Life Assurance
Opp • •
ortunthes
By J. H. J. DAY, F.C.I.I.
IT cannot be said about many commodities that the price paid by the consumer today is no higher than that which ruled prior to 1939. The rate of premium charged for life assurance did use immediately after the war, and particularly during the era of cheap money. During the past two years life offices have been able to introduce successive rate reductions, and, quite apart from the more important merits of life assurance, the premiums paid by new policyholders today are very attractive. Much more attention has been paid in recent times by the life Offices to the design of policy contracts to meet individual needs. Until a few decades ago the number of different types of policy available was very small. Today each company offers a wide variety of contracts, and almost every few months some new form of policy is introduced. This broadening of the basis of the assurance business has met with a good response. Men and women have come to realise the opportunities which life assurance offers as an investment, as a means of saving, or in its major role of providing financial security for dependants.
• A MEANS OF SAVING Where life assurance is considered as a means of investment or of saving, its basic purpose is still fulfilled. Endowment policies frequently are effected with the object of building up personal capital. Any voluntary effort at regular saving is liable to peter out unless there is some measure of self-compulsion. It is extremely difficult for the individual'consistently to set aside a definite pro- Portion of income. Saving by means of life assurance introduces Just that additional measure of discipline which is necessary. It has been said that the life offices provide the most potent force in private saving. In recent years this has certainly proved to be true, and it is evident that life assurance is outstripping other means of saving. This is due partly to the fact that people everywhere are appreciative of the measure of financial security which can be provided thronvim- life policies. It is not necessary to accumulate capital before personal aims can be achieved. Endowment policies enable the Individual to enter into commitments which he could not otherwise undertake.
HOUSE PURCHASE The house purchase schemes which both insurance companies and building societies offer represent the outstanding example of this use of life assurance. At the present time a high proportion of all !nonage loans are secured by life assurance. Sometimes this is done by means of endowment policies, but more often by policies which provide temporary death cover only. The most popular house Purchase policy, the decreasing temporary life assurance, affords death cover throughout the mortgage period and at all times for the amount of the loan which is outstanding. Should the death of the Purchaser occur before the loan is repaid, the policy monies are used to extinguish the amount of the loan which is outstanding, and the property passes to the dependants unencumbered.
GIFTS INTER VIVOS House purchase is only one of the many practical uses to which life assurance can be put. The purchase of professional practices and partnerships, and other financial corrunitments can be secured extensively the same way. Temporary life assurance has been employed ensively to safeguard beneficiaries under deeds of gift. By distributing property to his family before death, it man may minimise to effect of death duty. It is necessary for a formal deed of gift 1.9 be executed for this purpose. Such gifts inter vivos only achieve their object if the donor survives for a period of five years, Death within ordinary that period would render the estate liable to duty in the arY way. This risk can be insured by means of temporary assurances on the life of the donor. , The cheapest and most desirable form of life cover is that provided by whole-life policies effected at an early age. For obvious reasons life assurance should be secured while the individual is in good health, and this can best be done in youth. In later life, impaired health may make insurance more expensive or even unobtainable. Further, by spreading the premium payments over the longest Possible period, the annual premium outlay is reduced to the mini- mum, and this itself makes early assurance desirable.
INCOME BENEFIT POLICIES Increasing use is being made of the facilities which the life offices Provide for terminating premium payments at probable retirement age. Whole-life and endowment assurances can be effected so that premium payment will cease at a specified age, although the policy continues in force after that age. This enables the protection to be purchased out of income during the earning period, and removes the necessity for finding the means to meet premiums out• of retirement income.
To the young married couple perhaps the most attractive type of assurances now available are income benefit policies. These may take the form of whole-life or endowment assurances, and are designed to meet family needs until the children can be self-supporting. Super- imposed on ordinary whole-life or endowment policies is an annual payment which, if the policy comes into operation, will be made during the first twenty years of its existence. Should the life assured die at any time during the first twenty years of the policy period, a capital sum will become payable immediately in the ordinary way. In addition an annual payment, not subject to income tax deduction, will be paid from the date of death until twenty years after the incep- tion of the policy. The income period need not be twenty years, and in fact can be varied to suit individual needs.
Such 'policies can provide, in addition to a capital sum payable on death and annual payments during the income benefit period, a further capital sum at the end of such period. It is generally considered that these income benefit policies provide the maximum immediate death benefit obtainable for a given premium outlay. Pension or income can be provided also by purchasing annuities. Annuities are either immediate or deferred. An immediate annuity is purchased by payment of a capital sum, the annuity payments commencing six or twelve months after the purchase. Deferred annuities can be purchased by payment of a capital sum, but more frequently are bought by instalment payments over a period of years. Life annuities, which are payable until death, have the disadvantage that they are subject to income tax in the ordinary way. Annuities certain, under which the annual payments only continue for a fixed number of years, attract income tax only in respect of their interest content. For this reason, the "split" annuity has proved Very popular in recent years. The "split" annuity consists of two separate annuity contracts, the first being an annuity certain, and the second a life annuity which only starts to be payable after the annuity certain period ends. By adjusting the amounts of the two annuities; it is possible to equalise the amount of net income after payment of tax and, at the same time, effect a considerable saving in income tax. TAX RELIEF *It has long been the policy of governments to grant relief of income in respect of payments made by way of life assurance premiums. , gives encouragement to the individual to effect adequate life ‘over. In any calculation concerning the cost of life assurance, allowance has to be made for the relief of income tax which the Premium payments will earn. This tax relief is not the only factor ,(1)Ir Which allowance has to be made. Under with-profit contracts c bonuses to be earned must be brought into the computation.
,,_ Present conditions certainly favour policyholders and it is unlikely "12t there will be any decrease in the volume pf new assurances !Elected, despite the shortage of money which may be, apparent in other directions.
RETIREMENT INCOME The provision of retirement income is associated in the minds of many with group pension schemes. Such schemes are not available ,2P'eryone, and normally will not be available to professional and 7""employed persons. Further, not every employed person is `,?rtunate enough to participate in a group scheme. Much greater .., could be made by individuals of life assurance as a means of izoviding retirement income.
at policies can be effected in the ordinary way to mature 7E the intended retirement age. Such policies can be endorsed with t7,,annoity option. These options entitle the policyholder to receive pa' Policy monies, or some part of them, in the form of an annuity, Yable for the remainder of life. The rate of annuity is established TN outset, and when the retirement age is reached, the policyholder 1Iree to decide whether to take capital or income, or a combination both. Endowment policies effected for this purpose provide ,Lath cover throughout the earning period, and thus serve the double '"Pose of life assurance and provision of retirement income.
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