Insurance
HOW LIFE ASSURANCE WORKS.
I HAVE sometimes suggested to employers that it would be an excellent thing if they encouraged systematic saving by their employees by promising that, if death occurred while in the employ of the firm, the employers would increase the savings to 1100 and thereafter by a definite sum. The guarantee of this payment at. death should be dependent on the regular saving of a specified amount each week. This is a very practical inducement to save, and costs very little. Experience shows that this payment is an economy rather than an expense for the employer, and the trade-union attitude towards expensive superannuation funds is not always enthusiastic.
This plan illustrates happily the way in which life assurance works. If a man saves 2s. a week for a little less than fifteen years, he will have £100 of his own. If he dies before his savings amount to £100, the employer makes up the difference. The employer can obtain from an insurance company a policy which guarantees the steadily reducing amounts in the event of the man's early death. This constitutes in effect a fifteen-year endowment assurance under which the sum assured is paid at the end of fifteen years, or at death, if previous. The employee carries out the savings bank part of the transaction, and the employer pays for the insurance protection.
Most life assurance policies work in exactly the same way. In determining the rates of premium that should be charged, an actuary has to arrange that the amounts paid out of the premium each year will accumu- late to the sum assured by the latest date at which the policy can become a claim, while another part of the premium pays for insurance protection, or the difference between the accumulated savings and the sum assured.
Under endowment assurance policies, the latest date at which a policy can become a claim is that on which the policy matures by survivance, either at the end of twenty years, or at age sixty, or to the end of whatever endowment period may be selected.
For whole life policies, according to the table in most general use, the latest date for payment is age 103, by which time everybody is supposed to be dead. Hence a whole life policy is really endowment assurance payable at age 103, or at death, if previous.
These considerations are a definite help in choosing the most suitable kind of policy. If we merely want an investment, we should take endowment assurance for a comparatively short term, but if the important thing in our case is protection for dependents, accompanied by an excellent investment, then we should take endow- ment assurance for longer periods, even up to age 103, which is ordinarily called a whole life policy.
Another thing that follows from the recognition that life assurance is a combination of savings and protection, is that we should take out policies as early in life as we can. One reason for this is that the cost of insurance protection for a given amount at young ages, is very much less than it is at older ages. The death-rate is higher at sixty-five than at twenty-five, and naturally at the older age we have to pay much more for the chance of £100 being paid in the event of death within twelve months, than we should have to pay at age twenty- five. The best age of all for commencing life assurance is at birth, under the system of deferred assurances for children which I shall describe in a future article.
Frequently when a man is contemplating taking but a policy he compares the accumulation of his premiums at compound interest with the sum payable under the policy at the end of the endowment period, or he takes the average duration of life, and compares the accumulated premiums with the sum assured by the policy at the end of that time. These methods are absurd; and give no indication of the real yield upon a policy because they take no account of the value of the insurance protection. There are correct methods of finding the rate of interest yielded by life assurance, which proves to be surprisingly
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