Life Insurance: To Insure Or Not To Ensure

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Life insurance in its pure form is a simple idea. The companies selling, however, it seem to have decided that the way to build up a large volume of business is to make life insurance so complicated that no one can understand it without devoting an unreasonable amount of time and effort to the task.

Now let us try to clear away some of the fog. Pure life insurance is actually death insurance. It is a means of arranging, in advance, to offset or reduce the bad financial effects that may result from a person's death. A life-insurance policy is a contract between an insured person and an insurance company. At regular intervals the insured person pays a charge, called a premium, and in return for this, if he dies, the company pays the specified face, or death, value to the person named as beneficiary. These are the easily understood essentials of life insurance.

From the standpoint of investing, life insurance is a substitute for lack of capital. At moderate expense it enables a young man to leave money to his dependents, even though he dies without owning any capital. But the expense naturally increases with an insured man's age, although insurance-company practices may conceal this fact. In middle age and later, the expense of continuing a sizeable amount of life insurance on either an old or a new policy is great enough to use up considerable of the money that an insured man might otherwise add to his savings.

For a beneficiary, the death value of a life-insurance policy is a fixed-dollar investment. This makes an estate composed all or mostly of life insurance a poor substitute for one containing a large portion of well-chosen diversified equities. For an informed investor, life insurance is an unsatisfactory and temporary expedient, to be replaced as soon as possible by his own accumulated capital.

Paying the cost of life insurance is a plain waste of money, unless the death of the insured person will hurt somebody financially. A reader's reaction may be, "That's obvious; why mention it?" But for many premium payers it is far from obvious. Presumably because a life-insurance policy has or will have some cash surrender value, they assume that it is practically the same as a savings-bank deposit. They do not understand that part of a premium must pay the company's selling expense, and another part must pay the cost of protection against death of the insured person, regardless of whether anybody needs that protection.

Insuring the life of a baby is a common practice. One company offers more than 50 different policies, with rates starting at "age zero." Premium amounts are suitable to all sizes of pocketbook, on some types of contracts as little as five cents weekly, while on other types minimum premiums run to several hundred dollars.

In insuring the life of a baby, surely it is a rare parent who aims at receiving a substantial cash settlement in case the child dies young. So apparently parents look on child insurance as a method of investing for the child's own future benefit. But when a parent bothers to examine the results of investing through a juvenile insurance policy, he is likely to find that his child has little chance of collecting from the policy as many dollars as the parent has paid into it. Even on the best policies, with the premium always paid annually in advance for 20 and dividends always reinvested, the results are equivalent to about 2 percent compound interest, well below an E bond's performance.

Before you invest in a life insurance policy, do a little math and figure out if the premiums are worth the protection. Everyone wants to protect his family from an accident that might take the life of the head of household, but many insurance companies don't live up to the promises you might think they've made. Be sure to shop around and find the right policy for your family before you decide to throw up your hands and choose the first thing that comes along.

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