Endowment policy Options

A feature of most endowment policies today is the availability of options to increase the sum assured, without medical evidence. A few companies still include limited options without charge, but the majority now charge a small extra premium. In most cases this amounts to only 1 - 2% of the annual premium. A typical set of options on a 25-year policy would be the following:

1. Within the first 15 years the policyholder may exercise five options.

2. Each option (and no more than one option) may be exercised in one of five consecutive three-year periods.

3. The maximum single option is the increase of the sum assured by half the original sum assured.

4. The maximum total increase in the sum assured through the exercise of the options is to three times the original sum assured.

5. The maximum age for the exercise of options is age 55.

The exercise of the options is possible without medical evidence, but it is often stipulated that, if the terms of the original contract allowing for the exercise of all possible options increase the sum assured to above the normal limit for non-medical policies, then a medical report will be necessary at inception. Thus, a £500,000 sum-assured policy, which would be below an office's normal medical limit of £125,000, would be raised above it by the set of options described above, and the policyholder would be required to take a medical examination. The premium rate for the extra sum assured on the exercise of the option is that applicable to the age at that time.

Such options can be useful both for the younger man who cannot now afford to take out as large a policy as he would like and for older persons who wish to guarantee their future insurability.

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A less easily quantified factor is the restriction the flexibility of maturity dates imposes on a life insurance company's investment management. With dated policies and mortality tables, the company can predict with considerable accuracy the volume of claims likely in any year, and this means that it can plan its investments to produce a given amount of income to meet them.

If the amount of claims is uncertain, there will be a tendency to "play safe" and allow for a margin of extra income. To achieve this will require a larger proportion of funds being invested in fixed-interest securities,... see: Maturity

Of interest