Deferral and paid-up policy conversion in life insurance

Purpose

If a life insured falls behind on ongoing premiums, or simply wants to permanently reduce their premium burden, this does not have to result in cancellation of the policy. Converting the policy to a premium-free basis allows it to continue with a reduced but guaranteed benefit, without any further premiums being due.

Effect and limits

The premium-free benefit is recalculated under recognised actuarial rules based on the original pricing assumptions and accrued surrender value, and is generally lower than the original sum insured. If a contractual minimum benefit is not reached, no conversion takes place; instead, the surrender value plus any accrued bonuses is paid out and the policy ends. Risk components such as a disability rider are typically lost without replacement, as no premium-free continuation usually applies to them.

Negotiation and practice

Before converting, it is worth comparing the premium-free benefit, the surrender value, and a temporary deferral of premiums where the insurer offers one. Because a surrender or acquisition cost deduction is only permitted where it is contractually agreed, quantified, and reasonable, the calculation of the premium-free benefit should be checked against the tables set out in the policy.

Jurisdictional comparison

In Switzerland, non-forfeiture under Art. 93 VVG applies automatically once premiums go unpaid after the policy has been in force for at least three years; the contract converts by operation of law into its conversion value, with a further option to take the surrender value where eligible. In Germany, the life insured can request conversion under Section 165 VVG at any time, regardless of actual arrears. Austria’s Section 173 VersVG grants a comparable right to request conversion at any time, effective at the end of the current period. Despite the different triggers – automatic in Switzerland, on request in Germany and Austria – all three rules serve the same protective purpose.