Life Insurance Saving of American Families

Abstract

LN I935 and I936 American families paid out each year about 2.8 billion dollars for net life insurance premiums. In estimating the saving of American families for I935-36, the National Resources Committee 1 assumed that ioo per cent of such premiums constitute saving. Dr. Rufus S. Tucker has criticized this assumption,2 stating that it is not correct since part of the payments go to cover current protection and costs of collection and administration. After consultation with insurance experts, Tucker estimated that instead of ioo per cent, the proportion of such premiums that add to saving was 67 per cent in the case of families with incomes over $2500 a year, 62'2 per cent in the case of families with incomes between $I500 and $2500, and 6o per cent in the case of poorer families. It is true that of the 2.8 billion dollars paid for net premiums about i.o billion went to pay death losses in excess of reserves and to cover other costs. However, Tucker neglected to take account of interest credited to policy-holders during this period which amounted to about 0.7 billion dollars. The increase of assets of the policy-holders was then 2.5 billion dollars, or nearly 90 per cent of net premium payments to the insurance companies. This percentage is closer to that assumed by the N. R. C. than to that assumed by Tucker, which averaged about 6 I per cent. On the other hand, as Tucker pointed out in a letter to the author, if insurance interest is included in saving (as it certainly should be), it should presumably be included in income; 3 and this the N. R. C. failed to do. However, the omission of this item from income of individuals makes a difference of only i per cent, whereas its omission from saving makes a difference of about iO per cent. The proportion of a given insurance premium that constitutes saving depends, of course, upon the type of policy, the age of the insured at issue, the age of the policy, the interest rate, and also upon the Company. For any particular case the proportion is simply the ratio of the increase in cash value, as given in the policy, to the net annual premium. I am indebted to B. F. Blair, Actuarial Assistant to the Provident Mutual Life Insurance Company, for the following figures for the ratio of increase in cash value during 1936 to net annual premium, for policies issued 5, io, and 20 years previously to men 25, 35, and 45 years old: