22 May 2014 0 Comments

Some More Terminology Clarification

shutterstock_84080833Here are a few more insurance terms that could use a little clarification:

Surrender Charge

A surrender charge is a charge made against the cash Accumulation Value of a Universal Life Policy. The charge begins at a high amount in the first policy year and gradually reduces each year, generally vanishing between the 10th and 20th policy year.  If a policy illustration refers to a “Surrender Value” the surrender charge has already been subtracted.  The term “Account Value” or “Accumulated Value” would normally indicate that the surrender charge has not been applied.  However, an illustration showing this value should also include a “Surrender Value”.

The purpose of a surrender charge is to allow an insurance company to amortize its early costs of placing a policy in force, such as commissions and cost of underwriting, over the anticipated life of the policy.  Surrender charges cannot be levied against a death benefit.  Nor can the policy owner be required to pay this other than as a charge against the Account Value; i.e. the policy owner never has to write a check to the insurance company for the amount of the surrender charge.

The fact that a Whole Life policy does not include a surrender charge does not mean that such a charge does not exist.  It is simply made by reducing early policy cash values; the charge is not as transparent as the Universal Life’s surrender charge.


The dividend paid to a policy owner of a participating life policy is the return of an excess charge of premium.  It is typically associated with a Whole Life policy.  This is because Whole Life premiums are calculated assuming that the insurance company earns no more than the guaranteed minimum interest stated in the policy and has actual claim experience based on the Mortality Table used in the policy.  In fact, the company expects to earn more than the guaranteed interest and have better than guaranteed mortality experience.  After the policy is in force for a while, the overcharge of premium is returned as a dividend.  Dividends are not guaranteed.  They can be more or less than what is illustrated in Whole Life sales ledgers.

Policy dividends are not taxable as income unless the total amount of cash withdrawn from the policy, including dividends, exceeds the cumulative premium paid.

Next…some death taxes that may be due, in addition to Federal Estate Tax.

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