Guarantee Cash Value

Guarantee Cash Value (GCV) / Surrender Outgo is a benefit type that worth special mention, because of its complexity in formula.

For most saving products, policyholders will have a large maturity benefit payable upon maturity. Hence it is unfair to pay nothing to the customer if his / her policy has already been inforced for a long time. Meanwhile, early surrenders will be subjected to surrender penalty, since insurance is a mutual contract and insurers have the expectation that the customers will remain the contract inforce, so early surrenders will probably create losses to insurers that can only be compensated by surrender penalty.

The following graph demonstrated a simplified case (using linear interpolation) for calculating GCV:

In reality, GCV will normally calculated by Face Amount multiplied by a Surrender Penalty Factor. In formula:

\[GCV\_PP _t = FA × (1 - SURR\_PEN\_PC _t) \]

Let's go through a practical example below:

The maturity benefit at time 10 is equal to Face Amount which is 10,000 and the surrender penalty is given as below:

Year 1

GCV_PP = FA × (1 - 90%) = 1,000

Year 2

GCV_PP = FA × (1 - 80%) = 2,000

...

Year 10

GCV_PP = FA × (1 - 0%) = 10,000

Now we go more complicated by considering coupons.

Imagine that you are eligible to get the coupon at the end of year 6 for 100. If you surrendered your policy at the middle of the year 6, would you be eligible to get partial of the coupon? Say, 50?

It really depends on the company's practice. We have illustrated the two situations below:

Either case is possible. GCV_PP_1 illustrates the situation where coupon is not payable upon survival. Hence it is a "all-or-nothing" case: either you survived to the end of year and get the coupon, or you get nothing. GCV_PP_2 illustrates the situation where partial coupon is redeemable upon survival. Hence you can get the interpolated coupon value within the year that the coupon will be distributed.

We won't go into the detail for the calculation here since it includes monthly projection model that we still haven't discussed. But reader may have an understanding on the coupon effect and how it may affect the surrender value.