Analysis of an Endowment Policy

Two explanations have been offered as an analysis of the nature of endowment insurance. Under the first, and this is the usual analysis, the policy is explained as consisting of (1) "pure-endowment" insurance and (2) "term" insurance. This analysis looks upon the contract as a combination of a level term insurance, promising to pay $1,000 in case of death at any time during the term, and a pure endowment of the same amount payable only upon survival at the end of the term.

Several writers, however, while admitting that the above analysis is correct and convenient for purposes of mathematical computation, maintain that the pure endowment does not offer the correct explanation of an endowment-insurance contract; that there is another and more logical method of explanation and one agreeing more closely with actuarial practice. This newer explanation likewise divides endowment policies into two parts. But the investment part of the contract, and this is the fundamental difference, is not considered a pure endowment, all of which is lost in case of death before the end of the term, but is strictly a savings-bank accumulation which is available at any time to the insured through surrender or maturity of the policy. This investment feature is supplemented by term insurance, which is, however, not a level term insurance of $1,000 in amount at any time, but an insurance of an amount which added to the investment accumulated at the date of death will make the amount of the policy payable equal to $1,000. The insurance portion of the contract therefore is for a decreasing amount, being nearly equal to $1,000 in the early years of the contract and gradually decreasing throughout the term. Thus, if at a particular time a $1,000 endowment policy has an investment accumulation of $150, the insured will be protected by $850 insurance against death, but when the accumulation reaches $900 there will be term insurance for but $100. The premium for the policy may be divided into two parts, one part for the investment and one for the decreasing term insurance.