Hi, 1. I had doubts with the solution to Question 22.2 which says the premium is expected to fall if the term of endowment assurance is increased? My doubt is the EPV of the benefits should rise as the term is extended(more number of years) then why is it said that same amount of benefit is payable later? 2. Another doubt which is present in solution to question 22.5(Part i), it is said that "if very early on, the policy is reduced substantially in size, the new calculated premium should be larger than the office premium for the new small policy". If we look at the equation Old Policy Value + New Premiums = Value of future benefits + Value of future expenses + Alteration Expense. Now if the policy is reduced in size then the Value of future benefits should reduce , then why should the value of new premiums increase?
Hi Sayantani I'll answer 1. now and come back to 2. later. I'm afraid your logic here isn't right. The policyholder can only claim the benefit once. If we extend the term then they will receive the benefit later (unless they die within the original term). So we discount the benefit for longer giving a lower EPV of benefits. Another way to think about this is that a longer term means that premiums are paid for longer. But the benefit is still the same. So the premium must fall. Best wishes Mark
Hi Sayantani I think you have misread what we said here. We haven't said that the premium goes up when reducing the size of the policy. Instead we are saying that the premium for the altered policy could be larger than the premium that would be charged for a brand new policy with the new lower sum assured. The second line of the solution says "Using the current realistic value takes out full expected profit for the current policy." So using this method will charge the policyholder for all the profit expected on a large policy, whereas the office premium for a brand new smaller contract would only charge for the profit expected from a small policy. Best wishes Mark
