The couple had a savings policy with Equitable Life that was about to mature, and decided also to cash in another Equitable policy, which they had started in 1983. On this one they were paying pounds 30 a month, with a policy term of 20 years. They surrendered the policy on its ninth anniversary and received a cheque for pounds 5,817.51.
Mr Bridgman was unhappy with this amount. He had paid pounds 3,723.60 in premiums during the life of the policy, which had earned attaching bonuses of pounds 3,266.38, and expected to get at least the sum of these two amounts - almost pounds 7,000.
In response to his complaint, Equitable Life said it was unable to provide a breakdown of the surrender value but confirmed that it had been calculated correctly.
It explained that the value of the maturing policy (with which Mr Bridgman was happy) had been arrived at by taking the sum assured plus the declared bonus and multiplying by the final bonus rate.
Chris Matthews, senior assistant actuary at Equitable Life, did his best to explain in layman's terms how a surrender value calculation works, though he admitted that there were 'only a few people within the organisation who understand it fully'.
The surrender value is arrived at in a way that reflects the full maturity value calculation, but with reductions to allow for the fact that the policy is being cut off in mid-term.
The calculation starts by taking the sum assured plus the bonuses already declared. This figure is discounted - that is, it is reduced by a certain amount to cover various costs: the cost of death cover for the rest of the term, which is built into the policy from the outset, and the loss of the interest that would have been earned on Mr Bridgman's premiums during the remaining life of the policy. Both these factors involve a number of assumptions and actuarial projections, which are all rolled up into a discount formula.
The outcome of this calculation is a 'present value' figure. The company calculates the value of future premiums, discounting for various factors, and this is taken away from the present value. The result is multiplied by a final bonus rate, which is the same as if the policy matured after nine years. A nine-year surrender, Mr Matthews says, should not be very different from a nine-year maturity value.
The life company has borne a cost to provide death cover for 20 years, but will not now have to do so. It therefore claws back the cost of the life cover for the remaining period. In Mr Bridgman's case the policy had a guaranteed minimum payout of pounds 15,000, which would have made the life cover element of the policy more expensive.
The interest charge makes up for the fact that the company expected to earn interest on the remaining premiums, which would have boosted the final maturity value.
The policy at its surrender date is thus worth proportionately less than at maturity. Equitable is unusual among insurers in that it does not pay commission, so there are no massive up-front payments to intermediaries to be recouped from the policy-holder. In fact, Mr Matthews says, Equitable makes no charge at all for unrecouped expenses. 'We are effectively giving the policyholder an underlying asset share', he says. He says that as well as life cover for nine years, the Bridgmans received a 12.5 per cent annual yield on their policy - a good return by most standards. Although the two investments are not strictly comparable, had Mr Bridgman put pounds 30 a month into an average UK general unit trust over nine years to 30 April 1992, he would have received pounds 5,632.
The Insurance Ombudsman would not be able to help the Bridgmans as he does not rule on surrender values. Mr Matthews has offered to give them a more detailed explanation if they wish to contact him.
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