Reserves for pure endowment policies

[Lauren]

Hi there,

For an n-year pure endowment policy, should the reserve at time n be 0, or should it be equal to the sum assured? I'm just a little confused as I always thought policies have a reserve of 0 at the end of the term but in Q2 of the Chapter 23 PBOR the reserve at the end of the last year is equal to the sum assured.

I think this might also contradict what was shown in the notes for Chapter 23 where we had to explicitly include any benefit for surviving to the end of the year separately in the DSAR because the end-year reserve wouldn't include this survival benefit. I'm guessing the same theory would apply to the final policy year too.

It doesn't make any difference to the overall mortality profit answer as long as the survival benefit is included once but just wanted to know what the correct approach is because I have seen it done both ways and I'm not sure if I'd have lost marks in the first part of the question where it asks for the reserves and mine was 0.

Thanks!

 

[Darrell Chainey]

Hi Lauren,
It could be either but I would default to the survival benefit. The end of the policy term is a special case and we usually quote the reserve just before n rather just after n.
In theory, if it's just after n then the policy doesn't exist anymore and wouldn't have a reserve.
But as you say, as long as you know and understand what you are working with it doesn't really matter.