Life Insurance Savings Research Articles

Life insurance and income growth: the case of Sweden 1830–1950

In this paper we provide an analysis of the life insurance market in Sweden from the early nineteenth century to the mid-twentieth century. We consider determinants put forward in the financial history literature to explain the growth of life insurance. The paper shows that income elasticity of demand gives a fairly good approximation of the development in the twentieth century, while the development of risk and insurance innovation among other things need to be taken into account to explain the growth of life insurance in the nineteenth century. The price of life insurance, measured as the overhead-to-premium-income ratio, remained fairly constant during the second half of the nineteenth century, while the risk, as indicated in terms of crude mortality rates and its volatility, did decline. This probably improved the return on life insurance savings and further helped the entry of new firms. The average premium size was reduced to enable the diffusion of life insurance to workers.

Life Insurance Savings and the After-Tax Life Insurance Rate of Return

This paper presents a calculation of the time series of the after-tax rate of return to whole life insurancy. When compared to the after-tax return on an alternative portfolio of similar risk, more than 60%of the decline in life insurance savings (suitably defined) in the past two decades can be attributed to a widening after-tax rate of return differen-tial.Both the existence and importance of this result depend on the characteristics of life insurance savings. Life insurance saving is intimately connected to life insurance coverage and therefore is long-term and quasi-contractual in nature. Furthermore (and, in part, because of the above characteristics), the interest earned on the fixed income portfolio of life insurance intermediaries has been taxed under a special set of rules. From 1958 to 1981,these rules have taken the rather complicated form of the Menge formula. This formula is very sensitive to changes in nominal interest rate levels and in particular, during inflationary periods it acts so as to dramatically increase the tax burden of life insurancesavings.Life insurance savings is therefore an example of the non-neutrality of monetary policy. This is important for studies of flow of funds and capital accumulation using the historical record.

Proposals to Tax Life Insurance Savings as Personal Income

Abstract. Proposals to tax the realized net increment built up in life insurance policies amount to suggestions that we tax rewards to suppliers of capital. As tax policy it would tend to discourage capital accumulation. Many types of income and of capital gains are not taxed as a matter of social policy. Taxing the “inside buildup” would obstruct the building up of a capital base for the family and the economy. Economists recognize that there are alternatives, e.g., a consumption based tax. In a time of great need for capital, a time of capital shortage, this tax policy would be retrogressive.

Three Views of Life Insurance

The notion that level premium life insurance consists of increasing savings and decreasing protection has become so universally accepted that it is rarely questioned. Opinion about the relative merits of life insurance is likely to influence only the way the idea is used. Critics are likely to emphasize the low rate of return on life insurance savings relative to other investments. Advocates are likely to emphasize the favorable tax treatment given life insurance savings and the benefits of establishing a regular program of thrift. Savings accumulations are a critical component of a widely used life insurance cost measure, the interest adjusted surrender cost index. The belief that the contract has two separable parts is so widely held partly because of its strong rooting in tradition. In an early life insurance text, S.S. Huebner refers to

Modeling Life Insurance Savings: Some Methodological Issues

This paper is concerned with problems in modeling life insurance savings flows. Specifically, the paper focuses on: (1) the relationship between savings flows and inflationary anticipations, (2) the appropriate measure of inflationary anticipations, (3) stability of estimated relationships overtime, and (4) the use of the Almon method of estimating distributed lag models. No consistent relationship appears to exist between short-term anticipated inflation and savings flows, and savings equations estimated for the 1960s and early 1970s differ significantly from those using data from the 1950s. Further work is needed on modeling life insurance savings flows, specifically on the definition of the savings variable, time period of estimation, and form of the distributed lag process. This study is concerned with several issues and problems encountered by previous attempts to estimate a time series model of savings flows through the life insurance sector in the presence of inflationary anticipations. The discussion is based on a standard model utilized in previous work, but focuses on issues that have not been given adequate treatment in the past. Specifically, the paper is concerned with the following issues: (1) the degree to which savings flows are influenced by inflationary anticipations, (2) the appropriate measure of inflationary anticipations, (3) structural stability or instability,of the estimated savings model over long periods of time, and (4) the appropriateness of the Almon method of estimating distributed lag models of life insurance savings. The latter two issues are discussed primarily in the context of life insurance savings flows; however, they have much broader implications and deal with general problems encountered in any econometric estimation using time series data and distributed lag relationships. Thomas F. Cargill is Professor of Economics at the University of Nevada, Reno. Dr. Cargill has published numerous papers in professional journals dealing with monetary economics and applied econometrics. He is the author of Money, the Financial System, and Monetary Policy published in 1979 by Prentice-Hall, Inc. Dr. Terrie E. Troxel is Director of Research, the National Association of Independent Insurers. He holds the CPCU and the CLU designations. Prior to his current position he was on the staff of the American Institute for Property and Liability Underwriters. He is coauthor of Property-Liability Insurance Accounting and Finance published in 1978 by the American Institute for Property and Liability Underwriters. He was chairman of the 1979 Risk Theory Seminar of the American Risk and Insurance Association. The authors express appreciation to members of the 1977 Risk Theory Seminar for helpful comments on an earlier version of this paper and to the anonymous referees for their constructive suggestions.

The Investment Research Program of the Life Insurance Association of America

The life insurance companies are today, and have been historically, one of the principal financial institutions in the United States, along with the commercial banks, the savings and loan associations, the mutual savings banks, and the corporate pension funds. The volume of new savings accumulated by the public through life companies now exceeds $6 billion per annum, and the gross cash flow through life companies for long-term investment (taking account not only of new savings but also repayments on outstanding invested assets and sales of existing assets) amounts to about $15 billion per year. The total savings accumulated through life insurance over the years amounts to $132 billion, the largest aggregate of savings in any single form in the United States. The following figures will serve to illustrate the importance of life insurance savings in financing the nation's economic growth. During the period 1948-1962, inclusive, American business and industrial corporations increased their bonded indebtedness by $68 billion. Of this total, the life insurance companies added $34 billion to their holdings, or 50 per cent of the total. In addition, during the same period the net increase in outstanding mortgage debt on business and industrial

Life Insurance Savings in Canada

Modern macro-economic analysis has emphasized the role of saving and investment in economic fluctuations. As the totals of saving and investment are important, so are their components; for the more that is known about the components the more meaningful are the aggregates. Life insurance savings merit investigation for at least two reasons. In the first place, they constitute an important medium through which personal savings are effected. In Canada from 1926 to 1948, except for the war years, 39.0 per cent of total net personal savings were realized through the purchase of life insurance.This voluminous flow of savings has produced an accumulation of investment assets which has attracted the attention of economists concerned with trends in the supply of equity capital and the stimulation of depression period investment. Since the rate of return expected on insurance investments is important in determining premiums, the investment practices of the insurance companies have a bearing upon the welfare of millions of Canadians. This concern of the economists about insurance investments is the basis of a second reason for examining insurance savings. In the various proposals involving insurance investment it appears that the savings side of the question has been too little emphasized. In the case of an investment intermediary, investment policy cannot be considered totally apart from the demand for the institution's product; the institution's demand for investment outlets is a derived demand.

Life Company Investments and the Capital Markets

Abstract 1. Savings made through life insurance are at this time the most common by far of all types of individual savings. Life insurance accumulations at the present time account for something around one-fourth of the total savings of individuals.2. Savings made through life insurance are a very stable form of savings, varying less with business conditions than other forms of monetary savings.3. At the present time, life insurance savings form by far the most important source of capital which seeks mainly a secure rate of return and safety of principal, rather than tax exemption or chance for capital appreciation. Traditionally they have been invested very largely in evidences of long term debt.4. In the decade prior to the war, life company funds seemed to be outgrowing traditional investment outlets.5. However, at the present time this trend seems to be in reverse, with investment outlets, even in traditional form, becoming rather plentiful. With declining savings, higher prices, and a huge real capital demand both here and abroad, we seem to have entered a period of real capital scarcity.6. The main new outlet developed in recent years for life insurance funds has been direct investment in real estate, both housing and commercial.7. The tendency for life insurance companies to invest largely in debt media may create a problem from the point of view of some industries which should be financed largely through equities.

Life Company Investments and the Capital Markets

Abstract 1. Savings made through life insurance are at this time the most common by far of all types of individual savings. Life insurance accumulations at the present time account for something around one-fourth of the total savings of individuals.2. Savings made through life insurance are a very stable form of savings, varying less with business conditions than other forms of monetary savings.3. At the present time, life insurance savings form by far the most important source of capital which seeks mainly a secure rate of return and safety of principal, rather than tax exemption or chance for capital appreciation. Traditionally they have been invested very largely in evidences of long term debt.4. In the decade prior to the war, life company funds seemed to be outgrowing traditional investment outlets.5. However, at the present time this trend seems to be in reverse, with investment outlets, even in traditional form, becoming rather plentiful. With declining savings, higher prices, and a huge real capital demand both here and abroad, we seem to have entered a period of real capital scarcity.6. The main new outlet developed in recent years for life insurance funds has been direct investment in real estate, both housing and commercial.7. The tendency for life insurance companies to invest largely in debt media may create a problem from the point of view of some industries which should be financed largely through equities.