Question: Why during the early years of the life insurance contract, the surrender value is lower than I paid in premiums? If so, I suffered losses so much, is it better for me to send the bank?
In the early years, the cost of mining contracts such as customer costs, appraisal costs, and printing and publishing contract’s cost is very high, so in the first 2 years, the contract has no surrender value and the next years, the surrender value will be formed gradually. Meanwhile, the premium that customers play in every year is not changed during the contract term, this means that the actual costs in the early years are much higher than the fees receiving from the contract.
Furthermore, the characteristics of life insurance is “risk-sharing”, so soon as the contract takes effect, whether the customer has only paid one or two each charge, if the insured event occurs, insurance companies have to pay for insurance customers and the amount accumulated dividends.
For above reason, if you want to cancel the contract in the first year, it is disadvantaged not only for clients but also for insurance companies because there is no recoverable costs. For life insurance contracts, the longer customers join, the higher the surrender value will be.
Once insured, customers pay recurring fees to get the commitment of the company protection the payment on insurance benefits when risks occur in compliance with the contract regardless of the client’s time participated insurance and how much each fee paid. In the case of this payment, the insured sum is greater than the periodical premiums many times and usually higher than the total amount of fees that the customer has paid for the contract. Meanwhile, if in banks, customers only get back their savings.
Thus, we can see that the life insurance contract meets the 2 elements: safeguard financial commitments through payment of insurance benefits when the risks and benefits savings through maturity. Protective factors are the most important features and is the most fundamental differences between life insurance and savings deposits.