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In addition to the legal reserve, which is held to meet specific policy obligations, life insurance companies set aside various voluntary reserves, some of which may serve a special purpose and some of which may simply be another name for surplus. Special-purpose reserves may be set up to cover future declines in the market value of nonamortizable securities, to smooth out mortality fluctuations, to meet expenses under supplementary agreements, and the like. A general-purpose reserve is likely to be called a contingency reserve. In some companies the contingency reserve is the balancing item between assets and liabilities, and no surplus is shown. Since all of such special reserves are voluntary in nature, they can be used to meet any of an insurance company�s obligations.
In some states the amount of voluntary reserves, including surplus, that can be accumulated by a mutual life insurance company is limited by law. The purpose of such a limitation is to insure that the major portion of surplus earnings will be currently distributed to policyowners in the form of dividends. The accumulation is usually limited to 10 percent of the legal reserve as computed by the insurer. Therefore the more conservative the basis on which an insurer computes its policy liabilities, the larger the surplus or special reserves it can accumulate.
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