Surrender values

[dChetty]

If yields are high, lower surrender values are paid out, how does it makes sense when yields are high, lower surrender values are paid out. High yields should be a good thing. I understand the present value of benefits and expenses are lower when yields are high but just realistically it makes no sense to me.
Please explain.

 

[Mark Willder]

If yields are high, lower surrender values are paid out, how does it makes sense when yields are high, lower surrender values are paid out. High yields should be a good thing. I understand the present value of benefits and expenses are lower when yields are high but just realistically it makes no sense to me.
Please explain.

The insurer has probably invested in long term bonds that match the timing of the maturity payout. If yields rise, then the price of these bonds fall. So surrender values must fall to cover the lower value of the insurer's assets.

Mark

 

[dChetty]

That makes sense to me. Thanks a lot.