Planning One's Life Insurance

This department is designed to help readers to a better understanding of the general business conditions which affect their investments. It is obviously impossible to give advice as to specific investments.


IN these columns last month it was shown how a thousand thirty-year-old husbands could provide their potential widows with thousand-dollar estates by depositing a maximum of $26.64 a year for each husband-year of living yet to be done. This would be the cost should the dues be paid in gold, locked up in London, and drawn upon in thousand-dollar installments as wives became widows. In reality it would cost only about two thirds as much as this, for the reason that the unexpended balance always in the treasury would not be locked up in London, but would be put to work and the interest used to reduce the annual payments.

Basically insurance is an arrangement whereby an individual member of a group may project his earning power beyond his power to earn. How much of his power he will project, how far he will project it, or to what end, are of his own election. What he does about the matter constitutes his insurance plan.

Two reasons exist for a sound person’s not buying life insurance: the first is that he already has enough, and the second that he cannot pay for more. Any other reason only approaches validity and may sometimes prove to be disconcerting, as was the case with a wife of my acquaintance. She had advanced, with some show of heat, all the arguments she could muster why her husband should not take out more life insurance and make her the beneficiary. These he answered patiently one by one until she, finally cornered, retorted: ’Well, even if you were to die, I would soon marry again.’ Whereupon he replied: ’I don’t see how the proceeds of a good fat life-insurance policy would injure your prospects.’

But even if a husband has no opposition to overcome, or has overcome it, he still faces the problem of shaping his insurance programme to fit his circumstances. His individual ease is a phase of the far more general question of how life insurance can be employed to meet the needs of the millions of its purchasers and how it can be arranged so that each buyer may pay according to his ability and be repaid according to his needs. Insurance companies cannot, of course, draw up as many different contracts as there are different prospective buyers. And it is equally impossible for them to bend the affairs of every potential policyholder into conformity with the provisions of one general agreement.

The companies have met this problem by developing a basic contract to meet the demands of the maximum number of cases and introducing into this enough options to make it adjustable to most variants. This general framework is the straight life policy whereunder the purchaser may pay equal annual premiums as long as he lives and leave a lump-sum estate when he dies. The provision of this type of policy which gives it such wide applicability is that it stretches the installments out over the maximum period of time, — namely, the whole lifetime,—and thus reduces each payment, to a minimum amount. Options make this contract supple. A sorely pressed present may be relieved thus of some measure of burden.

In order to demonstrate how straight life insurance max be employed to effectuate a plan, let us be concrete and take the ease of Jones, a young fellow who got married early and at twenty-eight finds himself possessed of one wile, two children, four and six. and a $2500 job. Out of this income he must provide food, clothing, and shelter currently. Naturally he hopes to improve his situation and provide more. He feels keenly on the matter of formal education and aims to give his children a better opportunity than he himself enjoyed. He finds that by frugality and careful planning he can keep his expenses, including the payments on his home, within $2200. He is debating with himself the question of what he shall do with his $300 working margin. If all goes well and he holds his job he can maintain his family’s standard of living and probably improve it. But this is all in the lap of the gods. Anxiety beclouds hope. To insure or not to insure is the question.

He sits down with pencil and paper and makes two simple mathematical computations. The first one runs thus: Income $2500, outgo $2200, working margin $300. Since the amount of the working margin is equal approximately to one seventh of annual expenses, the margin will project the standard of living one seventh of one year beyond the cessation of the earning power which produces it. The answer to this first calculation is the ever-present possibility of some form of dependency or semidependency. The second problem is after this fashion: Income, outgo, standard of living, and working margin remain the same, but a new factor is introduced which modifies the result profoundly. Two hundred and fifty-four dollars of the $300 working margin will buy a $15,000 lump-sum estate, which, left with the insurance company to be paid out monthly. 3½ per cent interest on balance, will project the accustomed standard of living about seven years beyond the cessation of Jones’s power to produce it. The answer to this second problem is a considerable period of independence for the family and ample opportunity for it to readjust itself to its new manner of life. He, working alone and with all of each year’s margin, can project the standard of living very gradually, one seven I h of a year at a time. But working with the aid of insurance, and with only a part of each year’s margin, he can extend the standard instantaneously nearly fifty times that far. He eyes these answers and realizes anew how much strength there is in union.

Jones prospers somewhat beyond the expectation of his more sophisticated neighbors and causes a little arching of the eyebrows now and then when he happens to speak of the time when his children will be in college. At thirty-one he has raised his earning power to $3600 and somehow fhe story has leaked out. But it does not leak out that he has raised his expenses to only $2700, thus broadening his working margin from $300 to $900. He again turns to insurance and perfects a plan which tints the future with more hope.

He juggles a few dates and finds that during the first two years and the last two of a college period extending over six years he will have one child in college, and that during the middle two he will have two there. Now this is a problem. If he knew he was going to live, he could solve it; if he knew he was going to die, he could. He will do one or the other, of course, but, since he does not know which, he must make his plans to meet both possibilities. From the standpoint of his family, one plan is no less important than the other.

As a first step he retains the protection of his standard of living by not disturbing his $15,000 of straight life insurance. To guard this is his first responsibility. Next he buys an additional $8000, in the form of four $1000 and two $2000 policies, as a protection for eight years of college training for his children. The $146 premiums on these, together with the $254 he is already paying, increase his insurance load to $400 a year and leave his working margin at $500. The latter amount is available for shaping his affairs if he lives. He buys from his insurance company $5365 for future delivery nine years hence and pays for it with nine $500’s and interest at 3½ per cent, the last payment being made prior to the time when his older child will enter college.

His affairs are now arranged with nicety; his house is in order. He has employed his insurance company to do that which it can do and he cannot — namely, protect his standard of living and the college education of his children. He himself has undertaken that which he can do and his insurance company cannot — namely, execution of his plan.

At forty he is alive and awaits fulfillment. He collects his $5365 according to prearrangement and establishes a college fund. Out of this he pays in advance the entire cost of his elder child’s first year. This year, now paid for, needs no further protection. He therefore drops $1000 insurance, bought at thirty-one, collects a $77 cash surrender value, and kills an $18 premium. With these two amounts and his regular $500 working margin he replenishes his educational fund, building it up to $4960 and whatever interest it may have earned on its own account. At the beginning of each succeeding year he drops as many thousands of insurance as he pays thousands of college expenses.

Here is a slow-motion picture of his affairs during the six-year college span of his two children, who will use up eight years of instruction: —

College Paid in Advance College Paid in Advance
Prior to first year $0,000 $8,000
First year (1 child ) 1,000 7,000
Second year (1 child ) 1,000 6,000
Third year (2 children) 2,000 4,000
Fourth year (2 children) 2,000 2,000
Fifth year (1 child) 1,000 1,000
Sixth year (1 child ) 1,000 0,000

On his forty-seventh birthday he takes an inventory of his assets and accomplishments. He finds himself still possessed of one, and the same, wife, two children, now grown and with college degrees, a home free of debt, and a balance of $1768 in his educational fund. To all this he can add $146 which he no longer has to pay out for the protection of college education; also what he has been paying on his home and his accustomed $500 of working margin.

He is now prepared to enter the second lap of life, and for a third time can turn to insurance. But this is another theme.