Permanent Insurance As An Investment Source

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Permanent insurance can be kept as long as the insured wishes to keep it. If the insured lives, he has built up a substantial cash value in his policy which he may take in cash or as income or which he may leave with the insurance company as "paid up" insurance.

The most popular form of permanent life insurance is convertible whole life insurance, sometimes called ordinary life or straight life.

Convertible life requires the lowest premium of all permanent insurance plans. Premiums may be paid on this policy as long as the insured lives or for a shorter period of time depending upon the objective of the insured.

Permanent insurance has a level annual premium for the duration of the premium-paying period. The annual premiums in the early policy years are in excess of the actual premium needed to cover the risk. The excess premium is called the reserve and it is this reserve, together with interest earned on the reserve plus future earnings, which provide the cash needed to pay death claims in the later years.

There are many different kinds of permanent life insurance, which are designed to accomplish different objectives. A few of the most popular plans are the 20-payment life policy or a life paid up at 65 policy. As you can see by their names, these policies were designed so that the insured can compress a lifetime of premium payments into 20 years or 30 years or by the time he reaches age 65. Obviously the higher the premium paid the greater the reserve and the greater the value of the policy.

Straight life insurance taken out at age 25 costs $17.70 per year. This is the quoted rate of one mutual insurance company. A mutual company pays dividends to the policyholders. A stock company pays the policyholders no dividends and quotes a lower rate, but to compare the rates of each type of company, the dividends credited by the mutual company to the policyholder must be subtracted from the gross premium. Thus from the $17.70 must be subtracted the estimated dividend of $4.66 per year, leaving a net premium of $13.04.

This is the premium, which we can compare with the net average cost of a 20-year term insurance policy on a 25-year-old man of $3.82. For simplicity we will consider only the gross premium—we assume that the dividends are left in, not taken out.

What does the insured get for this extra premium? At age 45 the holder of the term policy gets nothing if he is still alive. He has lost his insurance. The holder of the straight life policy gets $403.94. Over a period of 20 years he has put in a total of $354. He got out of the insurance more than he put in total, and he still had his coverage from the day he took out the policy. Further, should he wish to do so he may continue his insurance at the same rate?

If we consider that the 20-year term rate is the pure cost of insurance, and that the difference between this rate and the straight life rate represents the savings element of his premiums, you determine this savings element by subtracting $3.82 from $17.70, which equals $13.88. Over 20 years this savings element amounts to $277.60. For this total of $277.60 put in premiums, $403.94 was collected—a profit of $126.34 over 20 years, or $6.31 per year.

Of course, you can choose to buy more expensive policies, with the result that you would accrue more wealth over the years to use during your retirement, to send a child to college, etc. Everyone who is married or has a family would do well to invest in life insurance, and what kind of policy you choose certainly depends upon your age and circumstances. Just remember, it's never too late to purchase a policy to protect your family.

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