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value." All policies except term is going to get when you die. $700. And that $700 is your net add a savings element that in- But not all policies provide protection from the policy. creases the premium but not the the same amount of protection in For term insurance, the net benefit. The one common ele- terms of the risk the insurance protection is the same as the face ment in all policies, irrespective company bears. If your policy amount, and the actual cost os of label and price tag, is the face has a cash value, the company's the premium for that year. But amount. For each $1,000 of face risk is less than the face amount. for insurance with a cash value, amount, whether you buy yearly If your $1,000 policy has a $300 the actual cost must be calculat renewable term or 20-payment cash value, for example, the ed. My method is to add to the life, $ 1,000 is all your beneficiary company's “net risk” is only premium an allowance for the

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interest that the policyholder is have advocated decreasing term, want if you impress on him that forgoing on his policy's cash term to age 65, five-year renew- you know these basic facts: value. Thus, the actual cost of able term, and yearly renewable (The mortality cost for your the policy rises year by year, just term. I have used five-year re- present age must be paid, whatas it does for yearly renewable newable term in my calcula- ever kind of policy you choose. term. But the net protection pro- tions, on the theory that its pre- (You can't avoid this ever-invided by the cash-value policy is miums remain stable for five creasing cost by buying a "levelsteadily shrinking, so that the ac- years at a stretch, yet it gives you premium" policy. All you'll do is tual cost per $1,000 of protection flexibility in readjusting the face pay now a part of the higher rises faster than it does for term. amount of the policy to your cur- rates you'd otherwise pay later. (For calculations covering two rent needs. As you choose, you Cash value is an unnecessary sample policies, turn the page.) can keep all your coverage or expense. It isn't added to the

The greatest advantage drop any part or all of it at each amount your policy will pay at claimed for cash-value life insur- renewal date.

your death. In terms of net risk, it ance turns out to be illusory, Easy though it is to shop for is subtracted from your estate. then: Though the pre um re- term insurance, it is astonishing- (Renewable or decreasing mains the same year after year, ly difficult to buy term. Again, term insurance, in which the enthe actual cost rises steadily. And my own unhappy experience is tire premium goes for coverage, only by complex calculations can that patients, relatives, and is the best buy at any age. you determine what a cash-value friends in the insurance business TYou know your own insurpolicy's cost truly is. Pricing are eager to “save money" for ance requirements better than term is, by contrast, easy.° The

me by urging the purchase of any agent or computer, and, as a premium you pay is the cost.

high-priced coverages. The best physician, you know the state of The only problem is to sort out way to get term at a good price, your health better than any unthe right kind of term for your re- I've found, is from a stranger. derwriting department. quirements. Various authorities Simply tell him you want term at

Armed with these facts, you • Assuming you buy level term. Decreasing term

the best price, and ask him to ought to be in a position to costs are harder to compare, bet ause the rate a show you comparative rates. make a good insurance decision

Chances are you'll get what you on your own. O

which protection decreases may vary from company to company

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“The work of science is to substitute facts for appear. ances and demonstrations for impressions"

Motto- The Society of Actuaries

LIFE INSURANCE DIVIDENDS FROM THE

BUYER'S POINT OF VIEW

By Frank S. J. McIntosh

The American public is, in varying degrees, becoming * nation of more astute buyers. The size of the bite from our confiscatory tax structure is, in a large measure, furcing our citizens to make more intelligent decisions in the market place. Competitive merchandising and increased product knowledge are also enhancing the trend,

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There are areas, nevertheless, where this proclivity does not exist. The late President, John F. Kennedy, summarized it as follows: "The consumer typically cannot know whether drug preparations meet minimum staniards of safety. quality, and efficacy. He usually does not know how much he pays for consumer credit; whether one prepared food has more nutritional value than another; whether the large economy size' is really a bargain."

The lack of consumer knowledge, however, is perhaps nowhere more prevalent than in the purchase of life insurance In many cases the premium price tax is quite mean. origless, and since next to food, clothing and shelter, few things are more urgent than the protection of a famiiy from the disasterous rexults of a premature death, this presents a social and economic problem of major inportance.

There over fifteen hundred conipanies currently engaged in the sale of life insurance. They range in size from the very small company, which has recently opened its doors, to the giant multibillion dollar organizations some of which have been in business & century or longer. In any case each falls, regardless of age or size, into one of two categories. There are the stock companies, owned and controlled by the stockholders, and the mutual compaties, owned and cuntrulled (in theory at least) by the policyhollers. The latter, in most cases, charge substantially higher premiums than do the stock companies, and they justify this overpricing by projecting eventual reimburse. ments called dividends. The word dividend as used here, however, is a misnomer. It conveys to the uninformed buyer the impression of profits whereas, in reality, it is solely the refund of an overcharge. Both the Internal Revenue Service and the US Supreme Court concur on this point and have ruled accordingly.

Does the purchase of these overpriced policies constitute a sound financial transaction? The question has long been vigorously debated in insurance círcles, but when giver adequate study and honest evaluation, the answer is, almost without exception, an unqualified NO!!!

This statement will bring forth bitter denunciation from the proponents of mutual life insurance, but the following irrefutable facts provide ample proof that it is undeniably true.

First let's consider the basic operational concept of the two types of companies. The mutual version can possibly best be demonstrated by a typical sales presentation

"Mr. Prospective Buyer: I represent the Mutual Life return of $82.00 is now projected, BUT ONLY AFTFE TW MUTUAL COMPANY HAS APPROPRIATED OWN USE, OVER $1,000.00 IN EXCESS PREVIEWS the end of ten (10) years the total overcharge ** $5.230.00, but the predicted return, even if pada* basis, amounts to only $3.159.00_ *hkh leaves the pan. holder with a defieit in excees of $2,000.00. A forte sa of this chart shows that it is not until the beginne 13th policy year that a break-even point ocrura ever, (see column 5) the mutual compary ta. premium loading and interest earnings, acquired $4,000.00 which should, and would, belong to the prin yet had he purchased the guaranteed cost" polky a tube femst place.

Insurance Company. We are only in business to serve you. The policyholders own the company, and as we have no stockholders to take the profits, the money not needed to pay claims and operational expenses is returned in the form of dividends. This means that the policyholder-owners get their insurance at cost. An illustration on the Ordinary Life plan, at your age 35, will show you what I mean. An premium (per thousand)

$ 24.13 Total premium ---20 years.....

482.60 Projected dividends--20 years

123.30 Net payments (prems. minus div'ds)

359.30 Cash value

366.00 20th year profit

6.70 Termination div'dg after 20 years.

11.30 Total net profit

18.00 Average net profit......

.90 *Thus, you see you can carry this insurance for 20 years and come out ahead on the deal. Expenses and claims will probably vary somewhat, so we cannot guarantee that diviciends will amount to exactly $123.30, or that you will realize a definite gain of $18.00 but should the current dividend scale prevail, this would be the case."

In contrast, the "guaranteed cost" concept can be shown as follows:

Annual premium (per thousand)
Total premium - 20 years
(ash value
Net cost
Average net cost

$18.90
378.00
339.80
39.20
1.96

This is basic and easy to understand, hut there is a slight cost involved whereas the mutual agent projects a hypothetical profit. Viewed in this light, the uninformed buyer naturally leans toward, what he assumes to be, the lower cost participating (par) policy The mutual cost illustration, however, is predicated on only a portion of the relevant facts and is therefore, incomplete Being incom plete, it is inaceurate, and being inaccurate it is certainly mislearling Analy shows the cost differential to be more fictional than factual

In support of this statement, consider the following First, the most obvious differerce in the two policies is the pre nun).

The "par" fairy require 2013 per thouvard and the "non-par" only $I$**0. The $5.23 extra premium leading totals over $100 00 for the 20 year projection period

Secondly, an interest factor on the premium differential is mandat ry The buyer who is smart enough to retais, this overcharge in his possession certainly will riot be foolish eneugh to hide it under the matters or a brick in the fireplace a. this wule rullify the investment putential The $3.23 invested at t has a 20th year value of $161 97. at 6, 20393 With interest corslered in this proper per. *pretive, the $123 in pregled vided tod to tw. die in value The basic principle, mureuter, is ret mitigater should the dollar differentia: be applied mure advantageously to decrease bank loans, or ta accelerate (ar or home payments etc., thus affecting ustantial interest saving* Fuente uld the money be used to enharce the fami'y's standard of living. it must be conceded that the premium differential has a definite and measurable wurth.

In the third place, a "marrin for safety" is necessary Mit state laws require agents to triform prospective buyers that divine prone toks are reither "guarantees" nur "Cti mates" of future results Nevertheless, this does not prevent them from presenting cost illustrations which, when calcu

This cost differential is amplified to an even eat" degree when consideration is given to the tax facter. I our present tax system a man in the 30" bracket ir to earn 82.00 in order to have $1.00 of perta. ** This taxpayer then, as a policyholder, Bust an **** each year in order to meet the $12.00 gyereka ke ** demanded by the mutual company and this are sizable $20,920.00 in "required earnings" sver the period. "Required earnings" and rot "take a however, is certainly a more realistic appt

att lem. This is one of the economie facts ? life war to live with, and it could be compensated for *** by adjusting the premium differentia! te euro intiividual tax bracket. (In this case, $1 646 0 ks $523.00).

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Chart A illustrates the exceVe

pre accumulated at 49, which would be elected by the *. Company with a corresponding loss to T* should the face value of the policy be paid to the bedroom as a death claim.

CHART A

POLICY COST COMPARISON

ISSUE AGE 35, POLICY ORDINARY LIFE, AMT

PREMIUM

IA B

COMPANY Mutual Life Insurarce Co Guarantee Life Insurance Co

GROSS PREMIUM DIFFERENTIALS

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COA Drvidend Premium Projected With 20- PE Yeer Differential Dividends Setety Fotter Drei 1 $5230

$ 2 S523.00

62 3

$52300 4 $523 00 5 $523 00 3! 6 $523.00 7 $523 00 8 S523.00 9 $533 00 10 $523.00

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lated to the last penny, provide a significant aura of validity. For this reason the law should also demand that prospective buyers be apprised of past discrepancies between projected dividends and those actually paid. To cite a few – from 1932 to 1952 twenty leading companies missed their projec. tions on the Ordinary Life plan, age 35, by an average of 35%. In 1951 a company, now listed among the leaders in low net cost, projected a dividend of $23.00 and paid $5.17 - a 345% error. From 1946 to 1951, one of the largest mutual companies projected a dividend of $52.31 and actually paid $4.58-an error of 1,042%. From 1932 to 1952, thirteen major participating companies paid an average of $3.83 on their projected $17.50. Another leading company, in 1960, paid 92.70% on the Ordinary Life plan; 67.18 on 20 Pay Life and only 38.46% on 20 Year Endowments. On numerous occasions companies have suspended dividend payments entirely. The list is endless, but when failures of such magnitude have occurred in some of the most affluent years of our entire economic history, it provides--if negativelyan unprecedented endorsement of the "guaranteed cost" principle in life insurance. The full impact of these errors in dividend forecasting, however, cannot be fully comprehended until it is realized that these lamentable discrepancies are computed without regard for the important interest factor on the premium overpayments.

All companies allow substantial margins for contin. gencies in their own operation, and one would think that an equivalent "safety factor" would be incorporated in the "net cost" illustrations presented to potential buyers. To our knowledge, however, this has never been done. It there. fore becomes essential for the buyer to provide his own margin for safety. The exact percentage, of course, is arbitrary, but here, after a detailed study of dividend payments made over the past half century, a very conservative 204 is used. Should the reader, after an appraisal of past dividend histories, consider this percentage inadequate he is, of course, at liberty to choose one of more realistie proportions.

With these facts in mind, and for additional clarity and understanding, let's compare the policies, in chart form, on a year by year basis. A $100,000.00 policy is purposely selected to emphasize the substantial variation in cont. Also, it, an attempt to avoid any possible charge of discriminat the "par" policy is a composite average of the rates and values obtained from the ten largest mutual companies, and the "non par" policy was formulated in exactly the same manner from the ten leading stock companies. As over two-thirds of all the life insurance in force today is under the Jurisdiction of these twenty companies, the analysis could hardly be more authoritative.

At this point your attention should be called to an error which is incorporated in all mutial coat illustration Premium payments and dividend returns are not simul taneous transactions as universally shown The primum is a'uay, paid at the beginning of the policy year, and tiruendis, if any, are decared and paid for credited) at the end of the policy year This time lag has a direct and substantial bearing on the interest earnings of the premium differential and, from an aer unting tandprome, can only be shown by recording the dividend return as being maite at the beginning of each subsequent policy year Thi procedure is used in the following cost illustrations.

$523 CO
12 $523 CC
13 $523 00
14 $523.00

99.00
15 $523 00
16 $523 00 $ 32
17 $523.00 $ 99.4

$S2300 $ 9313
$S23 00

$782
20 $323 00 $1.024 Cw
120: $

$1.071 CO $957
(All figures taken to the nearest dollar)
* Adjustment for a 50 tax factor.

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In Chart A, for instance, a $723.00 verpayment is re. quirert with the initial premium. Non dividend is returned A second premium with a $723.00 uvercharge is exacted at the beginning of the second policy year. A token premium

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