T cash surrenders a recently issued whole life policy

We analyze life insurance policy surrender activity to determine whether surrender is a function of certain macroeconomic variables and, therefore, highly correlated across policies. Results support the Emergency Fund Hypothesis and the Interest Rate Hypothesis. In addition, we provide evidence that surrenders are significantly related to policy replacement activity, as in Outreville (1990), which we refer to as the Policy Replacement Hypothesis. The significant relationship between policy surrender and macroeconomic factors strongly supports insurer efforts to understand and actively manage disintermediation risk via insurance contract features and investment policy.

Journal Information

The Journal of Insurance Issues, the official journal of the Western Risk and Insurance Association, is co-sponsored by the Southern Risk and Insurance Association. The Journal publishes original research on subjects associated with risk management, insurance, actuarial science, employee benefits, insurance regulation, or other risk and insurance related topics. From 1979 through 1984 the Journal was published as the Journal of Insurance Issues and Practices.

Publisher Information

The primary goals of the Western Risk and Insurance Association are to promote education and research in the field of Risk Management and Insurance.

When comparing life insurance online, it’s important to consider the difference between whole life insurance and term life insurance.  Whole life insurance is still popular around the world, but it has largely disappeared from the Australian market. Here we look at how term and whole life insurance in Australia differ.

For those new to Australia, or returning from a long interlude overseas, it may come as a surprise that whole life insurance is rarely sold here anymore.

Ever since the Australian government introduced compulsory superannuation in 1992, whole life insurance has been largely replaced with term insurance.

So let's explore the differences between the two types of insurance.

What is whole life insurance?

Whole life insurance was designed to cover the policy-holder for their entire life, regardless of when they died, so long as they continued paying premiums.

It typically had two components: death benefit and cash (or surrender) value.

Whole life insurance remains popular in many Asian nations and countries that don't have a superannuation industry like Australia's. 

There are also some Australians who still have whole life insurance policies that were put in place before 1992.

Common features of whole life insurance:

• Guaranteed payout value
  Traditionally, whole life insurance policies provided Australian beneficiaries with a guaranteed minimum payout, regardless of how long the policy holder lived.
• Fixed premiums
  Premiums did not rise or fall in line with economic or health factors. This meant, generally, that policy-holders would overpay for insurance in early years, and underpay as they aged and their risk of death increased.
• Savings and investment
  Premiums usually covered more than death benefit insurance. The extra amount paid would go towards a savings account which was typically invested by the insurer with a guaranteed minimum interest rate.

Growth in this account was called the 'cash value' (or 'surrender value'). Certain policies would allow you to collect bonuses or dividends on built-up cash values. Others allowed policy holders to borrow against, or withdraw from, the cash-value.

Generally, those wishing to terminate their whole life insurance could (and still can) do so by surrendering the death benefit and collecting the cash value (which may be subject to surrender charges).

It's worth noting, however, that the cash value of whole life insurance tends to accumulate at a fairly slow rate, especially in times of low interest rates.

Now let's look at term life insurance.

What is term life insurance?

Term life insurance (Term) provides a lump sum payment to your nominated beneficiaries (your spouse and/or children) if you die while holding a yearly renewable Term policy.

Common features of term life insurance:

• Adjustable
  Term insurance can be adjusted to suit your needs and stage of life. Generally, you can dial it up when you have high debts and financial obligations to others, such as mortgages and young children. At that time, term insurance solutions such as TAL's Income Protection Insurance and Total Permanent Disability (TPD) Insurance could be an option for protecting the life you have planned for your family.
• Cost-effective
  Term insurance can be at times more cost effective because you only pay for the cost of the insurance cover, not cover plus a savings and investment plan as you would have for Whole Life Insurance. Term insurance can also be reviewed more regularly, which allows you to review your circumstances to ensure that you're not over- or under-insured. Here we provide a rundown of life events that may prompt a review of your life insurance.
• Tax advantages
  Superannuation has tax advantages that may make it a better vehicle for long-term savings and retirement planning than whole life insurance.
• Level or stepped
  Term insurance can give you the flexibility to choose between level or stepped premiums. Stepped Premium increases your premium every year with your age whereas a Level Premium generally does not change your premium and is based on your age when the policy is taken out.

Insurance for This Australian Life

If you'd like to find out more about Term Insurance cover or want to get a term life insurance quote , you could visit TAL's Cover Builder to tailor and take out Term life insurance suitable to you. Alternatively you could seek expertise of a financial adviser. 

Life Insurance  

Life Insurance provides for your loved ones in the event of your death, or if you are diagnosed with a terminal illness.

What is cash surrender of life insurance?

How do you record cash surrender value of life insurance?

Is cash surrender value taxable?

What happens when you surrender a policy?