A rear-end loaded provision in a life insurance policy allows the policyholder to pay higher premiums initially, and then lower premiums as the policy term progresses. To discourage policyholders from cashing out the policy early, the policy may include a surrender charge. This charge is deducted from the total policy value if the policyholder terminates the policy before the end of its term.
When calculating a surrender charge for a life policy with a rear-end loaded provision, there are a few factors to consider. First, the policyholder must determine the amount of money they would like to receive from the policy if they terminate early. This amount is known as the “surrender value”. It typically reflects the amount of money that has been paid in premiums minus any applicable fees and charges.
The surrender charge is then calculated as a percentage of the surrender value. This percentage can vary depending on the policy and the provider, but is typically between 5-15%. The exact amount will be provided to the policyholder prior to signing the contract.
It is important to note that some life insurance policies allow for the surrender charge to be waived if the policyholder informs the insurer in advance. This is beneficial for policyholders who need to terminate their policy before its term is up, as it allows them to receive the full surrender value of the policy.
When considering a life policy with a rear-end loaded provision, it is important to read the fine print to understand both the advantages and disadvantages of the policy. As with any insurance policy, carefully examining the terms and conditions will help you make an informed decision and ensure you get the best possible coverage.