Life Assurance Example 13

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Life Assurance Example 13

Mr Thomas, aged 28, takes out two £1110 "units", making a £120-a-month premium. After 10 years, he decides to cash in one unit and with reversionary and terminal bonus this produces £111,500. Despite the fact that his health has deteriorated, he can still take out a new unit at £1110 a month to replace that cashed in. The guaranteed sum on death is lower (£13,300), compared with £14,200 on the original unit, because the term of the new contract is shorter.

The advantage of the "unit" principle is that the policyholder can cash in the requisite number of units to provide the sum he wants without having to dispose of the whole policy. Technically, therefore, each "unit" buys a separate policy and each can be treated separately - one could be "paid-up" while another was continued, for example if the policyholder could no longer afford the full premiums.

While the flexibility provided by these policies may be very useful, it does of course have a cost. One element of the cost comes through the life cover provisions. As we have seen, for the young man the life cover under an open-ended endowment is related to the premiums he can elect to pay up to the age of 65, and this produces a larger guaranteed death benefit than that on a shorter-term dated endowment. For example, the 29-year-old paying £1110 a month received £13,120 life cover, whereas on a 15-year dated endowment the same £1110 premium would provide a sum assured of about £111 ,800. This extra life cover under the open-ended contract must reduce the amount of investment benefit derived from a given premium.

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Open-ended Endowments

The basic characteristic of the endowment is its fixed maturity date. However, as we have already noted, many people wish to save but do not know precisely what they will be doing with the money or exactly when they will want it. For example, a couple may wish to save towards the marriage of a daughter now aged 10 without knowing when this will take place.

For this reason companies have introduced a new generation of endowment polices called open-ended or flexible endowments. They are in the form of endowments maturing at age 65 but with early maturity options, and incorporating - guaranteed... see: Open-ended Endowments

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