LIFE-INSURANCE FOG                                                        

  

Who Needs Insurance, and When ?

 

"If anything should happen to me..." With that idea planted in a man's head, he is an easy mark for a life-insurance salesman. This vague phrase gets around the ugly word "death"; and combined with pleasant phrases such as "security" and "building an estate," it develops the impression that life insurance is the ideal protection against almost any conceivable difficulty that a family might encounter. The great majority of American families are paying for some life insurance, but it is a rare person who has more than a foggy notion of what his policy will and will not do for him, or any notion whatever of how the cost and provisions of his policy compare with other available possibilities.

 

Life insurance in its pure form is a simple idea, but the companies selling it seem to have decided that the way to build up a large volume of business is to make life insurance so complicated that nobody 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 fifty 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.

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