www.stockinvestments.com-Types of Life Insurances Part 5

Ten- and twenty-year summaries are the standard means of presenting cost figures on policies. Here is a company's 1956 twenty-year summary, rearranged by us for easier reading and with some explanation added, on a $10,000 whole-life policy starting at age twenty-five:

Premiums, $184.20 paid at beginning of each year $3,684 Less dividends, paid at end of year, 1st year 0,

2nd year $11, 20th year $57 641

In these summaries, the companies apparently aim to give a prospective buyer the impression that a life-insurance and savings combination is cheap, or even profitable, if a policy is continued for a long time. Here is what enables them to make such a rosy showing. As long as an insurance contract remains in force, the company keeps a policy-holder's money without paying him any cash income on the savings portion of the policy. The dividends are not real income; they are a delayed refund of the excessive insurance cost figured into the premium.

To make a more honest summary, let us add compound
interest onto both premiums and dividends. This changes
the above twenty-year summary to look like this:
Premiums, with 3% interest added $5,098

If a policy holder thinks his savings should receive an income of more than 3 per cent a year, that increases the cost of insurance still more than we have shown. Whatever the interest rate used, any honest set of figures shows that life insurance costs money.

The standard company summaries can also be misleading in comparing two types of policy, or similar policies from different companies. The way for a company to make a superior showing in a standard twenty-year summary is to charge a high premium, pay small dividends in the early years, pay much larger dividends in the later years, and pay a large, conditional surrender dividend at the end of the twentieth year. This practice is illustrated in the company's summary figures given above, enabling them to show an alleged "return over cost."

A policy with a comparatively low premium and paying no dividends is apt to look inferior in a standard summary. But with interest added, as we did above, and especially if an interest rate of more than 3 per cent is used, the no dividend policy may figure the cheapest.

Aha...you may pick up the impression that we think the life-insurance industry needs some radical improvement, and you could be right!