IPTM7535 - Full surrender: example of gain calculation

Transactions

  • policy taken out on 2 May 2015 with a premium of £10,000
  • a part surrender of £2,000 is made on 4 October 2015
  • the policy is substituted for a new related policy on 15 July 2017. The surrender value at the time is £11,000, which is all applied as premium in the new policy
  • a part surrender of £1,500 is made on 4 April 2019
  • the policy is fully surrendered on 10 November 2020 for £12,000.

Chargeable events - old policy

The insurance years - see IPTM3505 - are 2 May 2015 to 1 May 2016 and 2 May 2016 to 15 July 2017.

1 May 2016: There is an excess event on 1 May 2016, the end of the insurance year in which the part surrender of £2,000 occurred. The gain on the excess event is £2,000 – (1 x 5% x £10,000) = £1,500. See IPTM7605 to IPTM7620.

15 July 2017: The substitution is a surrender of the old policy.

The chargeable event gain on the surrender is TB – TD – PG where:

  • TB = £11,000 + £2,000 = £13,000 (total of the amount of the surrender value on the substitution and the amount of the earlier part surrender)
  • TD = £10,000 (premium paid)
  • PG = £1,500 (gain on the earlier part surrender)

So the gain on the substitution surrender is £1,500.

Chargeable events - new related policy

The insurance years are 15 July 2017 to 14 July 2018, 15 July 2018 to 14 July 2019 and 15 July 2019 to 10 November 2020.

14 July 2019: There is an excess event on 14 July 2019, arising from the part surrender of £1,500 on 4 April 2019. The amount of premium for the purposes of calculating the gain on the excess event is £11,000, namely the premium applied to the new policy on the substitution. The premiums paid on the earlier related policy are not relevant.

The gain on the excess event is then £1,500 – (2 x 5% x £11,000) = £400.

10 Nov 2020: The chargeable event gain on the surrender is TB – TD – PG where:

  • TB = £12,000 + £1,500 + £11,000 + £2,000 = £26,500. It is the total of the amounts of surrender and part surrender proceeds from both this policy and the earlier related policy, including the surrender value on the substitution.
  • TD = £11,000 + £10,000 = £21,000. It is the sum of the premium applied to the new policy from the related policy and the original premium paid into the related policy.
  • PG = £400 + £1,500 = £1,900. It is the total of the gains on excess events on both this policy and the earlier related policy. However, it does not include the gain on the substitution surrender of the related policy (£1,500), which is not a calculation event.

The gain on the surrender is then £26,500 – £21,000 – £1,900 = £3,600.