Fraternity-Testvériség, 1970 (48. évfolyam, 1-12. szám)

1970-07-01 / 7-9. szám

László Eszenyi:

INSURANCE COUNSELLING

The other day one of our members wrote a letter in which she somewhat indignantly pointed to the fact that she will pay more in dues for her $10,000 10 Year Endowment certificate than what she will be able to collect at the date of maturity. She also mentioned that the premium paid along the years would yield a higher return if she would invest the same amount elsewhere.

We feel that she is not alone among our members who has a confused concept about the real nature of life insurance, therefore, we answer her letter publicly to secure a clearer understanding of the issue.

Every life insurance contract — with the sole exception of term policies — is a package deal which offers PROTECTION and SAVINGS to the Insured. In other words, the different life insurance policies may be viewed as different combinations of protection and savings and the prorated price paid for the two services change according to the kind of contract. In the case of a whole (or straight) life insurance a much higher percentage of the premium goes for the protection because the savings element is represented by the cash surrender value only. The larger part of the premium paid for an endowment policy feeds the savings element to build up enough reserve to pay face value on the date of maturity.

In order to establish the price of the protection in any insurance contract we must make an assumption about the age of the Insured, the plan and face value of the insurance and the rate of return Insured would earn if premium paid were invested elsewhere with safety comparable to that found in a life insurance.

Let’s assume that a 35 year old member takes $10,000 Ten Year Endowment insurance with our Federation. He shall pay $955.38 annually which amount includes also dues for waiver of premium rider.

Safety comparable to that found in life insurance is offered in Savings certificates, and perhaps in bonds but certainly not in stocks. The latest market fluctuations make it unnecessary to prove this statement with too many words.

Nationwide survey shows that average interest paid by savings institutions on demand deposit is 5%% compounded quarterly. If above mentioned member religiously deposits $955.38 on a savings account every

year, leaves interest earned with the institution and never withdraws any money in case of emergency, he will accumulate $13,061.19 at the end of the tenth year.

His endowment policy will pay $10,000 only, that is $3,061.19 less than the amount accumulated on his savings account. This is the price he has to pay for the protection element in his endowment contract. Since the coverage was in force for 120 months the monthly price of his protection was $25.50 per $10,000, or a mere $2.25 per $1,000. What is he getting for that price?

The first and most important feature is that through his life insurance he established an instant estate. Should he die one day after the date of issue of his insurance contract, his beneficiaries would receive $10,000 while on his savings account there will be only the initial deposit of $955.38;

If he is totally and permanently disabled but lives, premium payment on his certificate will be assumed by the Federation and his insurance will remain in force;

In case of emergency he may take a loan against his certificate as sole security at 5% interest and the requested amount up to the cash value of his certificate will be sent to him within 24 hours without asking em- barassing questions. Taking out a part of the savings, on the other hand, would adversely affect the final amount on his account depending on the amount withdrawn and the period of time used;

Interest earned on savings deposits are automatically reported to the IRS and taxed according to the income bracket of the individual. It is not the case with endowment policies. This factor alone may, very seriously affect the end-result of the savings procedure.

We freely admit that winding up with $13,061.18 instead of the $10,000 offered by the endowment policy is a very tempting proposition. Before falling however for this version of “get rich quick” idea one should seriously consider the fact that the instant security of the family is jeopardized which is a very dear price to pay for the eventual higher earnings. One also loses all the valuable services which a life contract offers all along the ten long years.

Answering the question raised by our member we can safely state that endowment policies are not obsolete and a comparison with other savings methods should be carefully made taking into consideration all the facts and circumstances mentioned in this short article.

In planning family estate we would recommend to take an endowment insurance policy first, purchase a residence next, and only after securing these two safest savings opportunities of a medium income family look for other methods such as savings accounts, bonds or stocks.

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