I
Ivanhoe
Member
Could you please explain this method with an example? I looked up some other threads for the explanation. I did not quite understand them. I only can understand that some excess premium is paid for extra sum assured opted for. I am pasting the text for your convenience. I would be grateful if you could throw some light especially on the font in bold
Paid-up policy value plus premium for balance of sum assured
This method cannot be used to calculate the terms for conversion to paid-up
status. It involves the following three steps:
(i) The policy is notionally converted to a paid-up policy at the alteration
date.
(ii) If the alteration involves a change in the outstanding term to maturity, the paid-up amount is converted to be appropriate to the new outstanding
duration by the use of reversion factors, ie:
Paid-up sum assured after change =Paid-up sum assured before change *Ax+t:n-t/Ax+t:m-t
where n and m are the original and revised total terms respectively.
(iii) A premium – calculated on the current premium basis – is then charged
for the balance of the required sum assured over the – if need be,
converted – paid-up policy amount.
Meeting the principles
The method produces acceptable results when applied to reduce the
premium substantially, running into the paid-up value if the term is
unchanged.
It would be unlikely to reproduce the original premium if a policy is altered
to itself.
If the paid-up value is based on the surrender value, ie it is the latter
thrown into reversion using the surrender value basis assumptions, then
a reduction in the outstanding term to zero would produce the normal
surrender value. However, if conversion to paid-up status is on some
other basis then the method may well be inconsistent with the surrender
value on a substantial reduction in outstanding term.
It is not immediately obvious whether it meets the other principles.
Paid-up policy value plus premium for balance of sum assured
This method cannot be used to calculate the terms for conversion to paid-up
status. It involves the following three steps:
(i) The policy is notionally converted to a paid-up policy at the alteration
date.
(ii) If the alteration involves a change in the outstanding term to maturity, the paid-up amount is converted to be appropriate to the new outstanding
duration by the use of reversion factors, ie:
Paid-up sum assured after change =Paid-up sum assured before change *Ax+t:n-t/Ax+t:m-t
where n and m are the original and revised total terms respectively.
(iii) A premium – calculated on the current premium basis – is then charged
for the balance of the required sum assured over the – if need be,
converted – paid-up policy amount.
Meeting the principles
The method produces acceptable results when applied to reduce the
premium substantially, running into the paid-up value if the term is
unchanged.
It would be unlikely to reproduce the original premium if a policy is altered
to itself.
If the paid-up value is based on the surrender value, ie it is the latter
thrown into reversion using the surrender value basis assumptions, then
a reduction in the outstanding term to zero would produce the normal
surrender value. However, if conversion to paid-up status is on some
other basis then the method may well be inconsistent with the surrender
value on a substantial reduction in outstanding term.
It is not immediately obvious whether it meets the other principles.