The question is: A house-owner is considering taking out an endowment assurance to repay the capital sum under a mortgage of £60,000 due in 25 years’ time. During the term of the loan, interest payments are made to the lender, but no capital is repaid. He first considers: (a) A regular premium, 25-year, without-profit pure endowment where the only benefit payable is £60,000 on survival to the maturity date. Describe the risks avoided and accepted by the investor in opting for product (a) and mention any insurance products available to overcome the risks accepted. The answer says: Depending on the terms of the contract little or no benefit may be available on early surrender and there is therefore a risk involved if the mortgage is to be repaid early. It is not mentioned that the mortgage might be required to be paid off early. It is a very unlikely scenario for the lender to ask for payment earlier than scheduled. Is this point okay to mention? Why will such a seemingly wrong assumption get marks?
Hi. You're right, it is unlikely for the mortgage lender to call the loan back early, but the house-owner might want to pay it back early. A surrender value on the endowment assurance that's particularly low would represent a risk to the policyholder who wouldn't get back as much as they expect.
