Savings Profit

This question is about the revalorisation method, so we would normally talk about savings profit being actual return over that assumed in the valuation basis. This is because the method is based on an increase in the amount of assets backing the reserves. As explained in Chapter 7, if these assets increase by an additional r% over and above what is expected (the reserves would be expected to increase by the valuation rate of interest, all else being equal) then this r% can be added to both the sum assured and future premiums, and the amount of assets will remain sufficient to cover the reserve for this higher benefit (minus the higher premiums).

Having said that, as stated at the bottom of Chapter 7 page 4 in the course notes: in countries which use the revalorisation method, the valuation interest rate and pricing basis interest rate are usually the same.

Referring to it in relation to the reserves (ie the valuation interest rate) helps to reinforce the underlying process that the method is based on.

 

The question states that the individual is buying the endowment assurance contract with the specific aim of generating an amount to use as a pension in retirement. It then asks whether this product is suitable to meet those needs.

If the death benefit (the 'sum assured') is the same as the maturity benefit under this contract, then this gives the individual quite a high level of death cover throughout the term. Part of the premiums being charged will relate to this high level of death cover (the 'sum at risk' could be significant, particularly early on). As bonuses are added, the amount of death benefit provided will increase further.

However, the individual hasn't expressed their needs in terms of benefits required on death, but on benefits required when they reach retirement age. Therefore they appear to need a good maturity benefit but not a high death benefit. If the product instead provided a lower amount of benefit payable on death (eg return of premiums with interest), the premiums being paid are now focussed on building up the retirement benefit, not paying for extra life cover. And this would seem to meet the individual's needs much better.