Salvage value – What it is, definition and concept | 2022

Therefore, it is what we can receive before the policy expires. In this way, we redeem part of the money, although there are certain conditions that must be met. In addition, it must be established in detail in the signed contract.

For example, if we have life insurance, we can obtain a refund of part of our contributions, suspend the policy for a while or cancel the contract. The first option is the most common in situations where the policyholder is going through a bad time.

Salvage value and mathematical reserve

The mathematical reserve is a concept related to the salvage value. From an economic point of view, it is the amount that one of the parties must deliver to the other in case of cancellation. Among other things, it reflects the possible future loss of that part.

Thus, the redemption value follows these principles and is calculated taking into account a financial law and a previously agreed interest. In this way, the insurer’s loss due to an earlier than expected reimbursement is compensated.

On the other hand, there are a series of expenses and penalties that must be considered, since they will be part of the amounts to be paid for the ransom. Thus, the sum of all of the above will be deducted from the amount to be delivered.

Refund conditions

In order for the policyholder to recover part of his money, a series of conditions agreed in the contract must be met. Some are required by insurance laws and others are the responsibility of the insurer.

  • In the first place, the law usually establishes the prior payment of a certain number of premiums. In Spain and other countries there are usually two.
  • You must request it in advance and pay the salvage value calculated as stipulated in the insurance contract.
  • Term life or survivorship insurance does not have this surrender value option and therefore cannot be exercised.
  • If after a refund the insurance is still valid, we can redeem another part in the future, but at least two years must pass.
  • Sometimes, the insurer can offer an insurance rescue to contract a new one. In this case, although the second will be more beneficial, we must take into account the penalties for cancellation.
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Types of insurance and salvage value

Life insurances are the usual types in which the early reimbursement can be exercised. In them, as we have explained, certain conditions must be met. In addition, the amount to be delivered must be calculated, discounting the expenses or penalties.

But in savings and investment insurance we can also exercise the right to withdraw the amounts before maturity. In this case, the redemption value is also established in the contract, as well as the conditions for it to occur.

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