19

NONTRADITIONAL INSURANCE PRODUCTS

This chapter has discussed surrender values under ordinary life insurance products. Nontraditional products that were developed during the 1980s, such as universal life insurance, have an explicit accumulated value on which the contract�s rate of interest is paid. The surrender value is the accumulated value minus an explicit surrender charge. Typically the surrender charge begins at 100 percent of the accumulated value for termination during the first year of the contract. Then it declines steadily until it disappears, usually at least 7 years after policy issue and sometimes as many as 20 years after policy issue.

The removal of the mysterious "black box" operation typical of surrender values in traditional life insurance is a defining characteristic of many modern nontraditional insurance contracts. The distinct surrender charge clearly displays the cost to consumers of purchasing permanent insurance only to cancel it after a short period.

NOTES: As mentioned elsewhere, all policies give the company the legal right to postpone payment of the cash surrender value for a period of 6 months. Enforcing this contractual provision has a serious effect on the company's position compared to the competition and on customer relations, and few companies choose to do so.; The term "adjusted premium" is usually used to represent only the premium defined in the Standard Nonforfeiture Law, which produces minimum values. Any other modified premium used to compute surrender values is usually called a "nonforfeiture factor." A nonforfeiture factor is employed to produce larger values than those required by law. In more complex methods of computing surrender values, several nonforfeiture factors may be used in the same policy.; The maximum special first-year expense allowance that may be used in finding the adjusted premium is the sum of 125 percent of the lesser of the policy's net level premium and $40 per $1,000 of insurance. For a policy with a nonlevel benefit amount and/or premiums, a more complex method is used. The percentage factors in the expense limitation formula consider expenses that depend on the amount of the premium and the plan of insurance. The constant factor of $20 per $1,000 reflects those expenses that depend on the number of policies or the amount of insurance.; The 5-cent discrepancy between this value and that in chapter 18 is eliminated by using the more exact net level premium amount of $8.5063.

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