How do you calculate surrender factor?

Calculating Surrender Factor in Life Insurance Policies

Life insurance policies frequently provide a surrender value, which is a percentage of the policy’s accumulated value, including bonuses. This surrender value enables policyholders to terminate their coverage and receive a partial refund of their premiums.

The surrender factor determines the percentage of the accumulated value that will be paid as a surrender benefit. It typically starts at 0% during the initial three years of the policy and progressively increases thereafter. The specific surrender factor for a given policy depends on the terms and duration of the policy.

How to Calculate Surrender Factor

The surrender factor is usually stated in the policy contract. If it is not explicitly stated, it can be calculated using the following formula:

Surrender Factor = 1 - (Policy Duration / Number of Policy Years)

For example, if a policy has been in force for 10 years and has a policy duration of 20 years, the surrender factor would be:

Surrender Factor = 1 - (10 / 20) = 50%

This means that if the policyholder surrendered the policy after 10 years, they would receive 50% of the accumulated value as a surrender benefit.

Factors Affecting Surrender Factor

Several factors can influence the surrender factor of a life insurance policy:

• Policy Type: The type of policy, such as term life or whole life, can impact the surrender factor.
• Policy Duration: The number of years the policy has been in force generally affects the surrender factor, with longer durations typically resulting in higher surrender factors.
• Insurance Company: Different insurance companies may have different surrender factor schedules.

Importance of Surrender Factor

Understanding the surrender factor is crucial for policyholders considering surrendering their coverage. It allows them to assess the potential financial implications of terminating their policy and make informed decisions.

A high surrender factor implies that a larger portion of the accumulated value will be returned as a surrender benefit. However, it is important to note that surrendering a policy often results in the loss of coverage and can have tax consequences.