If we go beyond the point of death in our consideration of investment strategies, and we will shortly see that we must do this unless we care not at all what becomes of our money once we are dead and thus there is no invest­ment as good as insurance. This is so because a person can purchase $10,000 worth of life insurance (or any amount) pay just one premium of $58 on the $10,000 policy and then drop dead with the result that the insurance company will pay $10,000. There is no other investment in the world that compares in yield with this.

The last 50 years have seen a substantial increase in awareness of the problems caused by dying too soon, living too long and/or becoming disabled. More and more men are seeking methods of assuring that their wives and children will be taken care of adequately in the event of a catastrophe. Life insurance plays an enormous role in creating an estate which will be sufficient to help the widow to raise and educate her children and to have an income for herself when the children are grown so that she can maintain her own independence. Further, life insurance has become very important as a means of conserving the sub­stantial estate in this age of high estate and inheritance taxes.

But now let us look at insurance from the point of view of an investment for the individual. What does insurance offer him? What kind of return can he personally get from the different kinds of coverages offered? What kind of a policy can we realize the best return without having to die in order to get it?

When looking at life insurance for investment strategies,while there are innumerable kinds of life insurance available, life insurance can generally be simplified into two types: those that insure against death only and those that not only insure against death but make a provision for savings in addition to insuring. The first type is called term insurance. It pays off only in the event of death. While it is worth nothing to the individual himself, since he never gets his hands on any of the money that went to pay the premiums, it does generally provide the maximum death benefits per dollar of premiums at the younger ages. Its sole purpose is to insure against death. As its name implies, it is written for a term—1, 5, 10, 20, 25 or 30 years—and if the term expires before the insured dies, that is that. There are no more premiums due and he gets nothing from the insurance company except the right to renew the policy for a longer term and/or the right to convert the policy to permanent insurance without a medical examination.
Policies other than term insurance cost more than term insurance initially and the additional premium provides essentially one thing—savings for the person insured. Now the main question to answer from an investor's point of view is, "What do I get for this additional premium in the way of a return on my money?"

Possibly the best way to determine the yield or return on insurance is to compare different kinds of policies purchased at different ages. Since the rate or premium and what you get in the way of a return for paying this rate both depend on the kind of policy you purchase and your age when you purchase it, a table has been prepared covering the different types of policies purchased at three different ages—25, 40 and 55.

There is no rate of return possible on a term insurance policy. It pays off only in the event of death, and it pays the face amount of the policy. If you buy a five-year term insurance policy in the face amount of $1,000, your estate will be paid $1,000 in the event your death takes place in the five-year period. At the end of five years you have no more insurance coverage and nothing in the way of cash value for the premiums you have paid in. If you live, term insurance is the most expensive insurance you can buy in the long run.

At age 25 the average net cost per $1,000 payable annually for a five-year term policy is $4.29. It must be made clear that all the rates quoted are those of a particular mutual life insurance policy in the middle of 1961. The quoted rate per $1,000 applies if a policy of $10,000 is purchased. The rate varies somewhat according to the size of the policy purchased. The total cost per year of the life insurance policy of $10,000 is ten times this $4.29, or $42.90.

If a ten-year term policy is purchased the average net cost per $1,000 is $3.91 per year, and if a 20-year term policy is purchased the average net cost is $3.82. It gradually goes down according to the length of the policy, but if term insur­ance were bought each year, for just one year, the annual rate would be higher with each renewal since the older a person is the greater the likelihood of his death.

If instead of being 25 years old a person buying insurance is 40, the average net term insurance cost is $7.89 instead of $4.29 per $1,000 of coverage. Longer policies now rise in cost. They don't decrease. Ten-year term insurance costs $7.94 per $1,000 and 20-year term $9.87.

If he waits until he gets to age 55 the cost of term insurance rises tremendously. A five-year term policy at age 55 costs $21.85 per $1,000 and a ten-year policy $23.26. Term insurance usually may be maintained only until the insured is age 65. Thus, if a man kept term insurance to age 65, but died at age 66, his bene­ficiaries would get nothing and all of the premiums he had paid for this insur­ance would go down the drain.

As investment strategies go, these policies all provide nothing in the way of savings and there is no return on your money that you, the insured, will ever get. Your beneficiaries will get the face of the policy at your demise.

In contrast to term insurance there is permanent insurance. This is insurance that may be kept as long as the insured wishes to keep it. If the insured lives, he has built up a substantial cash value in his policy which he may take in cash or as income or which he may leave with the insurance company as "paid up" insurance.

The most popular form of permanent life insurance is convertible whole life insurance, sometimes called ordinary life or straight life.

Convertible life requires the lowest premium of all permanent insurance plans. Premiums may be paid on this policy as long as the insured lives or for a shorter period of time depending upon the objective of the insured.

Permanent insurance has a level annual premium for the duration of the premium-paying period. The annual premiums in the early policy years are in excess of the actual premium needed to cover the risk. The excess premium is called the reserve and it is this reserve, together with interest earned on the reserve plus future earnings, which provide the cash needed to pay death claims in the later years.

There are many different kinds of permanent life insurance, which are designed to accomplish different objectives. A few of the most popular plans are the 20-payment life policy or a life paid up at 65 policy. As you can see by their names, these policies were designed so that the insured can compress a lifetime of pre­mium payments into 20 years or 30 years or by the time he reaches age 65. Obviously the higher the premium paid the greater the reserve and the greater the value of the policy.

Straight life insurance taken out at age 25 costs $17.70 per year. This is the quoted rate of one mutual insurance company. A mutual company pays dividends to the policyholders. A stock company pays the policyholders no dividends and quotes a lower rate, but to compare the rates of each type of company, the dividends credited by the mutual company to the policyholder must be sub­tracted from the gross premium. Thus from the $17.70 must be subtracted the estimated dividend of $4.66 per year, leaving a net premium of $13.04. This is the premium, which we can compare with the net average cost of a 20-year term insurance policy on a 25-year-old man of $3.82. For simplicity we will consider only the gross premium—we assume that the dividends are left in, not taken out.

What does the insured get for this extra premium? At age 45 the holder of the term policy gets nothing if he is still alive. He has lost his insurance. The holder of the straight life policy gets $403.94. Over a period of 20 years he has put in a total of $354. He got out of the insurance more than he put in in total, and he still had his coverage from the day he took out the policy. Further, should he wish to do so he may continue his insurance at the same rate?

If we consider that the 20-year term rate is the pure cost of insurance, and that the difference between this rate and the straight life rate represents the savings element of his premiums, you determine this savings element by subtracting $3.82 from $17.70, which equals $13.88. Over 20 years this savings element amounts to $277.60. For this total of $277.60 put in in premiums, $403.94 was collected—a profit of $126.34 over 20 years, or $6.31 per year.

The $277.60 was not put in all at once, but over a period of 20 years. Nothing was invested at the beginning of the 20-year period, and in the twentieth year the whole sum was invested, so that the average investment for the period was halfway between nothing and $277.60—$138.80. The return on this figure is the true return, and $6.31 per year on $138.80 is a little under 5%.

Let us consider the Retirement Income policy at 65, bought by a person 25 years old. Over a period of 40 years, he puts in $30.92, the annual premium, times 40, or $1,236.80. If the average net cost of the pure insurance feature is assumed at $7.79 per annum and the cost is subtracted from the total annual premium of $30.92, we get the investment in the savings element of the insurance, $23.13 times 40, or $925.20. For these invested savings the insured gets back $2,326.81 at age 65-40 years later-a profit of $1,401.61.

If we use the same reasoning in regard to the average amount invested over the period (one half of $925.20), we arrive at an investment of $462.60. The profit or return per year is determined by dividing the total profit of $1,401.61 by 40 years and we get $35 per year. This $35 represents a return on the invest­ment of $462.60, or 7½% per year.

How good an investment is this $462.60 that grows to $2,326.81 in 40 years? It is almost identical with an investment of $462.60, which returns 4% per year if the 4% is left in the investment to be compounded annually. The discrepancy between the 7½%per year and the 4% is explained by compounding.

The 4% compounded is not a bad yield. It is roughly equal to the return of an insured building and loan association in the year 1962, but not as good as the better yielding ones.
Now the characteristic of the Retirement Income policy is that premium pay­ments end at age 65. The insured is now entitled to $2,326.81 if he left his dividends in.

Further, the insured can have his $1,597 (due him if he took his dividends out) paid to him and/or his heirs at the rate of about $10.00 per month for 157 months (a full refund). If he is still living at the end of the 157 months, the in­sured would continue to receive $10.00 per month for the balance of his lifetime.

If desired, an alternate amount or alternate type of annuity could be selected.

In addition to the guaranteed amounts, there would, of course, be dividend income payable each month in accordance with the company practice. The present income dividend is about 10% extra per month.

All of the above income would be tax-favored as compared to ordinary invest­ment income.

The income or annuity return per $1,000 of accumulated cash in the insurance policy is guaranteed by contract as of the date of issue for future delivery. An important thing to note as far as considering insurance for investment strategies, is that the cost of an annuity at 65 has been increased seven times in the last 20 years as the science of geriatrics has prolonged life.

There are really only two general categories of life insurance policies: (1) those that insure only and are called term insurance policies and (2) those that provide not only insurance but savings as well. Here are included the straight life policies, endowment policies and retirement income policies, etc.

There are all sorts of variations of life policies to suit individual needs and desires. My wife and I started in the insurance business some years ago, special­izing in mobile homes (house trailers). One of our main lines of insurance was credit life insurance. It insured the life of the purchaser of a mobile home for the term during which he was purchasing the home, and it insured for exactly the amount owed the bank on his time payments. If he died the day after he purchased a mobile home on which he owed $5,000, the insurance company paid off the $5,000 debt and his family would not be dispossessed.

There is one type of policy, which represents the savings element alone and does not provide the insurance element. This is the annuity. You make a cash payment early in life, or periodic payments throughout your life, in order to get an income when you retire or pass a certain age.

At age 25, for an annual premium of $100 for 40 years, you can get (a) $8,201.47 in cash at age 65 or (b) monthly payments of $51.34 for the rest of your life.

You have invested in 40 years 40 times $100 or $4,000, and at age 65 this has grown to $8,201.47. It has better than doubled.

To find the average annual return, we determine the profit ($8,201.47 less $4,000), which equals $4,201.47, and divide this by 40 to get an annual profit of $105.

The average investment is halfway between zero and $4,000 and is equal to $2,000. The annual return is thus $105 divided by $2,000, or 5¼%. This represents considerably less than 4% compounded annually.

If the option of $51.34 per month is selected instead of the sum total of $8,201.47, it takes between 13 and 14 years to exhaust the total, and if you live longer than this number of years, you have come out ahead.

If you pay $1,000 in a lump sum at age 25 and pay nothing more, by age 65 this $1,000 has grown to $3,920.17. It has almost quadrupled, and the profit is $3,920.17 less $1,000, or $2,920.17-$73 a year. This is, of course, a return of 7.3%, which is equal to $1,000 compounded annually at roughly 4%. It is safe and it is not a bad investment.

The rate is slightly better than all of those worked out above because the mutual insurance company whose rates are quoted above anticipates an income dividend roughly equal to 10% of the monthly payments. Thus 10% should prob­ably be added to the monthly payments.

What we are discussing in this book is return on your money and in this chapter we are talking about insurance as an investment. We are not talking about the absolute desirability or undesirability of insurance. Our approach must not be lost sight of.

To go back to term insurance, this type policy provides for payment of the face amount of the policy only in the event of death. As a general rule it pro­vides the highest protection per dollar of premium.

Most other policies provide savings, and the return on these savings is what we are concerned with here. Interestingly, considering insurance for investment strategies, while the yield on the savings is low it must be pointed out that by entering into an insurance contract the insured is forced to save what he might otherwise spend. A second advantage in buying policies other than term policies is that if the insured falls on hard times these policies are worth something in cash to help tide him over; and if he can't keep up the premiums there is a cash reserve to pay premiums for awhile. If term insurance premiums cannot be met the policy lapses.

One insurance company took what it considered to be a typical year as re­gards death claims and determined what the insured's family got back in relation to what was paid. It determined that the average insured who was paid off that year collected $1.75 for every $1.00 put into premiums, and the average number of years each policy had been in force at the time of death was 22.6. The return was 4% per year, and the insurance company points out that the 4% return was tax-free in that no income tax was taken out either as the policy went along or when final payment was made. This 4% equals 8% in income for a person in the 50% tax bracket.

The return on the savings element of life insurance can be determined by reference to the attached table. The major types of policy have been compared for ages 25, 40 and 55 as to annual premium, value of the policy in cash at different ages and monthly payments which can be received from age 65 to the end of one's life.

Two of the greatest benefits of life insurance depend on: (1) inheritance taxes and (2) the uncertainty as to when the insured will die. These factors are not related directly to return on investment but cannot be minimized in any consideration of life insurance. The Life Underwriters' Training Council worked up a table to show how much a person's estate shrinks upon death. This is the average shrinkage of estates of various sizes:

Net Worth Of Person At Time Of Death	Shrinkage Of Net Worth	% Of Shrinkage Of Net Worth
$25,000	$5,590	22%
50,000	9,650	19
100,000	18,550	19
250,000	61,728	25
1,000,000	329,560	33
5,000,000	2,251,190	45

The shrinkage was caused by estate taxes, administrative expenses and debts. Thus a person of modest means if all his assets are included—home, savings, car—is faced with a loss of 22%.

If his wife held the policy on his life, a policy for say $25,000, the wife would get the entire $25,000 without any deduction for estate tax, any legal expense or any protracted delay in probating the will.

There is the case of the automobile dealership in Washington, D.C. that was willed by the founder to his family. In order to pay the inheritance tax the estate had to sell various parts of the business—insurance agency, finance company and used car lots.
Not only was the company severely shrunken by the estate tax, but all of the elements of the automobile agency were sold which made it able to com­pete with other automobile agencies. The result? The agency worth close to $3,000,000 failed!

A person with no estate and no savings needs insurance if he has any obliga­tions to a family or to anyone else if he should die. A person of great wealth needs insurance to save a material part of his estate from the inheritance tax, particularly if he has a going business to pass on to his heirs. The amount of in­surance one should own will depend upon the job to be done in the event of death and the high costs of dying. There is no question of the almost universal need for insurance.

There is, however, a question of return on investment after the insurance ele­ment has been provided. It will be recalled that savings are provided by a rate of premium higher than the term policy rate. The question is, "Should this excess or higher rate be invested in something other than insurance policy savings, since at best the savings work out to about 4% per annum compounded annually?" The answer must lie with the investor after he reviews other investment oppor­tunities open to him. As in all things, balance should prevail.

Remember when considering insurance for investment strategies that the law makes certain tax allowances for a person's charitable contributions in an effort to promote these contributions. These allowances plus the benefits of an annuity combine to return a good yield to certain investors under certain circumstances—but not to everyone. Furthermore in some cases the actual yield in percentage is hard to compute; but let us explain certain moves an investor can make to utilize contributions as well as the annuity:

In the first place the tax laws allow a person to deduct from his income, which is subject to taxation, a charitable contribution of up to 30% of his taxable income. Thus a person who has an income of $200,000 per year can contribute $60,000 to charity and have this $60,000 deducted from his $200,000 income before the tax is applied. Obviously a person with such an income is in the 91% tax bracket. He would pay roughly $54,000 tax on his top $60,000 of income. But since his $60,000 contribution is deducted from his income before the tax is applied, Uncle Sam really contributes $54,000 and he contributes only the difference— $6,000.

Let us next assume he contributes $60,000 worth of securities, but let us assume that these securities cost him when he bought them long ago only $10,000. By contributing them he cuts his tax liability by $54,000. In other words he loses $60,000 but gets a tax allowance from Uncle Sam of $54,000.
Now if he sold the securities he would have to pay a capital gains tax of 25% on his long-term gain of $50,000—$12,500. He could keep $37,500. In return for the charitable contribution he gets $54,000 from Uncle Sam, and by selling them he gets $37,500. In the latter case his income tax is not diminished by $54,000 since he made no tax-deductible contribution.

Next, let us combine the charitable contribution with the annuity for further financial benefits to the giver:

1. The investor can purchase an annuity from a charitable institution, and many charitable and educational institutions have plans set up for the purpose of securing contributions:

The investor contributes whatever he wants to the charity as the purchase price of an annuity administered by the charitable or educational institution. This annuity has a present cash value determinable by reference to an actuarial chart. If we subtract this present value of the annuity from the amount of the contribution we get the amount, which can be deducted by the investor from his income before the income tax is applied. If he makes $100,000 per year and contributes $30,000, this $30,000 may purchase an annuity worth $15,000. The remaining $15,000 is deducted from his $100,000 income before the tax is applied, and he thus pays a tax on only $85,000.

ANNUAL GROSS PREMIUM AND THE VALUE OF DIFFERENT INSURANCE POLICIES BASED ON 1961 RATES AND ESTIMATED DIVIDENDS OF ONE MUTUAL INSURANCE COMPANY

Age When Plicy Taken Out	Kind of Policy	Gross Annual Premium Not Taking Dividends	Value of at Age 45	Value of at Age 65	At age 65 Monthly payment to end of life
25	5 Year Term Insurance	$4.29	None	None	None
25	10 Year Term	3.91	None	None	None
25	20 Year Term	3.82	None	None	None
25	40 Year Term (rider on straight life policy)	7.79	None	None	None
25	Straight Life Insurance	17.70	$403.94	$1,134.48	$7.09 +10% income div.
25	20 Year Endowment	49.05	1,238.27		5.60
25	30 Year Endowment	31.18	753.38	1,398.71 (at 55)	7.57
25	40 Year Endowment	23.06	544.32	1,637.47	11.07
25	Annuity to Begin at 65	100.00	. . . .	8,201.47	51.34
25	Cost of Annuity to Begin-$1000-one payment at 65		. . . .	3,90.17	24.54
25	Retirement Income Policy - Age 65	30.92	747.17	2,326.81	14.54
40	5 Year Term Insurance	7.89	None	None	None
40	10 Year Term	7.94	None	None	None
40	20 Year Term	9.87	None	None	None
40	Straight Life Insurance	28.08	110.98	798.24	4.99 + 10% income div.
40	25 Year Endowment	42.07	172.20	1,380.86	8.64
40	Annuity to Begin at 65	100.00	. . . .	3,678.93	23.03
40	Cost of Annuity to Begin-$1000-one payment at 65			2,278.20	14.26
55	5 Year Term Insurance	21.85	None	None	None
55	10 Year Term	23.26	None	None	None
55	Straight Life Insurance	61.84	. . . .	378.47	2.36 + 10% income div.
55	10 Year Endowment	114.22	. . . .	1,148.68	7.17
55	Annuity to Begin at 64	100.0	. . . .	1,056.06	6.61
55	Cost of Annuity to Begin-$1000-one payment at 65			1,585.71	11.17

His return on the $30,000 contribution - and this is where you will get an idea of its value for investment strategies - (he sets the entire contribution up in an annuity) is the average return realized on the investments of the educational or charitable organization, let us say 5% per year. Now as he gets this 5% per year ($1500) a certain amount represents the return of his capital and is thus non-taxable, even though as long as he lives the income is received, just as though the capital of $30,000 were still his. On his demise the capital of course passes to the charitable institution.

2. If he wants, the investor can set up a trust and pick a mutual fund as the trustee. In this way he actually has the money until his passing, when it goes to the institution. He can also pick the fund that he thinks will do the best job of getting a satisfactory return. By the establishment of this trust he can also see that his wife is taken care of after his passing.

Tax bracket of the investor is all important in annuities. If a man is in the 50% tax bracket he pays on his top $2000 of income $1000 in tax and keeps $1000. At age 60 he can buy for $30,000 an annuity yielding him $2000 per year. If he hadn't purchased the annuity but instead kept the money in the building and loan association where it earned 4%, his annual return would be $1200, and he would keep $600 of this and pay the rest in tax.

From his annuity, however, he keeps $1100 tax free (3% of his investment of $30,000 in the annuity is considered his annual income and thus taxable—$900). He pays tax on this $900. Out of the $900 he keeps after his 50% tax $450. He thus is in pocket $1100 plus $450-$1500 in all, as against $600 when he had his $30,000 invested at 4%.

The fact must not be lost sight of, however, that he always has the $30,000 he has invested at 4%, and that when he has purchased an annuity the capital is gone. Neither it nor any part of it can be passed on to heirs.

Now let's take the estate tax into consideration. When you walk into the office of an estate planner these days he is likely to bring out a kind of slide rule and ask you how much you are worth. You tell him, and he immediately adjusts the slides to show you how big a bite Uncle Sam takes at the time of your passing. You can see at a glance that your estate will be diminished by estate taxes by say 25% or 50%.
Let us suppose a man in the 50% bracket faces a 30% estate tax. At age 65 he can purchase an annuity for $100,000, which will pay him $8000 per year. 3% of the $100,000 is taxable—$3,000 per year—and the rest is free of tax and considered a return of capital. The $3,000 is taxed $1,500 and he keeps $1,500 plus the $5,000 tax free-$6,500 in all. If he invested his $100,000 at 4% his income would be $4,000 per year on which he would pay $2,000 taxes and keep $2,000.

If he lives for 20 years he will get back his $100,000 ($5,000 capital return times 20 years), and he has saved $30,000 in estate taxes (30% of $100,000).

A very pursuasive argument for the purchase of an annuity is the ability to maintain current income from a very much smaller investment. If a person invests $100,000 at 4% his annual income is $4,000, and if he is in the 50% bracket taxwise he keeps $2,000. At age 65 for $25,000 he can buy an annual income of about $2,000, and the major part of this money is not taxable.

Now he can take the remaining $75,000 and attempt to build it up by risking it, since his income will be maintained just as if he had $100,000 for the rest of his days. Or he can pass it along to his children as a gift and save a material part of it by subjecting it to the gift tax instead of the inheritance tax. The chil­dren, being in all probability in a lower tax bracket, will be able to keep more of the income from the $75,000 than he could.

Probably the most prominent expert in the field of estate planning and tax saving is J. K. Lasser. One of his examples of tax saving through the purchase of an annuity is worth repeating:

A man can buy a single premium deferred retirement annuity for $100,000. This means that for a cash payment of $100,000 he can have an annuity which begins some time in the future, and as time goes on the annuity has more and more of a cash value as it earns. This is what the annuity is worth year by year:

VALUE OF A $100,000 SINGLE PREMIUM DEFERRED RETIREMENT ANNUITY

First Year	$91,720
Second Year	94,700
Third Year	97,800
Fourth Year	101,000
Fifth Year	104,200
Tenth Year	119,600
Twentieth Year	153,200

The difference between the initial value of the annuity ($91,720) and $100,000, the purchase price, is $8,280. If the investor in this annuity puts up this amount of collateral he can borrow $100,000 against the policy. At the end of four years the annuity has grown to over $100,000 and he will get back this $8,280.

If the $100,000 loan costs him 3% in annual interest ($3,000), and he is in the 60% bracket his real cost is $1,200 (interest cost is deductible from income). This is his real annual cost. If we compound annual interest just on this $1,200 interest cost he has to pay, and compound it at 5% per year, for 20 years, the total real cost to him is $29,739.

But his equity is now $153,200, as the table shows. So he sells this annuity for $153,200 and pays off the $100,000 loan. He is in pocket $53,200. After he pays the capital gains tax of $13,832 on this sale he has left $39,368, his profit after taxes. But since we have considered his real cost over the 20 year period to be $29,739 we must subtract this from the $39,368, and his undisputed profit, any way you want to look at it, is $9,629.

As we develop more and more complex plans to build estates and to save taxes it becomes increasingly difficult and speculative to determine rate of return - this can complicate looking at investment strategies. This book is written primarily to indicate opportunities for investing money at higher rates of return rather than to outline plans for saving taxes and building up estates. For the person interested primarily in the latter two objectives there are literally hundreds, possibly thousands, of plans which include donations, the establishment of trusts, the transfer of interests in estates to other members of the family, and the use of personal corporations, perhaps domiciled in the Bahamas and elsewhere. It is not the province of this book to go into these things. It is felt, however, that those plans which have to do directly with in­vesting one's money for higher return should be presented here in a brief way, while money saving devices not directly connected with investing in high yield opportunities have been excluded.