Whole Life v. Endowment Assurance

WHOLE LIFE POLICIES are being recommended in certain quarters in preference to endowment assurances. These recommendations are usually made by " inside officials," that is to say, by those who occupy positions on the administrative staffs of assurance offices and who do not commonly come in contact with members of the public, as do agents and brokers. The public undoubtedly prefer endowments and if left to themselves would almost invariably choose this type of policy. Each kind of policy has its own peculiar merits and it depends on individual circumstances which is the better of the two. A consideration of the subject will furnish guidance as to the most appropriate policy in different cases. Protection, say the advocates of whole life policies, is the object of life assurance, and as the whole life policy gives a greater amount of protection for a similar premium than the endowment assurance, therefore, they assert, the whole life policy should be chosen. If the sole object is the greatest amount of protection at the least premium then a whole life non-profit policy should be selected instead of a with-profit policy, but it would be a bad thing if all life assurance was on a non-profit basis. So-called non-profit policies must in bulk produce a profit or the issuing office would soon be insolvent. The difference between a non-profit policy and a with-profit policy is that the profit on a non-profit policy is taken by, the shareholders while the profit on a with-profit policy is mainly taken by the policyholders—in fact, in a mutual office all the profit is taken by the policyholders. About ten years ago a leading life company decided not to issue any more with-profit policies and since then the price of its shares has risen from about £5 to £15.

USES OF NON-PROFIT POLICIES.

And yet the non-profit policy has its uses. Perhaps a few examples may be of assistance to the uninitiated. A man who has a life interest in an estate wishes to make provision at his death for others. The best policy for him is a whole life non-profit policy with premiums payable throughout life, as it will secure for the least possible premium the desired sum at his death. In effect, the premium will reduce the available income from his life interest and the smaller the reduction the better, irrespective of other considerations. A similar policy would be suitable for the provision of death duties, and for the same reason, namely, that it involves the minimum reduction in the income from the estate. As uncertainty must exist about the amount of duty ultimately payable, owing to the graduation and possible changes in the rate of duty leviable, as well as to the difficulty of determining in advance the total value of the estate, a whole life with-profit policy might well be considered for providing for death duties. Such a policy will over a long period yield much better financial results than a non-profit policy. The bonuses would be available to meet any extra sum required should the duties payable prove to be larger than foreseen. Or in the event of the rate of Income Tax or Surtax being increased the bonuses could be applied to the payment of the premiums, thus tending to stabilize the free income.

WHOLE LIFE POLICIES.

Whole life policies are sciitable: for Civil Servants, and officials of municipal authorities, railway, public utility, banking, insurance and other undertakings where pensions on retirement are usually granted. The guarantee of an adequate pension eliminates the need for old age provision, so that assurance is only required for dependants in the event of death. As it will be desired to do this with the least deduction from income, a non-profit policy will probably be the more suitable.

i

Premiums, in this instance, should be arranged to cease on or before the date of retiring from business, otherwise their payment may be burdensome when a pension becomes the sole or main source of income. The limita- tion will entail a higher rate of premium, and this in turn involves a reduction in the amount of protection, that:;

is to say, the same annual premium will produce a smaller amount of protection if payable for a limited number of years than if payable throughout the whole of the life assured.

While the maintenance of a non-profit policy calls for a less deduction from income than that of a with- profit policy this does not necessarily mean that in the end it is cheaper in cost. The advantage of a non- profit policy is that it assures for a given premium a larger immediate sum than a with-profit policy, but that sum is fixed. and unalterable while the sum assured by a with-profit policy steadily increases. The advantage diminishes every year owing to the addition of bonuses to the with-profit policy until in a few years the combined sum assured and bonuses exceed the amount of the non-profit ,policy. Which will prove the more profitable policy turns on whether the life assured survives the minimum period for the bonuses to accumulate to the difference between the original sums assured, This period is usually from ten to fifteen years, and the chalices are in favour of survival, but the uncertainty has to be faced. - -

POINTS FOR CONSIDERATION.

The question then resolves into whether it is worth running the risk of securing a smaller sum in the event of early death. This is a nice problem which the individual concerned can alone determine. Points to be considered will be the age and position of dependants for whom the protection is intended. To take the case of the wife first. Assuming the assured's previous death, would she be able to support herself, wholly or partially, by her own efforts up to the date when the total assured by the with-profit policy would have passed the amount of the non-profit policy ? If so, the with-profit policy would be the better choice. A woman's earning powers are normally related to her age, and therefore what her age will be at the time when the total assured by the with-profit policy exceeds that of the non-profit policy is material.

But children may have to he taken into account. Children in the course of years will become self-supporting. Protection is required until they attain that position, but thereafter it is superfluous. Thus their requirements arc the opposite of those of their mother, and the conjunc- tion of mother and children greatly complicates the matter. If protection during the dependency of the children be the main necessity a short term assurance might be a better solution than a whole life policy, or, better still, a convertible term policy, as at the conversion date the period of dependency will be less and the nature of the protection required simplified.

The greatest amount of immediate protection is not always, as we have seen, the most important factor. First, we saw that in a large group of cases the limitation of the period during which premiums were payable was strongly advisable, and that this limitation entailed a reduction in the amount of protection. Next, we saw that a with-profit policy is often preferable to a non-profit policy, involving a further reduction in the amount of immediate protection. In the great majority of instances the with-profit policy yields the better financial return, and this is a consideration that cannot be ignored by many persons. The purely protective policy (that is. the whole life non-profit policy with premiums payable throughout life) is rarely the most applicable.

ADVANTAGES OF ENDOWMENTS.

Whole life assurance offers protection against cessation of income through death, but it affords no protection against cessation of income through old age. To the mass of the population without prospect of an adequate pension except that provided by their own exertions the old age contingency is equally, if not more, important than the death contingency. In the event of death, dependants only have to be provided for, but in old age the breadwinner, as he was, must provide for himself as well as for dependants. True, by then the children will probably have ceased to be dependent, or the wire may have died, but if so the whole life policy will have

been -useless, and will be a tantalizing possession to a lonely old man seeking to maintain himself in his remain- ing years of life.

Life assurance offers not only protection against loss by death, but also an expert investment service, guaran- teeing automatic investment at compound interest, with special Income Tax privileges. A life office' with its staff of-experts can-invest to better advantage than the average man. No better way of accumulating money for old age provision is available. Just why this investment service should be decried by thoSe who should be its advo- cates is not easy to -understand. When combined with protection against death, as in a- life assurance endow- ment, both can be obtained more cheaply than if obtained separately. _ The mistake commonly made is the selection of short term endowments. - An endoWment should be chosen that will mature on or just before the proposed date of retirement. There is not a great deal of difference between the amount of death protection secured for the same premium by an endowment maturing at age 65 and a limited payment whole life policy, and that difference is a small price to pay for provision for old age—where