We extend the literature by incorporating early surrender into the distribution estimation for policy reserves. First, we employ the cointegrated vector autoregression technique to estimate an empirical relation between the lapse rate and interest rate. The tests indicate a significant cointegrated vector that implies a long-term relation between the lapse rate and interest rate. Based on the estimated error-correction model, we then simulate the policy reserve distribution with stochastic mortality, interest rate, and early surrender. We find that early surrender reduces the expected value as well as the risk for policy reserves due to surrenders in the low interest rate periods. Further analyses indicate that the early surrender effect depends on the sign and magnitude of the difference between the market interest rate and policy credit rate. When the credit rate is higher (lower) than the market interest rate, early surrender acts to decrease (increase) the mean reserve. This effect increases with the magnitude in the difference.