The Problem of Cash Surrender Values and Cash Loans

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The granting of cash surrender values and loans from reserves is developing into a serious problem for life insurance companies. Originally the surrender value of a lapsed or forfeited policy was granted in the form of paid-up or extended insurance. It was thus limited on the theory that the policy was not a banking contract, that the retiring policyholder having made a contract for insurance, his reserve should only be applied in the form of insurance. In time the abandonment of this theory was forced by competition and the practice of paying surrender values in cash became common. In 1906 this privilege was made a statutory requirement in the new Insurance Law of the State of New York. For the ten years following 1905, the proportion of cash payments to the reserves on the policies surrendered increased 42 per cent. The right of the deserting policyholder to withdraw the reserve on his policy minus a reasonable surrender charge cannot be questioned. The weakness of the present method of expressing this right lies in the fact that the privilege of taking cash instead of paid-up or extended insurance reverses the original purpose of the contract and often encourages needless lapsing. This privilege has tempted many policyholders to unnecessarily surrender their policies to secure ready cash which has resulted in the loss of a great volume of valuable insurance protection. While the return to the original practice of giving paid-up or extended insurance in place of cash for surrendered policies may be classed among the impossibilities, there is a phase of the application of the present plan which demands, and it is hoped may receive, remedial action, namely, the question of the surrender charge. The New York Laws of 1906, under which the bulk of American life insurance is written, and which have been copied in many states, provide that the entire reserve less one-fifth or the sum of two and 54