Expert: Scotto - 3/31/2009

Question
I work in customer service for a finance company. Im often asked a question by customers  on what the surrender (early withdrawal) penalty  would be. Im given the total account value  then what the surrender value is (what the client would receive less charges) currently I have to go look at the policy year then count the years then look at a chart to figure out the actual percentage, Is there any way i can find out the percent charge from those 2 numbers?
example total account value is 3,000  surrender value is 2,400. how could i figure out the percentage from those 2 numbers?

Answer
Divide 3000 by 2400 and subtract 1, and then multiply by 100.
That would give the interest rate.

3000/2400 = 1.25 - 1 = 0.25, so its at 25% interest.

To compute a penalty, figure the fraction of a year they took it out early and multiply that fraction by 0.25.  That's the amount of penalty.  For example, suppose they took it out 2 months too early.
If you look at 2 months, that 2/12 of a year, which is 1/6.
That amounts to 16 2/3% interest that they would not have gotten yet.
So instead of an extra 500 to make 3000, 16 2/3% of the 500 bonus is about 83, so they would only get 500 - 83 = 417.

Of course, banks usually have some stipulation in there about additional penalty for early withdrawl.  There's also the fact that they usually don't compute interest yearly, but daily.

If it was semiannual interest, it would be 1.25^0.5 - 1 per six month period.  That would be 0.118 or 11.8% interest twice a year.

If the 25% per year was done monthly, that would be 1.25(^1/12) - 1 interest per month, which would be about 0.01877 per month or 1.877% percent month.