International Styles

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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