Study Notes for the Long Term Insurance Examination (2011 Edition)

costs of setting up the policy have been absorbed, the early"excess" premiums and interest earnings thereon start to create afund or reserve against the future liability.With other types of insurance, the premium is calculated eachyear and at the end of the year the premium is considered fullyearned by the insurer. The life policy, under the level premiumsystem, soon begins to build up a cash value for the policyowner.(c)Longer-term consequences: some of the implications andproducts of (b) above will be examined in more detail in Chapter4, but we may briefly mention the features that developed fromthe early years’ "surplus" premiums found with the level premiumsystem:(i)Cash value and surrender value: the insurer cannotcancel a life policy, but the policyowner can. When apolicy has been in force long enough to "clear" the set-upcosts, part of the premiums paid – after the risk premiumfor the past period has been deducted – can be consideredto be "not yet earned" by the insurer; it is referred to as“cash value”. Therefore, when a policyowner cancels apolicy with cash value, there should be a sum of moneypayable to him, representing a refund of premiums"unearned" by the insurer. This sum is known as“surrender value”. Surrender value equals cash valueminus surrender charge, a charge that is applicable when apolicy is surrendered for its cash value or when a policy,under some plans, is adjusted to provide a lower amount ofdeath benefit.Note: This is not true for Term Insurance (see 2.1.1),where the premium is geared only to the risk of deathduring a specified period of cover. Such policies have nocash value.(ii)(iii)(iv)Policy loan: the cash value is excellent collateral securityfor a loan. Borrowing money from the insurer using thecash value as security is now a right under modern policyterms.Nonforfeiture: without specific policy provisions to thecontrary, the policy will lapse if renewal premiums are notpaid. However, the cash value may be used voluntarily bythe policyowner or sometimes automatically under policyterms, to keep the insurance in force (see 4.5).Paid-up insurance: should the policyowner decide that hecannot or does not wish to pay any further premiums, as an1/15