Is There a Better Investment than Life Assurance ?
" I HAVE a better use for the money " is an excuse often made for not effecting life assurance. PreSumably what is implied is that the premiums can be invested to better advantage. But can they ? Let us examine how life assurance compares with other investments, weighing the security offered and the yield. We will ignore its principal benefit—protection against the financial con- sequences of death—and consider it solely as a business proposition.
British Government stocks are recognized as the best investments in the world. Let us take them as the test. Representative yields on them at around current quota- tions are : 8s. 6d. per cent. on War Loan 3+ per cent. stock at 1021 ; £3 5s. 6d. per cent. on 21 per cent. Consols at 761 ; £3-13s. per cent. on Consolidated 4 per cent. at 109:1 ; and £2 13s: 6d. per cent. on Conversion 21 per cent. at 931.
Insurance shares stand high in the esteem of investors, as a glance at their yields will show. In many instances the return on them is smaller than on British Government stocks, being occasionally as low as 21 per cent. They may thus be regarded as being on. the same plane as the National Issues..
From the point of view of security,. the sums payable under life assurance policies rank above insurance shares. The obligations to the life policy-holder have to be met before the insurance shareholder is entitled to a penny, either for capital or dividend. In a sense, life policies are the senior security, a super-preference stock or bond, having first claim on the funds.
Now let us see what they return in the way of interest. For the sake of clearness gross yields will always he stated, Income Tax at 5s. in the being assumed. To Surtax payers the yields will be actually higher than those mentioned. Average policies will be chosen as examples and the age at entry taken as 30 all through. . An advantage possessed by life assurance over all other forms of investment is the rebate of Income Tax allowed on the premiums. As the present time this is 2s. 6d. in the E. The effect is really to reduce the rate of premium. Setting off the 5s. allowed, a premium at the rate of £2 ' per cent. becomes £1 15s. per cent. The result is greatly to increase the rate of interest on the premiums paid. Except where otherwise stated, the rebate has been allowed for in calculating the rates of interest below.
A man aged 30 next birthday has an expectation of life of 36 years. The annual premium for an assurance payable at death only would be £1 14s. per cent. On the basis that the sum would be paid at the end of the 36 years the yield would be about £4 3s. 4d. per cent. per annum compound, or, excluding Income Tax rebate, £3 6s. 6d. Should the assured life die at age 60 the yield would be £6 Os. 8d., or, if death occurred at age 55, £9 6s. 8d. per cent.
Although the bonus outlook is at present uncertain, a with-profit assurance would, in all probability, prove more profitable than a non-profit policy. We will dis- count the chance of future reduction of bonuses by esti- ' mating an average rate of 40s. per cent. per annum. At 'this rate the total bonuses at the end of 86 years would be 72 per cent. of the fixed sum assured. The annual premium to assure £172 (inclusive of bonuses) at the theoretical date of death would be £2 8s. The sum then receivable would work out at about £5 6s. 8d. per cent., or £4 13s. 4d. per cent., without allowing anything for Income Tax rebate. If death occurred earlier, the rate would, of course, come out higher. At the age of 60 it would be equivalent to £7 Os. 8d. per cent.
Examples drawn from whole life assurance may be objected to on the ground that they involve assumptions as to the date. of:death. Let_ us take, then, one or two illustrations from endowment assurances. Under policies of this type the rate of interest earned on maturity will 4 be certain and will be the lowest that can be expected. Death before maturity would mean a much higher rate of interest on the premiums paid. An annual premium of £5 12s. will secure a sum of £100 at the end of 15 years or earlier death. The sum payable on survival would represent an investment at the rate of £5 per cent. compound interest. Without the Income Tax rebate it would be £8 per cent. On a with-profit policy, taking bonuses at an average of 40s. per cent. per annum throughout the endowment period, the total amount payable at the end of the 15 years would be £130 for an annual premium of £6 16s. This would be equal to accumulating the money at £6 per cent. compound interest.
Plenty of men, of course, would not be satisfied with such rates of interest. They like shares paying big divi- dends. Well, as we have seen in recent years, the greater the interest rate the greater the risk. Capital losses must be set against income receipts and the balance remaining is the true interest earned. When this has been done few men can show a greater return on their investments, or speculations if you will, than in the examples above. The interest return on a life policy is after all capital losses have been made good. Holders of endowment assurances maturing in the last two or three years have been envied by their fellows who have seen the greater part of their own fortunes swept away by the Stock Market slump.
Thenthere is the man who thinks that his business offers greater scope for the employment of his capital than life assurance. He overlooks the fact that after two or three years' premiums have been -paid a loan can be raised on a life policy at a low rate of interest. In other words, a policy-holder can have most -of his. capital back again for use in his business and still be assured for the full sum. The rate of interest on the money borrowed may be less than that earned on the policy—certainly it will be in the event of early death—in which case the borrower would be actually making a profit- on the transaction, and securing life assurance in addition. The difference between the rate of interest on the loan and that earned on the policy would be small in any circumstances and a cheap price to pay for the protection.
Liquid reserves and depreciation funds are necessary for every business. A life policy serves both purposes. The premiums can be paid out of the sums set aside for depreciation, and when the cash is wanted, a loan can be