Liquidity Option on Indexed Life

Most indexed life policies have a surrender charge, or a stated charge that will be assessed against the account value of the policy if it is surrendered during the surrender charge period (ranges from nine to 20 years). Although the charges on the policy may be level each year, most decline annually. The cash surrender value, the amount paid to the policyholder among cash surrender, is the account value minus surrender charges and any indebtedness. Surrender charges are intended to protect the insurance company, as life insurance is a long-term financial instrument. When a policyowner places their premium in a life insurance policy with a 15-year surrender charge, the insurance carrier may invest their money for a 15-year period for asset/liability matching purposes. This allows the insurer to offer more competitive participation rates, caps, spreads/asset fees and fixed rates. However, if the policyholder surrenders part of their funds early, the insurer no longer has use of those funds to cover their investments. Therefore, a surrender charge encourages policyholders to remit the right type of money to the insurance carrier- long term funds.