Paid-Up Reduction (Reduktion)

Concept

Paid-up reduction refers to converting a capital-forming life or annuity policy into a premium-free policy when the policyholder discontinues further premium payments but does not fully terminate the contract. The originally agreed sum insured is reduced to an amount derived from the policy reserve existing at the time of conversion, without any further future premium payments.

Distinction from Termination

Unlike full termination, where the surrender value is paid out to the policyholder and the contract ends, paid-up reduction leaves coverage in place at a reduced level, and the existing policy reserve continues to accrue interest as scheduled; paid-up reduction is therefore generally more advantageous for policyholders who wish to resume premium payments later or retain ongoing coverage.

Calculation of the Reduced Benefit

The amount of the reduced sum insured is derived actuarially from the ratio of the existing policy reserve to the policy reserve that would have been required had premiums been paid in full until the end of the contract term; for Zillmerized tariffs, paid-up reduction in the early contract years can result in a particularly low reduced benefit, since acquisition costs have not yet been fully amortized.