International Styles

Functions of Endowment Insurance

Functions of Endowment Insurance. In the past endowment insurance was frequently advertised as "investment insurance" without making proper reference to the cost of the insurance protection. But as Mr. Dawson states in considering endowment and limited-payment policies as an investment "a life-insurance policy, at the best, can be compared as an investment with other investments, not accompanied with life insurance, only when a proper allowance is made for the cost of the life insurance. ... It behooves the company as a matter of fairness both to make it plain that at the best the investment is good, only in case the form of the protection is considered, and then to render the handicap as little as possible by loading endowment and limited-payment life premiums justly". The real function of endowment insurance is not to yield a large investment return but rather to furnish a means of inculcating the saving instinct and to afford-a sure method of providing against old age or some other specific contingency by accumulating a definite sum of money within a definite time. Briefly stated, endowment insurance may be defended under proper conditions because of its usefulness in four main ways, namely:

1. As an incentive to save. The argument most generally advanced in favor of endowment insurance is that it constitutes a sure method for systematic saving in that it provides for the laying away of a moderate sum each year with a view to having all the accumulations returned in one sum at the end of a fixed period. This era is recognized as a particularly extravagant one, and vast numbers of young men, because of extravagant habits, never save a dollar although receiving good incomes. For such persons an endowment policy generally turns out to be a means of forcing thrift, since it compels them to do that which, if left entirely to their own option, would remain undone. By requiring the payment of specific sums at regular intervals during a period of years, endowment insurance enables many to save a sum worth while, without being conscious of the sacrifice, whereas haphazard methods of saving seldom achieve this result. Such a policy, "as has been said, gives a person a definite aim he must save just so much every year, and experience soon teaches that he can do it easily". It should also be emphasized that in ever so many instances the difference between the premium on an endowment policy and some other kind of contract requiring a smaller payment would not be saved were it not for the voluntarily assumed sacrifice of paying the higher rate. Endowment insurance, therefore, as it concerns those who find it difficult to save, represents a means of utilizing the by-product of their earnings the small sums otherwise wasted in needless expenditures for the accumulation of a competence. And even assuming that these small sums are not wasted, it would still be true that in probably the majority of instances, they would be invested injudiciously and would be subject to the hazard of business, or even if carefully invested would be withdrawn under the temptation of speculation or luxury.

It is also contended by many that endowment policies maturing in, say, twenty years afford to many young men, especially if they labor under the difficulty of not being able to save or keep their savings, the advantage of yielding a cash capital "at the prime of life when, ripened by years of experience, they can use it to the best advantage". Strange as it may seem many of the nation's most prominent business men, who we would think could currently use all spare funds to the best advantage in their business, have publicly emphasized this feature of endowment insurance. Only a few years ago one of the leading merchants of this country in addressing a meeting of life-insurance agents related how he had been induced to take one endowment policy after another until he carried a huge amount of this type of insurance. He explained its advantages to him as a means of compulsory thrift, of accumulating sums little by little until a large fund existed, and expressed his belief that if it had not been for the sum realized upon the maturity of his endowments he might never have erected his splendid store.

2. As a means of providing for old age. Endowment insurance, if the term is so selected as to make the policy mature at an age like 60, 65, or 70, may serve as an excellent method of accumulating a fund for support in old age. Many who oppose endowments maturing at earlier periods because of their greater cost are ardent supporters of long term endowments maturing at an age when a man's earning capacity usually ceases and when he naturally expects to retire from actual work. Statistics show that less than one man in ten succeeds in laying up a competence by the time this age is reached. Most men are therefore confronted with two contingencies: (1) an untimely death may leave their families unprotected, and (2) in case of survival until old age they may lack the means of proper support. Both of these contingencies may conveniently be provided against by a long-term endowment. If death should occur at any time during the term, the insurance proceeds revert to the family; but should the insured survive to old age, when the need of insurance for family protection has largely or altogether passed away, he will himself receive the proceeds of the fund which his prudence and foresight enabled him to accumulate, to be used for his own support and comfort.

In this connection it should be remembered that a whole-life policy, based on the American table of mortality, is an endowment at age 96, since this age according to that table is considered the extreme limit of life. At age 25 a whole-life policy is, therefore, an endowment policy for a term of seventy-one years. Now those upholding long-term endowments take the position that it is most illogical to choose age 9,6 as the age when the insured shall have completed his savings fund under the policy, and that it accords much more with the real needs of the average man to move the maturity of the contract from the ridiculous age of 96 to the more reasonable age of 60 or 65, when the need for insurance protection is usually small while the need of a fund for comfortable maintenance in old age is usually pressing. Especially, it is argued, should this change to an earlier date of maturity be provided when the difference between the premium on an ordinary life policy and that on an endowment maturing at, say, 65 is so small that its payment does not involve any appreciable sacrifice and would in all probability not have been saved except for the voluntary determination to pay the slightly higher premium. Thus at age 25, using the aforementioned rates, the premium on a forty-year endowment is $21.80 as compared with the premium of $19.00 for an ordinary life policy, or a difference of $2.80. As regards a forty-five-year endowment maturing at age 70 the difference between the two premiums charged by this company is only $1.20. In other words, the payment of this slight extra sum each year during the forty- or forty-five-year period insures the payment of the full amount of the policy in case of survival at age 60 or 70.

3. As a means of hedging against the possibility of the saving period being cut short by death. Reference has been made several times to the fact that the saving of a competence involves the time necessary to save and that life insurance affords the only known method of protecting a person against the possibility., owing to an untimely death, of not being able to accumulate the desired amount. Were it not for the uncertainty of life and the inability of most people to carry out their resolution to adhere to a definite plan of saving the accumulation of an estate could readily be accomplished by the deposit of certain sums at regular intervals. But, as we have seen, the effort to save a fixed amount is confronted by two dangers: (1) death before there has been time to save the desired amount, and (2) failure of the individual to continue his plan of saving or to keep intact what may already have been accumulated.

Endowment insurance seeks to protect the individual from both of these dangers. Thus let us assume that it is the purpose of a person aged 25 to accumulate $20,000 during the next forty years. The accomplishment of this purpose might be attempted by saving a certain amount periodically for investment in business, securities, etc., and by securing protection against the possibility of the saving period being cut short by death, through the purchase of term or whole-life insurance. But it is also clear that the result can definitely be accomplished by the purchase of a $20,000 forty-year endowment maturing at age 65. On the one hand, this policy by requiring the payment of the premium at regular intervals will tend to enforce thrift on the part of the insured, and will place accumulations beyond the danger of loss to which private investments are usually subject. On the other hand, it hedges the insured^ savings fund against premature death. In explaining the nature of an endowment policy we saw that it can be regarded as a combination of saving and decreasing term insurance. Thus in the first year of the contract when the investment portion of the contract is small the term insurance amounts to nearly $20,000, but if at a particular time the investment accumulation under this policy is $3,000 the insurance protection amounts to $17,000. When the investment portion equals $19,000 the insurance portion is for only $1,000; likewise when the accumulation of the $20,000 fund is completed and paid at age 65, the insurance portion is reduced to zero. It is thus seen that this policy assures an estate of $20,000 and protects -the insured from the chief danger death before the fund reaches the desired amount attaching to any plan of saving which is not hedged with a life-insurance policy. This function of endowment insurance has recently been presented very clearly by Mr. Albert Linton, and the following four paragraphs of his excellent address are herewith reproduced:

For the purpose of illustration, consider a $1,000 "Endowment at 65", a Forty-year Endowment, taken on the life of a young man aged 25. The purpose of this contract is to provide insurance protection during the years of active manhood and to provide support for the insured during his old age. Under this contract the beneficiary receives the face of the policy upon the death of the insured, should death occur before age 65. If the insured lives to age 65 the age when, according to statistics, more than 90 out of every 100 men are dependent he himself receives the full amount of the policy. It may be mentioned in passing that according to the experience of The Provident Life and Trust Company, 66 out of every 100 men who insure at age 25 do live to the age of 65.
The first step in our analysis is to determine what sum, payable at the beginning of each year, will accumulate at compound interest to $1,000 in 40 years. As the contract is to extend over so long a period, we assume a conservative rate of interest, say 3% percent, and find that the required sum is $11.43. In other words $11.43 paid at the beginning of each year, together with 3% percent, interest upon accumulated funds, will produce $1,000 at the end of 40 years. At the end of 10 years the accumulation will be $139, at the end of 20 years, $334, and at the end of 30 years, $611. If, therefore, the contract were merely one of compound interest an ordinary savings fund contract the amount payable should death occur within the 40 years, would be simply the accumulation of principal and interest, of which the above three amounts are examples.
Suppose, however, we devise as an accompaniment to the above, an insurance policy under which, should death occur before age 65, the amount payable will be the amount by which the accumulation of the annual payments of $11.43 falls short of $1,000. For example, in the tenth year the accumulation is $139. In the tenth year, therefore, the amount of insurance will be the difference between $1,000 and $139, that is, $861. In the twentieth year it will be $666, in the thirtieth year $389, and in the fortieth year zero. Technically speaking, therefore, the policy that we are devising is one which provides for a decreasing term insurance covering a period of forty years. Performing the actuarial computation on the basis of the American Table of Mortality, with interest at 3% percent, we find that the uniform annual premium for this policy at age 25 is $6.97.
Therefore, if we weld this insurance contract to the compound interest contract we obtain the policy which we have taken as our illustration the policy which pays the full $1,000 if the young man of 25 lives to the age of 65, or at his death, if it occurs before age 65. Adding the two premiums $11.43 and $6.97, we obtain $18.40, the exact American 3% percent, net premium at age 25 for a forty-year endowment. We have thus, by employing the simple conception of a savings fund and of an insurance policy which pays certain stipulated amounts should death occur within a given period of years, constructed the ordinary endowment policy and computed the premium therefor. We have learned that in paying an endowment premium, a part of that premium builds up a fund which will mature the policy at the expiration of the endowment period, and another portion of the premium provides for insurance sufficient to make up the amount by which the accumulated fund falls short of the full face of the policy, if death occurs before the fund is complete.

4. As a means of accumulating a fund for specific purposes. The special purposes which endowment insurance may be made to serve are exceedingly numerous, as a few illustrations will indicate. Thus, the credit and successful operation of many business firms desiring to negotiate a bond issue may be dependent chiefly upon the life of one man whose unexpected death may so endanger the success of the business as to preclude the redemption of the bonds upon maturity. But this contingency we have seen (Life Insurance as Security for Bond Issues) may be averted if the head of the business insures his life for an amount equal to the bond issue under an endowment policy which will become payable at the same time that the bonds mature. In the event of death the firm receives the face of the policy and may either redeem the bonds if that is possible and desirable, or may set aside such an amount of the policy proceeds as will, with interest, amount to the face of the bond issue at the time of maturity and use the balance for the development of the business. In case of survival the endowment policy will have resulted in the accumulation of a sinking fund year by year which will be just sufficient to redeem the bonds. The same principle might also be applied to the liquidation of a mortgage on a home. Furthermore, endowment insurance may be used in various ways by an employer as a means of binding his employees to himself and thus increasing the efficiency and loyalty of his working force. (Life Insurance as Security for Bond Issues). We have also seen that endowment insurance lends itself admirably to the accumulation of a fund for the benefit of such institutions as colleges, churches, hospitals, etc. ( The Insurance of Employees for the Benefit of Their Families)

But in addition to such business uses, endowment policies may often serve some special family purpose, especially as regards the making of proper and certain provision for starting children in life. It is to accomplish this purpose in the most convenient manner for parents or guardians that companies issue the various forms of "children's endowments" already enumerated. By means of such policies small savings, which would otherwise probably be wasted, may be accumulated into a fund to be used for educational purposes, or to start a son in business, or to provide a daughter with a dowry in case of marriage.

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