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3 Pure endowment and endowment assurance 3.1 Definition A pure endowment provides a benefit on survival to a known date and hence operates as a savings vehicle, providing a lump sum on retirement, or a means of repaying a loan. An endowment assurance also provides a significant benefit on the death of the life insured before that date and, in this case, operates also as a vehicle for providing protection for dependants. In addition to the maturity and death benefits described above, the policyholder may be allowed to surrender an endowment assurance contract before maturity and receive a lump sum surrender value at that time, on guaranteed or nonguaranteed terms. If the policyholder wishes to keep the contract in force but without paying further premiums, a reduced sum assured paidup value may be granted. 3.2 Use to meet customers needs Endowment assurances are often used as a means of transferring wealth from, say, parents to children. Question Explain how an endowment assurance could be a more attractive means of transferring wealth than a noninsured savings method. Solution If the sum assured on death is chosen to be the same as at maturity, then the endowment assurance provides the guarantee that a substantial wealth transfer will be made whether or not the policyholder survives the intended savings period. A noninsured savings method would simply have accumulated the contributions paid in by the date of death, and this could be very small eg if the policyholder died after only a short time. End of question. An endowment assurance is sometimes used as a means of repaying the capital on a loan eg an interestonly mortgage. Where this is done, the borrower pays interest only to the lender during the term of the loan. The borrower also takes out an endowment policy, the proceeds of which are hoped to be sufficient to repay the original loan amount at the end of the loan term or on earlier death. Another use of endowments is to provide a vehicle for saving money for retirement. We describe this use in more detail later, under the heading of deferred annuities. An endowment assurance could come in withoutprofit, withprofit or unitlinked forms. 3.3 Existence of a group version A group endowment assurance would enable, for example, an employer to provide benefits at retirement, and maybe also on death in service, in respect of their employees. Group contracts usually arise as a way for an employer to provide some form of insurance cover or savings benefit to employees as part of their overall remuneration package. Group contracts might also be sold to ‘affinity groups clubs, societies etc. Question Suggest problems with group arrangements where the workforce is highly mobile. Solution By mobile, we mean the ability to change jobs frequently. With a highly mobile workforce, the administration of such an arrangement would become costly. It might also result in poor surrender values for employees who leave after a short time, if the individual contracts have to be surrendered on leaving.