Group Plans

When looking at types of life insurance, a man had better find out to what extent he is covered automati­cally or can obtain low-cost insurance through his being a member of a group.

In the United States the group life-insurance program covering by far the most people is the one included in the Federal Government's Social Security law and financed by tax on covered employees and then employers. At the death of a covered worker, the law settles who may receive insurance benefits, and how much. Benefits are not payable to children over eighteen years of age, or to a widow without children under eighteen, unless she has reached age sixty-two. For a man with quite young children, Social Security is the equivalent of a life-insurance policy with a pretty large value. Details are readily available at the nearest branch office of the Social Security Administration.

A military veteran whose service ended by 1956 is en­titled to $10,000   Government   life   insurance, the   rules varying with the time when he served. Starting in 1957, military servicemen have been absorbed into the Social Security system, and separate military insurance has been dropped.

Many employers when looking at types of life insurance make a group contract with a life-insurance company, enabling the employer to offer in­surance to his employees. It is usually of the short-term type, with no cash value. All or part of the cost may be paid by the employer. Probably the main drawback to group insurance through an employer is that when an employee quits or is fired, he may simultaneously lose his insurance, his prospect of a pension, and his earned in­come.

A professional society, labor union, or other organization may also have group insurance for its members.

Policies for Individuals

Now we turn to the policies a person can buy direct from an insurance company or its agent for types of life insurance. The length of time cov­ered by a policy may be anywhere from one year to a whole lifetime, provided the premiums are paid. As long as a contract remains in force, the annual premium rate per $1,000 death value remains unchanged, or "level." There are technical exceptions, but they don't disturb the principle. This practice of maintaining a level premium rate on an old policy misleads most people into the pleas­ant and expensive delusion that on an old policy, the cost of insurance does not rise with advancing age.

The cost of pure life insurance depends primarily upon how much chance there is that an insured person will die within the coming year. In estimating this chance, the in­surance companies put their main emphasis upon a per­son's age. Among a large number of people, such as all residents of the United States considered as one group, vital statistics show that after children reach about ten years of age, their mortality rate increases gradually each year, as they grow older. Whatever age you start from, a man's risk of dying is estimated to be higher in the second than in the first year ahead, still higher in the third year, and so on.

Other things being equal, the lowest premium rate is of­fered on a policy lasting only a few years. When a contract covers more years, we have this inconsistency: the mor­tality rate rises with age, but the premium rate does not change. The trick is that the company charges a premium rate higher than is needed at first, the extra premium dol­lars being held as a reserve to take care of the rise in mortality rate in later years. The longer the period of time a policy is to cover, the larger the premium rate is. This is worth noting when looking at types of life insurance.

Most policies have a cash-surrender value. A contract that expires at the end of a specified number of years, with no surrender value remaining, is called a "term" policy. This book sometimes calls these contracts "pure" life insurance, because they are limited to the one job of giving protection in case of death, without being mixed with a savings plan. Term insurance is usually considered a temporary arrangement, but the term can be as long as forty-five years. Discussion of term policies will be resumed a little later on.

The great majority of policies are a combination of life insurance and a systematic savings plan. Contracts vary greatly in the degree of emphasis upon savings. In some, after only a few years the surrender value exceeds the original death value, and from then on, the policy is wholly a savings plan, with no real life insurance. A policy-owner can borrow all or part of the surrender value, the company charging about 5 per cent annual interest.

In the most common type of insurance-savings combina­tion, usually called "whole life" types of life insurance, the surrender value grows slowly, not rising to equal the death value until some such age as eighty-five or one hundred, if anybody ever keeps on paying premiums that long. On some whole-life policies the minimum death value is very much larger than the tradi­tional $1,000, and this permits the company to charge a lower premium rate than with a smaller minimum. In­stead of stating this difference in a clear manner, the companies usually make technical distinctions, so that it is especially easy for a buyer to become confused among whole-life policies, essentially alike, offered by the same company.

Here are some figures on a whole-life contract with a death value of $10,000, offered in 1956 to a man at age twenty-five. If the premium is paid annually in advance, it is $173 the first year, and thereafter $146. We selected this policy partly because it pays no dividends; that simpli­fies our presentation. At the end of the twentieth year, when the insured man reaches age forty-six, the guaranteed sur­render value of the policy will be $2,650.

Now let us divide the contract into its two elements, in­surance and savings. The real insurance value of the policy is the total death value, $10,000 minus the savings fund. At first the savings fund is insignificant, but as it rises each year the real insurance value shrinks correspondingly. After twenty years of premiums, $10,000 minus $2,650 surrender value leaves $7,350 of real insurance. Each suc­ceeding year, the level premium pays for a smaller dollar amount of real insurance. (Some figures on a whole-life policy with dividends are given near the end of this chapter.)

The death value of a policy can be greatly enlarged by adding a "rider," with a comparatively low premium rate. On a "family-income' rider," death settlement takes the form of a uniform dollar payment each month up to the end of a specified number of years after the rider is issued, and the payment of death settlement of the basic policy is delayed until the end of the rider's monthly-payment per­iod. These riders are intended for families with young children. Suppose that when a child is born the father takes out a twenty-year rider. If the father dies during the twenty years, the insurance company will pay his family a monthly income until the child reaches twenty years of age, then will make settlement of the basic policy, according to whichever option has been chosen. On a basic policy of $10,000, the company whose figures we are using allows a maximum family income of $150 monthly, and for this amount on a twenty-year rider issued when the insured man is twenty-five, the annual premium is $71.

A rider is pure term insurance, adding nothing to the surrender value of the basic policy. A large rider converts a whole-life policy into a contract with far greater empha­sis on real and temporary insurance. Obtaining a rider might well be a man's reason for buying the basic policy.

A whole-life policy may be the best type to buy, especially with a rider added, provided these conditions are present:

1. The buyer is sure he will need at least that much insurance for twenty years to come.
2. He wants to put his savings into a fixed-dollar con­tract.
3. He does not mind the rigidity and complexity of the contract.

If you really enjoy complications, try this one: Buy a whole-life and family-income combination. Borrow the cash surrender value each year as fast as it accumulates and never pay it back. Of course, this will cut the death value of the basic policy each year. On the loan, the company will charge you about 5 percent annual interests on your own savings. Your net cost will be your premiums, plus interest on the loan, minus loan amounts, also minus divi­dends, if any. This cost will be similar to that obtainable with much less fuss on a term policy with equal death value, reduced each year. But here is the clincher: in the present Federal income-tax rules, the interest you pay on loans is deductible from your taxable income, so that after paying the tax, your net cost on this borrowing plan may be lower than on a term policy. The higher your income tax rate, the more this scheme can save you and that can be an advantage when looking at types of life insurance.

Short-Term Policies

In the previous chapter we said that paying life-insurance premiums is an unsatisfactory and temporary expedient, to be replaced as soon as possible by an investor's own ac­cumulated capital. With this plan, the long-lasting level premium has little meaning. An investor had better select a policy with a low-cost rate in the early years. A rise in the cost rate later on will bother him less, because he will be paying on a reduced amount of death value, and in time he will be out altogether. There are two ways for him to obtain low-cost insurance. One is a combination of a large rider and a whole-life policy, as illustrated above. The other is a short-term policy, discussed below.

It seems that most life-insurance companies aim to pena­lize anyone who merely wants to buy simple, "pure insur­ance" types of life insurance. Suppose a man buys a term policy that is "convertible, but not renewable." At the end of the term, if he still wants insurance, the company forces him either to take another medical examination or to convert to a policy with a con­siderably higher premium.

To avoid this risk a buyer should select, at the begin­ning, a term policy that is "renewable," meaning that he can extend the term repeatedly by paying a higher pre­mium rate on each renewal. The renewal privilege is apt to expire at around sixty-five years of age, but by that age an investor surely should be through with life insurance. Most companies seem to keep their renewable term con­tracts hidden, but these policies are not rare. Five out of six of the largest United States companies list at least one of them, usually a five-year term, in the 1956 Unique Manual. So with persistence, a buyer can find several of them, for comparison.

A short-term policy is superior in these respects:

1. Life insurance is entirely separate from savings, so that an investor can change either one without automati­cally affecting the other.
2. The policy-owner can cut the death value whenever he chooses without disturbing the rest of the policy.
3. The form of death settlement is not restricted,  as in a family-income rider; it can be any of the options the company  offers  generally.

Premiums Weekly, Monthly, Quarterly

"Industrial" is the polite word used to cover types of life insurance that are a separate group of policies with weekly premiums, offered by a num­ber of companies. So many people pay these weekly pre­miums that in spite of the smallness of individual policies, their total volume is about one tenth of all life insurance issued by United States companies.

A year's total of the net payments on an industrial pol­icy is roughly 40 per cent higher than when the premium is paid in one sum annually on a comparable policy. Of course, a company incurs extra expense in collecting pre­miums weekly and keeping records on small policies, but the extra charge looks excessive. Let us hope that none of our readers is careless enough to buy industrial life insurance. Industrial insurance is often bought on a baby's life. Parents' paying insurance premiums at the exorbitant weekly rate to protect themselves against the risk of a baby's death is probably the craziest of all the wacky practices in life insurance.

Monthly premium rates are cheap compared to the weekly, but a monthly rate, multiplied by twelve months, is 5 to 8 per cent higher than the annual single-payment rate on the same policy. Remember that in paying monthly, compared to annually in advance, the average delay in payment is less than half a year, so that the extra charge in these monthly rates is equivalent to an annual interest rate of 10 to 16 per cent. If a buyer can borrow from the insurance company or a bank at an honest annual rate of 5 or 6 per cent on the remaining unpaid balance, he had better borrow the money needed to pay his premium an­nually rather than monthly.

Quarterly premium rates are 4 or 5 per cent higher, and semi-annual rates are 2 or 3 per cent higher, than an­nual. Obviously a policy-owner had better pay annually or semi-annually, unless he expects to die within the year!

When a buyer wants a policy with a death value larger than the minimum required, he can split up his premium pay­ment without incurring extra charge by taking out two or more policies, each as large as the minimum, and spacing their dates through the year. Suppose the minimum death value is $2,500, and a man desires $15,000. He can buy six policies, with annual premium dates two months apart.

What   Company?

With the two largest companies being among those in­volved in selling industrial policies at outrageous premium rates, it is evident that a company name, by itself, prob­ably gives no clue as to the quality of a policy. Disregard­ing the industrial group, a giant company may not offer a policy at as low a cost as a smaller company does. And a company's making a good offer on one policy gives no as­surance for its other policies. A Canadian company's offer may be better than any U.S. company's. Savings banks in Massachusetts, Connecticut, and New York State issue life-insurance contracts, and a resident of those states should compare their rates.

Dealing with an easily accessible agent is more con­venient, but contact with a company's nearest office can be maintained by mail or phone.

The best way to select a policy when looking at types of life insurance is to study one of the manuals of the industry. But poring over the mass of figures takes a lot of time, and is hard on the eyes, as the writer has learned to his sorrow. And the manual's figures on cost are misleading and need to be corrected by using compound-interest tables, as we will show. The writer uses the Unique Manual (published by The National Un­derwriter Company, 420 East Fourth Street, Cincinnati 2, Ohio). Its 1956 edition contains information on 1,100 companies. Besides quoting rates on policies, it gives statis­tics on the financial standing of the companies.

The next-best way to select a policy is to find, if possi­ble, an agent or broker who is both honest and knows where to look. If an agent's own company lacks a policy that suits a buyer, the agent can make a small fee by selling a policy in another company.

Ten- and twenty-year summaries are the standard means of presenting cost figures on policies. Here is a company's 1956 twenty-year summary, rearranged by us for easier reading and with some explanation added, on a $10,000 whole-life policy starting at age twenty-five:

Premiums, $184.20 paid at beginning of each year	$3,684
Less dividends, paid at end of year, 1st year 0, 2d year $11, 20th year $57	641
Net payment	$3,043
Cash value and surrender dividend	3,100
"Return over cost"	$ 57

In these summaries, the companies apparently aim to give a prospective buyer the impression that a life insurance and savings combination is cheap, or even profitable, if a policy is continued for a long time. Here is what enables them to make such a rosy showing. As long as an insur­ance contract remains in force, the company keeps a policyholder's money without paying him any cash income on the savings portion of the policy. The dividends are not real income; they are a delayed refund of the excessive insurance cost figured into the premium.

To make a more honest summary, let us add compound interest onto both premiums and dividends. This changes the above twenty-year summary to look like this:

Premiums, with 3% interest added	$5,098
Less reinvested dividends, with 3% interest added	705
Net payment	3,100
Cash value and surrender dividend	3,100
Cost	$1,293

If a policyholder thinks his savings should receive an in­come of more than 3 per cent a year, that increases the cost of insurance still more than we have shown. Whatever the interest rate used, any honest set of figures shows that life insurance costs money.

The standard company summaries can also be mislead­ing in comparing two types of policy, or similar policies from different companies. The way for a company to make a superior showing in a standard twenty-year summary is to charge a high premium, pay small dividends in the early years, pay much larger dividends in the, later years, and pay a large, conditional surrender dividend at the end of the twentieth year. This practice is illustrated in the company's summary figures given above, enabling them to show an alleged "return over cost."

A policy with a comparatively low premium and paying no dividends is apt to look inferior in a standard summary. But with interest added, as we did above, and especially if an interest rate of more than 3 per cent is used, the no dividend policy may figure the cheapest.

A reader may pick up the impression that we think the life-insurance industry needs some radical improvement with its types of life insurance, and he could be right!