Pure Endowments

A pure-endowment contract promises to pay the insured value in case the holder survives a certain fixed period. Thus, a ten-year pure endowment issued at age 45 will pay the holder the amount named in the contract if he be living ten years from the date of issue. The mortality table shows that 74,173 persons are living at age 45, and that 64,563 are still living at age 55, leaving 9,610 as the number dying during the ten years. A policy thus insuring against survival during this period must itself provide 64563/74173 of the amount of the contract at the end of the period. Or it may be stated in this way: the probability insured against is 64563/74173 and since the money paid as a single premium will be held ten years before the policy matures the formula for determining the net single premium is: 64563/74173 X 1000 X .744094 = $647.69

The decimal, .744094, is the present value of one dollar discounted for ten years at 3 percent.

A clear distinction must be made between a pure endowment and a savings-bank account which is left to accumulate at an agreed rate of interest. The insured cannot get possession of the money invested in a pure endowment before the expiration of the endowment period. If he should die during this period all the money paid is lost, i.e. it goes to swell the fund which will be paid to the survivors. A savings-bank account on the other hand is not lost through death of the investor. This fact makes it possible to divide the $1,000 which will be paid in case of survival through the endowment period into two funds, one of which might be called the investment fund, and the other the speculative fund. The investment fund in a ten-year pure endowment, issued at age 45, will equal $647.69 plus interest compounded for the ten years at 3 percent, thus:

647.69 X 1.3439 = $870.43

This $870.43 is the amount which would be obtained by investing the net single premium of this pure endowment policy at 3 percent, interest for ten years. The remainder of the $1,000, or $129.57, comprises the survivor's share of the amounts forfeited by those policyholders who died before their policies matured. The latter amount is here called the speculative fund. The possibility of thus losing the entire amount of one's investment by death before the endowment period has expired, makes the pure endowment a policy that finds little favor with the insuring public. For this reason it is usually combined with, or constitutes a feature of some other kind of policy.