Insurance Furnishes an Assured Income in the Form of Annuities
Life insurance also proves valuable to a very considerable number of people,
who, as the result of a lifework have succeeded in saving only a limited
amount of capital, and who have no one to whom they particularly care to
transfer this sum in case of death. Thus, let us assume that a person aged
60 has accumulated $10,000, and that this represents the entire estate available
for the maintenance of the owner during his later years. Owing to the limited
size of the estate, the owner will be obliged to invest the same in the
most careful manner, and the current rate of return for such investments
would probably not exceed 4 percent. Consequently this individual's income
will be limited to $400, an amount insufficient for proper maintenance during
old age. Nor can he afford to take a portion of his principal for living
expenses, because this would reduce his annual income. The danger confronting
him is just the opposite of that facing the man who wants insurance against
death. The latter wants insurance because he does not know how long he will
live, while the former is confronted with the danger of living too long,
i.e. of outliving his income.
Just as the man who felt that death might intervene too soon, could hedge
himself against that risk, so our owner of the $10,000 fund, who feels that
his income is too limited and that he might outlive this income if he should
resort to the expenditure annually of a portion of the principal, can protect
himself by buying an " annuity". An annuity is a contract by which an insurance
company promises to pay the holder thereof a certain stipulated income every
year as long as he lives, the payment ceasing upon death. Thus, for illustrative
purposes, let us apply an annuity to a man aged 60 who has saved $10,000,
which sum, as stated, will yield only $400 income a year if invested at
4 percent. Now, to quote the rates of a certain company for annuities, this
individual may deposit $1,066 and receive therefore a promise of an income
of $100 a year throughout life. This sum, it will be observed, represents
a yield of 9 percent, or more than twice as much as the assumed current
rate of 4 percent. The older the annuitant is when he buys an annuity the
larger is the annual return the company can afford to give. Thus if the
individual, assumed in our illustration, should be sixty-sis years old this
same company promises him $100 a year throughout life for each $888 paid
in, or over 11 percent. At age 70 the $100 annuity will cost only $630,
or an annual return four times greater than the 4 percent, rate used for
illustrative purposes. If, therefore, the holder of a limited estate does
not particularly care to transfer his property to some individual or institution,
life insurance makes it possible for him to pay the same to an insurance
company in return for a promise of a certain definite income a year, thus
relieving him from all further worry as to the sufficiency of his future
income. The companies can afford to give these large returns at the later
years of life because the death rate at age 60 and thereafter is high and
because of the understanding that the annuities will cease just as soon
as the annuitant dies, in which case the balance of the money deposited
with the company goes to the benefit of the other annuitants who may survive.
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