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Introduction
Cash surrender value is the amount paid by an insurance company to the holder when there is voluntary termination before it matures or before the occurrence of the events. Currently, Rodney is 35 years old. Therefore, he is entitled to surrender a value of up to $30,000 since he started saving for retirement. In addition, no bonus would be accrued to any of his savings when he withdraws the money. Therefore, the calculations of surrender value without the value of money are as follows:
Applicable surrender value= $30,000
Interest rate per annum=1%
Cash surrender gain=$(600+5,000+30,000) =$35,600
Gain on cash surrender=$(35,600-30,000)
=$5,600
When Rodney withdraws the savings at 35 years and expects value for money, the interest rate of 1% applies. Hence, there would be a growth in his surrender value due to the gains realized in the invested amount. The calculation for surrender value with the value of money is as follows:
Applicable surrender value= $(30,000 x 1%) =$300
Cash surrender gain=$(600+5,000+30,000) =$35,600 x 1%=$356
Gain on cash surrender=$(356-300)
=$56
Compounded Rate of Return per annum at the end of 45 years
At 45 years, Rodney is entitled to a maximum surrender value of $100,000 plus all the previous values of the preceding years of savings. The total surrender value will therefore be $135,600. In addition, withdrawing at 45 years attracts high-interest value, which accrues annually. The principal amount withdrawn will therefore generate a higher value upon its maturity due to the inclusion of the growth rate annually. The calculation is as shown below:
Total surrender value= $(100,000+35,600) =$135,600
Compounded rate per annum=
=
=$141,106
Computation of Bonus Plan at the end of 70 years
The bonuses are only available at the maturity of the retirement scheme. Hence, upon attaining 70 years of age, Rodney can withdraw the surrender value plus all other bonuses due to him. In this regard, the total benefit at 70 years will include $700,000 and all other benefits in the previous years of the savings plan. In addition, Rodney has accrued a surrender value of $835,600, which includes all the values in the previous years plus the current year’s surrender value. Bonus will therefore be calculated at 6%, representing the difference between death benefits and the surrender value. The calculations are shown below:
Total death benefit= $979000
Total surrender value=$835600
Bonus plan=$(979000-835000)
=$144000 x 0.06
= $ 8640
Two implications For Retirement Planning
Retirement planning involves establishing retirement income objectives and the resources required. All components of retirement planning include identifying income sources, estimating expenses, implementing a savings plan, and managing assets and risks. From the calculations of (a) to (c) above, the following are the two key implications of the retirement plans chosen by Rodney.
When Rodney decides to retire, the gain on surrender value will be $5600. However, when he retires at the end of 70 years, he will likely realize gains on the retirement plans and bonuses accruing to $8640. Therefore, Rodney should invest in a retirement plan of 70 years since there would be high compounded values with bonus amounts accruing annually.
Conclusion
In addition, having a retirement plan of 70 years benefits Rodney since security and arbitrage benefits accompany the investment capital. For instance, investing in compounded amounts that accrue by the end of 45 years plan is likely to be safe, and the risks involved are reduced compared to investing on a short-term policy.
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