A Guide To Life Insurance - Paid-up Policies ....

 

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Paid-up Policies...

A further alternative is to make the policy paid-up, in which case no more premiums are payable and the company keeps the policy in force.

However, there could be a taxable "chargeable event" on eventual claim.

The sum assured is reduced, normally by the "proportionate" method.

This means that the new sum assured bears roughly the same relation to the original one as the number of premiums actually paid bears to those payable under the original policy.

Thus, having paid five premiums on a policy requiring the payment of ten, Mr Drake should expect a paid-up value of about five-tenths of his £200,000 sum assured, while existing bonuses continue unreduced.

The surrender value is derived from the paid-up value by discounting the reduced sum assured over the remaining period of years until the original maturity date, and this will mean a lower figure than the paid-up value. The paid-up policy usually continues to participate in bonuses, but not all companies allow this.


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It is worth re-emphasising that the surrender value of the typical with profit endowment policy over 20 or 25 years will be less than the total gross premiums paid for the first four or five years.
Such policies are designed to produce the expected benefit over the stated period, and if life insurance companies also had to guarantee surrender values in the early years at a rate that represented a better return on money invested, then those who stuck with their contracts would get less.click here for Education


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