FINANCE-PUBLIC AND PRIVATE.
LIFE ASSURANCE AND INVESTMENT.
[To THE EDITOR Or THE " SERCTATOB."] Sin,—In view of the appalling depreciation in high-class investment securities, not merely since the war, but over a much longer peiod, not a few investors must have looked back with chagrin upon the ill-fortunes which seem to have dogged their "prudence." Scarcely_ more than twenty years ago, for example, we had Consols at 111, since when they have been down to 45, and even now are no better than 47. Moreover, the same misfortunes have overtaken all gilt-edge 'securities, and most of the prior charge stocks of English Railways have fallen fully 50 per cent. To take one instance alone, it may be noted that the 3 per cent, perpetual debenture stock of the London and North Western Railway, which in the year 1900 was 108, and in the previous year touched a much higher figure, now stands at 51. These are the kind of movements which might well undermine the prudence of the most prudent investor, and discourage thrift and investment generally. There are two classes of the community who may be said to have fared better during the last quarter of a century than the ordinary investor in so-called high-class securities. Those who have embarked on low price speculative descriptions have frequently seen those securi- ties appreciate even when the gilt-edge stocks have declined, while the other section of the community which has had small cause to regret the course pursued with regard to investments, is that which has gone in largely for life assurance and endowment policies, not only to cover the risk of early decease, but as an investment operation. As I shall explain later, it may be doubted whether the chances of investment along these lines will offer the same opportunities in the near future as in the years which have passed. But, if only because of the perplexity which many are feeling at the present time with regard to the employment of savings, even with investment stocks at their present low level, some observations with regard to the general policy of life and endowment assurance as a means of investment may be opportune and useful. If I should deal with the subject in somewhat elementary fashion, it will be understood that I am writing more especially for those who may perhaps be unfamiliar with the general system of life and endowment assurance from the investment point of view.
The combination of thrift with life assurance results in its simplest form in the endowment assurance policy which promises payment of a fixed sum at the expiry of a definite term, or at death, should that event occur before the end of the term. Endowment assurances may be either with or without profits, but as the consideration of the merits of any form of with-profits insurance must turn upon future bonus prospects, I will leave the discussion of that subject for the moment and deal with contracts which provide for the payment of definite sums.
There are, of course, all sorts of schemes—products of the actuary's ingenuity—designed to appeal to the public by the offer of different options or alternative benefits ; but practically all of them are only variations of the endowment assurance, with a little extra charge for the complications introduced by the alternative benefits— the more complications the greater the expense, as a rule.
Clearly, however, the man whose simple endowment assurance contract guarantees him a cash sum at a certain date is in the position of possessing an almost unlimited number of options, for he can enter into any sort of fresh contract which may appeal to him when his policy becomes due. With the cash sum he may buy an annuity, or invest the capital at his own discretion. The terms upon which this may be done will, of course, be governed by the conditions obtaining at the time. The advantage of the many-option policy is the fixity of the alternative benefits. But it is possible to pay too much for this advantage, and it is an easy matter to ascertain the approxi- mate cost of the options by comparison with the premium payable for an ordinary endowment assurance for a sum sufficient to provide an annuity or other benefit, similar to that to be derived from the option policy.
The ordinary non-profit endowment assurance as an Instrument purely for saving cannot, of course, compete with . a gilt-edged redeemable investment security in the matter of yield in the present state of the market for high-class investments, because the cost involves the added benefit of life insurance, the policy being in force for the full amount from the moment the first premium is paid. Nevertheless, the result of such a policy taken out twenty-five years ago, and maturing for payment at the present time, would, from the standpoint of the holder, compare very favourably with an investment in any of those gilt-edged securities which enjoyed the greatest favour at that time—namely, Consols and other stocks of an irredeemable nature. In the case of Consols the interest income over the past twenty-five years, even without deducting the Income Tax, would have fallen short of the depreciation of the capital. A non-profit endowment assurance, however, taken out with a good British life office would have given the investor a sum equal to the return of the whole of his premiums, with approximately two per cent. compound interest upon them, from their dates of payment, without taking into account the Income Tax relief obtainable in respect of them, and, of course, the holder would have had a life policy for the full sum assured throughout the period.
If the investor's need is for a schema of saving by means of an insurance contract without the benefit of life insurance proper, he may be attracted by what is known technically as the "pure endowment." This is a type of contract under which the holder gambles on his prospects of longevity instead of against them. For this reason, perhaps, the offices do not push it to any extent, for only very " good" lives would be attracted by it, and consequently there is a " selection " exercised against the office, with the result that the mortality under such schemes inevitably comes out much below the averages upon which ordinary life policy rates are calculated. The investor pays an annual premium for the selected period and receives a definite sum at the end of it, only if he survives it. The premiums are either returnable, with or without interest, should he die before the policy falls due, or are not returnable at all. If they are returnable the annual rate is naturally higher than if no return is to be made, since in this case the office can afford to give more to the survivors than if it has -had to return the premiums under policies where the holder has died during the period. The non-returnable scheme, however, obviously involves a risk which few individuals would care to take if they have dependents who would be affected by any impairment of the value of the investor's estate at death. Nevertheless, for the " good " life who is in a position to take a purely selfish view of his chances of living for a definite period of years, the plan offers the certainty of investing an annual sum under terms which, taking a twenty-five year period, will return from 34 per cent, compound interest, free of Income Tax, if started at the age of 25, to 5 per cent, compound interest free of Income Tax if entered upon at the age of 40, the policies being payable at the ages of 50 and 65 respectively. It should be mentioned, however, that no relief from Income Tax in respect of the annual premiums under such con- tracts is obtainable, as they do not provide for a sum payable at death.
A modification of the "pure endowment," or rather a combination of it with a non-profit endowment assurance, however, combines the advantages of both schemes. This is generally known as the "double endowment," or by some similar title. It provides for a certain sum payable on the attainment of a certain age and for a smaller amount, generally one-half, at death, should that occur earlier. At the rates of premium commonly charged the holder of a policy of this kind receives his premiums back with about 2i per cent. compound interest free of Income Tax should he survive the stipulated term. If he should die in the early years of the contract his estate benefits handsomely by the life insurance portion of the contract, while if death should occur towards the end of the term the death benefit would fall short of the amount paid in premiums by a sum which would only be appreci- able if the death took place within the last four or five years. An incidental advantage of this type of policy is the absence, as a rule, of any necessity for medical examin- ation, and it is surprising that such policies have proved comparatively unpopular since their introduction. The with-profits endowment assurance provides a gradually increasing assurance and, on the basis of pre-war bonus records, offered a much more attractive bargain to the insurance investor than the non-profit policy. There were offices which could show results equivalent to an investment at 4 per cent, compound interest, but the reduction or passing of bonuses during and since the war have sadly upset the continuity of these records. In time, no doubt, such results will be repeated as invest- ments depreciation is wiped out and the companies, per- haps, get a little relief from the Income Tax, which presses upon them with peculiar severity. At the present time, however, the uncertainties of the future make the guaran- teed contract for a fixed sum appear more attractive than the best of past bonus records. Time may prove the fashion to be wrong, but at the moment future bonus prospects are not quite definite enough to be made the subject of calculations as to investment results.
As to the Income Tax reliefs to the individual, the Revenue authorities have tried to whittle them down as much as possible, and the idea commonly prevails that they are now hardly worth having. This, however, is quite a mistake. The provisions have been restricted so as not to allow life or so-called life insurances to be made the medium of actual tax-evading schemes, but, owing to the rise in the rate of the tax, the relief is relatively more valuable than ever before.—I am, Sir, yours faith-
The City, July 14th.
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