Life insurance, bonds, and mutual funds are described in detail in other chapters of this book. They are discussed here in summary form so that the savings and investment opportunities they provide may be easily compared with the savings facilities just discussed.
Life insurance is not intended primarily for long term saving, but it can be used for this purpose very easily. While the actual interest return on endowment insurance is only about 2 per cent, this calculation assumes that you receive the protection provided by endowment insurance for nothing. A better estimate of the percentage return on endowment is found by comparing the cost of endowment insurance with the cost of term insurance, where the face amount of the two policies is the same.
Only the amount by which the cost of endowment insurance exceeds that of term insurance should be regarded as a saving premium. The remaining cost of the endowment insurance is the cost of protection. This calculation is shown in more detail elsewhere in the next chapter. It shows that the actual net return on endowment insurance is between 42 and 5 per cent.
The particular advantages of life insurance as a long term savings facility are the guarantee of safety it provides, the relatively high rate of interest, the convenience supplied by using the same facility for both protection and saving, and the ease with which small amounts of money may be invested. In addition, it has some element of forced savings, in that regular payment of insurance premiums is required. The disadvantage of life insurance as a long term savings facility is that no money is refunded to you if you drop out of the plan in the first few years, and that to obtain the rate of interest indicated, it is necessary to continue with the plan until near its maturity.
Life insurance could be used for long term saving by a family that wanted to use the same facility for both protection and savings and that wanted to be able to save in small amounts.
