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Surrender Profits

J

jensen

Member
In Section 8 of chapter 5, bullet 2 mentioned that there will be a surrender profit if the lump sum is greater than the reserve.

Wouldn't the surrender benefit will always be less than the reserve throughout the entire policy lifetime? Otherwise the policyholders will be motivated to surrender.

Thanks.
 
Yes, in reality, surrender benefits should be set at a lower level than the reserve. Otherwise the office is exposed to policyholders choosing to surrender.

That's not to say that you couldn't be given a question where the surrender benefit exceeded the reserve, in order for the examiners to test this idea.
 
Don't forget that by buying the policy in the first place, the policyholder exhanged a cash amount (premium) for a (presumably) lower reserve, which is the exact opposite of surrendering.

So it isn't completely unreasonable for policyholder to keep policy even if surrender value is more than the reserve being held.

It does widen the door for selection and can also be a liquidity/cash flow issue.
 
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