Pure Endowments

[JMO Fan]

Florida prohibits issuance of pure endowments by rule, apparently in conjunction with the law against tontines. Do any other states have such laws?

[urysohn]

I don't believe there are regulations to that effect, but the TEFRA rules effectively put an end to them with the implementation of "corridor factors" - minimum death benefits as a percentage of the policy's cash value. So a $100,000 policy designed to endow at age 18 (for $100,000)would be required to have a death benefit just prior to maturity of $250,000 (250% ratio required until older ages are reached) -- not an attractive design for a company.

[Chuck]

I don't have an answer to the question, but if I remember my terminology right, a pure endowment is not a life insurance policy. A pure endowment would, I believe, have no benefits whatsoever unless you survive to the endowment age. So there would be no life benefit or inside build-up to worry about complying with 7702.

It's more like a deferred income annuity (with one payment) that has no cash values. In that sense, a life only SPIA is a series of pure endowments and you could theoretically buy a pure endowment by purchasing an SPIA and selling off all the payments before and after the endowment date.

If there are laws against pure endowments, I would think that it is because of concerns similar to third party viatical settlements. An incentive to murder is created. If the pure endowment is guaranteed and adequate reserves are held, I don't see a tontine problem.

Chuck

[urysohn]

Chuck is correct - my response related to endowment insurance not to pure endowments.

Florida also requires a smoothness test on benefits, to make sure there is not a sudden jump in benefits in any one year (designed to prevent products like deposit term and other big refunds at the end of the n'th year). A pure endowment would certainly fail their smoothness definitions, so I would think an outright ban would not be required. Perhaps that ban was the precursor to their smoothness requirements.

[JMO Fan]

Pure endowments are exempt from the Standard Nonforfeiture Law (SNFL) in Florida as well as everywhere else. SNFL doesn't just regulate cash values -- it includes smoothness, among other things.

The smoothness test isn't just a Florida law -- it's a part of SNFL everywhere. (So it doesn't apply to pure endowments.) Most states don't worry about enforcing it, probably because it was written to stop deposit term, which isn't sold much anymore. But it still applies to all cash value life insurance.

The Florida rule (4-149) appears to have started completely prohibiting pure endowments about 8 years ago, apparently unrelated to SNFL.