A Note on Life Insurance Cash Values

Abstract

The present system of allowing the same cash surrender values on any two policies belonging to the same generation is defective because it does not consider the possible differences in the states of health of the two policyholders who surrender their policies at the same age. The injustice towards one who is in poor health is illustrated by the fact that, while he would be charged an extra premium if he purchases another policy, he would not receive any extra surrender value if he surrenders an existing policy. The primary purpose of the typical life insurance policy is to provide for the payment of the face amount at death. Payment of a surrender value is not an inherently essential part of the contract, and may be viewed as an allowance to the policyholder in lieu of a subsequent payment of the face amount. Under this view, the surrender allowance should be equal to the net amount that the life insurance company saves by not having to pay the face amount. This net saving is the difference between (1) expenses and claims, and (2) premiums and interest from the time of surrender to the time when the policy would have otherwise matured. The actual amount of the net saving can be calculated only after the expiry