customer took out a 10 year endowment with SA = 10,000 and premium 8,000pa. (NB These numbers are completely made up ) Now, the customer wants to alter the policy, leaving the maturity date the same, but increasing the SA 10 15,000. This method basically says that the company should consider what the premium would have been if the customer had come along 2 years ago and bought a 10 year endowment with SA = 15,000. Suppose this premium would have been 12,000pa at the time. Then, at the alteration date, the customer has underpaid by £4,000pa for 2 years. This can be accumulated to a "debt" at the alteration date. This "debt" is then recouped by adding it on to the 12,000pa premium for the rest of the policy term. The bullet points you refer to point out some problems with this approach. The method is assuming that during those first two years the expenses and the cost of providing the insurance cover would have been the same. In practice, the expenses (eg the commission) could have been larger if the SA was 15,000 rather than 10,000, and the cost of cover would have been larger. This means that the method can give theoretically wrong and inconsistent answers. Another problem occurs if the company has changed its premium rates during the 2 years. If in the method we go back and calculate what the premium would have been on the premium rates being used at the time, this could result in an answer that looks strange compared to the company's current premium rates. Best wishes Lynn
