Non-Forfeiture Laws

Although the practice of allowing a surrender value in some form is an old one, it should be noted that for many years the matter was entirely optional with the companies. But while a few companies exercised their discretionary powers in a liberal manner, practically all the companies doing a general business pursued a policy so illiberal, in nearly all instances allowing no value whatever upon surrender, that there developed on the part of the public a demand for legislative control of the matter, and as a result the several states have enacted so-called "nonforfeiture laws". Mr. Elizur Wright is given credit for having started the first important campaign for such legislation in the United States. As a result of his efforts the state of Massachusetts enacted a law on May 10, 1861, which required the companies of that state upon the surrender of a policy to apply the terminal reserve by the Actuaries7 table and 4 percent, interest, less a surrender charge, as a net single premium to purchase extended insurance for the original amount, such extensions to attach automatically upon the failure of the insured to pay his premium when due. Following the enactment of this law other states soon followed suit, and at present such legislation is general.

All the laws now in force base the surrender value upon the amount of the reserve at the time of lapse or surrender, and all allow the companies to retain a surrender charge. In most instances this charge takes the form of a stipulated percentage of the amount of insurance; but sometimes it consists of a percentage of the reserve, or a percentage of the reserve or of the insurance., whichever is greater, or, as in Massachusetts, a percentage of the present value of the future net premiums to be paid under the terms of the policy if continued. As summarized by Mr. James M. Hudnut:

No law has ever required a surrender value of any kind unless at least two years' premiums have been paid. No state now requires non-forfeiture provisions until three years' premiums have been paid, but all allow companies to pay surrender values earlier at their option. Canada, on the other hand, requires policies to be non-forfeiting after three years and does not allow the issue of policies guaranteeing surrender values until three years' premiums have been paid. The laws of every state base the surrender value upon the reserve, either by a specified standard or by the standard upon which the policy is issued, and all allow a surrender charge that is to say, a deduction is allowed to be made from the reserve and the balance is the cash value which may either be received in cash or used to purchase paid-up or temporary insurance. The surrender charge allowed under most state laws is 2% percent, of the amount insured. In one state it is 3 percent, of the insurance. Sometimes it is 20 percent, of the reserve; and in Massachusetts it is " 5 percent, of the present value of the future net premiums which by its terms the policy is exposed to pay in case of its continuance."