The Investment Value of Life Assurance

Purchase of Medical Practices

IT is evident from the fresh high record figures announced by nearly all the leading life assurance offices in respect of last year's new business totals that life assurance is steadily gaining ground as a means of saving as much as for the protec- ticn it furnishes on behalf of dependants. Even so, it is to be doubted whether its real merits are sufficiently appre- ciated, both as an investment pure and simple, and as a means of financing purchases that otherwise would be out of the question.

Let me take the investment merits first. The rise in the rate of income tax and the fall in the rate of interest that can be obtained on first-class investments, to say nothing of the fear that they may fall back again in price after their sustained rise, have made the ordinary types of marketable investments less attractive. But at the same time these very factors have enhanced the actual as well as the relative merits of life assurance. For the man who can pay life assurance premiums out of income that has to bear the 5s. rate of tax has the real cost of these premiums directly reduced by 2s. 6d. in the £ because of the income tax rebate, provided that he does not spend more than one-sixth of his income on life assurance premiums, a proportion not reached by very many people in any case.

But while his premiums are reduced in this way, the benefits derived from a life policy are entirely free of income tax. Only the sum assured, it is true, under a with-profits contract, is absolutely guaranteed, but the bonus records of the leading life offices are such as to make it reasonably sure that rates of bonus accumulation, despite the fall in the rate of interest obtainable on new investments, will not be much, if any, less than they have been in the past, over a period which has seen vicissitudes of values in the Stock Exchange quite as great as anyone could have imagined say thirty cars ago.

AN UNRIVALLED INVESTMENT.

It is sometimes forgotten, too, that the man who takes out a with-profits policy with an old-established life office having its funds soundly invested, becomes a participant in a fund which is yielding a return unobtainable today. The with- profits endowment assurance, therefore, is a very fine invest- ment, giving a return, if it is not taken out too late in life, of the equivalent of the investment of money at from 42 to 5+ per cent. per annum compound interest, if future rates of bonus do not fall much short of the rates now being paid by many offices.

Such a policy can be used for all sorts of purposes. It provides direct security for loans on a modest scale directly three or four premiums have been paid, or it may form the basis of a larger financial transaction. If a house is purchased on mortgage, for instance, the policy will ensure that in the event of the death of the borrower, the property will pass to his widow or other dependant free of any debt, and generally with money in hand besides. Or if it runs its full time, the borrower can repay the mortgage out of the proceeds of the

policy.

Am FOR THE DOCTOR.

This principle of financing purchases of capital assets with the aid of a life policy has been carried to many other spheres than house purchase. One of the most interesting developments of the kind in recent years is the financing of the purchase of medical or dental practices. It is true that a year or two ago, when the system was in its infancy, it was exploited without sufficient care in certain cases, with unfortunate consequences. But now it has been placed upon a very sound foundation.

Several of the leading offices are willing to advance a substantial part of the cost of a practice on the same lines as a house-purchase plan. That is to say, they will lend up to a certain proportion of the cost, even up to ioo per cent. in approved cases, the borrower paying interest on the loan and a premium upon a life policy. There is frequently also required a guarantee policy, guaranteeing the repayment of the loan if the practice does not produce the requisite sum during the term, and a sickness and accident policy so that a loam tenens may be employed to keep the practice going should the .owner be incapacitated.

The rates of interest charged under such schemes are very reasonable as regards the actual loan, but of course the cost of the guarantee premium and the sickness and accident policy premium naturally raise the total cost. As an illustration it may be taken that a loan of &,000 raised in this way, by a doctor aged 3o, will cost about Li6o per annum for ten years. In some cases the life insurance cover merely provides against death within the term ; in others it is a whole life policy which has a substantial value at the end of the term, and may of course be continued. If means will allow, it is of course far better to effect a policy which will be of use later on and one which will not involve a continuance of premium payments in the later years of life.

A SEMI-OFFICIAL SCHEME.

A particularly attractive plan is available to doctors and dentists through a company, British Medical Finance, Ltd., which operates under the auspices of the British Medical Asso- ciation. Here the purchase of a practice is met from a loan which is repaid on " building society terms " spread over ten years. Here there is no premium required for a guarantee policy or for a sickness and accident policy, the whole of the financial risk being borne by the lending company, which of course protects itself at the outset by strict investigation into the value of the practice. This investigation, however, is a valuable safeguard to the young doctor who is thereby protected against paying an unduly high figure for a practice if it is not worth it.

An insurance policy on the doctor's life is required, but 'his can be effected with any approved company, so long }s it is for a sum which will cover the amount of the loan at the outset. The loan is reduced each year by the amount of the repayment included in the instalments and the cost therefore may be reduced by effecting insurance only to the amount necessary to cover the amount of the outstanding principal at any time. This will be a decreasing sum, but may be covered by a level annual premium running for two-thirds of the period only. But obviously it is better, as in the illustration previously given, to effect a policy which will continue to be of value after the repayments have ceased. The moral to be observed in all these schemes indeed is that they are designed to assist the doctor or dentist to buy a practice, not to enable the penniless fledgling to start on his own with money provided entirely by other people.

ANNUITY ATTRACTIONS.

The lowering of the rate of interest obtainable on invest- ments has turned attention more to annuities as a means of providing an income in the later years of life. Here, unfor- tunately, the income tax question operates unfairly against the annuitant, for no allowance is made for the fact that part of the income really comes out of the capital. All the same, this is not an insuperable bar, for any income has to pay tax, and where there are no dependants, an annuity offers a means of ensuring a safe and certain income for the remainder of life.

Where an income, as with so many people, is derived from a miscellaneous collection of doubtful securities and the claims of dependants have not to be considered, or can be provided for otherwise, it is often possible to secure a larger income with much improved security by selling out the investments and purchasing an annuity.

The insurance companies have raised their prices for annuities in recent years, owing to their own difficulty in investing money at rates of interest which would make annuity business attractis e, especially as annuitants have been living longer to enjoy their annuities. But such rise in annuity prices has not been nearly so great as the rise in most invest- ment values, certainly not so much as these represented at the best levels. Government stocks still stand high in price, and where such stocks now yield little, or are liable to be redeemed in a short -time, the capital can often be profitably transferred to the purchase of an annuity.

TAX—FREE INCOMES.

For younger people, still building up capital resources against future requirements, there are policies which make use of the fact that benefits, if paid by instalments, with the appearance of income, but really capital, are free of income tax. Thus one of these schemes provides for an income for life, with the benefit free of tax for twenty years after a certain age; thereafter it becomes an ordinary annuity, payable for the remainder of life, but subject to tax. For instance, under this scheme the policy holder may elect to receive £so per annum payable from the age of 65 onwards, for a period of zo years, that is to say, until he is 85. If he dies before that age the remaining annual payments will go to his depen- dants. But during this twenty-year period the payments will be free of income tax, a consideration in these days, when £50 free of tax is the same thing as £66 16s. 8d. subject to tax at 5s. in the £.

If the beneficiary under such a policy as the above should live beyond 85, then the £50 per annum continues for the remainder of life, but on an ordinary annuity basis, subject to tax. A policy of this kind costs only some £16 per annum at 30 years of age.

ACTUARIUS.