surrender value

Here is the part that surprises most people. You can pay premiums faithfully for three years, decide to stop, ask for your money back, and be handed an amount that is less than everything you put in. And not since anyone cheated you, but because that is how the product was built from day one.

A life insurance policy with a savings or investment side, like an endowment policy, spends your early premiums mostly on two things: the cost of insuring your life, and the insurer's commission and admin costs. Only a small slice goes toward the pot that eventually becomes your surrender value. So in the early years, that pot is thin, sometimes almost nothing.

Take a Nigerian civil servant in Enugu who takes an endowment policy paying ₦20,000 a month, hoping to use it as a forced savings plan. Two years in, a family emergency forces her to cancel. She has paid roughly ₦480,000 in total. Her insurer tells her the surrender value is ₦180,000. She feels short changed, but the shortfall is the price of the life cover she enjoyed, plus the costs of running the policy in its first years.

In the United Kingdom, someone with a with profits policy from an old established insurer might get a slightly better deal after five or six years, once the policy has built up bonuses, but early exit still bites. The lesson holds on both sides of the water: these policies reward patience and punish early exit.

For the diaspora relative sending money home to fund a parent's policy, this matters double. If the policy gets cancelled early because a payment was missed while money was tight one month, the surrender value received back may feel painfully small next to years of faithful contributions.

This is why anyone selling you a life policy as an investment should also show you the surrender value table for year one, year five and year ten, before you sign anything.