Ch 31

[Mahima Singla]

Hi, I have doubt in solution 31.1, page 35

In surrender, it is mentioned that significant risk as the surrender value (the value of unit fund) is likely to exceed the asset share at early duration, a position that might persists for several years".
The next line is "the cause of this is the uneven incidence of expenses while the charges gradually increase from a low level at the start of a contract"

As per my understanding, asset share will be less than fund value because of initial expenses because investment risk will be borne by policyholder (P/H) itself. So whatever the fund value will be we will pay the P/H on surrender but there's a possibility that company might not have recouped the initial expenses incurred so that's why surrender will be a problem in early years.

But what does it mean with "uneven incidence of expenses .. while the charges increase from a low level at the start of contract. I don't understand the term uneven incidence of expenses and what does it mean that charges increase from low level at the start of contract ??

Does the charges increase means that as the unit fund grows .. fund management charges increases with the duration but initially when the unit fund size is low so low charges are taken out of fund ?

 

[Mark Willder]

Hi, I have doubt in solution 31.1, page 35

In surrender, it is mentioned that significant risk as the surrender value (the value of unit fund) is likely to exceed the asset share at early duration, a position that might persists for several years".
The next line is "the cause of this is the uneven incidence of expenses while the charges gradually increase from a low level at the start of a contract"

As per my understanding, asset share will be less than fund value because of initial expenses because investment risk will be borne by policyholder (P/H) itself. So whatever the fund value will be we will pay the P/H on surrender but there's a possibility that company might not have recouped the initial expenses incurred so that's why surrender will be a problem in early years.

But what does it mean with "uneven incidence of expenses .. while the charges increase from a low level at the start of contract. I don't understand the term uneven incidence of expenses and what does it mean that charges increase from low level at the start of contract ??

Does the charges increase means that as the unit fund grows .. fund management charges increases with the duration but initially when the unit fund size is low so low charges are taken out of fund ?

Hi Mahima

The expenses are uneven because there will be very large initial expenses followed by much lower regular expenses.

So yes, there is the risk that the charges will not have recovered the initial expenses if the policyholder lapses early on.

And yes, the charges will start small as the fund starts small and so fund management charges gradually grow over the term of the contract.

Best wishes

Mark