UNIVERSITY OF CALIFORNIA AT LOS ANGELES LIFE INSURANCE By SOLOMON S. HUEBNER, M. S. , Ph.D. Professor of Commerce, Univ. of Pennsylvania This work presents the important facts con- nected with those forms of insurance which indemnify owners against the loss of pro- perty. It covers the subject of fire insurance in all its various details and also discusses in a complete and detailed form the prin- ciple* and practices of marine insurance, title insurance, and credit insurance. A classified bibliography is included; also copies of leading forma and clauses. 40 illustrations. $2.00 net. LIFE INSURANCE A TEXTBOOK BY SOLOMON S. HUEBNER, PH.D. PROFESSOR OF INSURANCE AND COMMERCE, WHARTON SCHOOL OF FTSAKCT AXD COMMERCE, UNIVERSITY OF PENNSTLVASIA ENDORSED BY THE EDUCATION AND CONSERVATION BUREAU THE NATIONAL ASSOCIATION OF LIFE UNDERWRITERS NEW YORK AND LONDON D. APPLETON AND COMPANY 1915 COPYRIGHT, 1915, BT D. APPLETON AND COMPANY Printed in the United States of America JSus. Admin. Library PEEFACE The preparation of this text was undertaken at the sug- gestion of the National Association of Life Underwriters. In making the suggestion, the Association was actuated by the desire for a comprehensive textbook adapted to the needs of classroom instruction for beginners of the study of life insurance in colleges and high schools; one which would also serve as a clear and simple exposition of the subject for laymen and life insurance solicitors. To fulfill this purpose it has been the author's object to bring together in com- pact and classified form the essential facts, principles and practices of the life-insurance business, and .to present them in a simple and untechnical manner. The book does not at- tempt to discuss the highly technical aspects of the business, such as the specialist may desire; instead its purpose is to treat comprehensively those phases concerning which the average student, layman and solicitor should be informed in order to have a clear understanding of the nature of life insurance and the family, personal and business uses to which it may be put. The thirty-two chapters of the text have been grouped into five distinct parts, dealing respectively with the " Nature and Uses of Life Insurance," the " Science of Life Insurance," " Special Forms of Life Insurance," the " Organization, Management and Supervision of Legal Eeserve Companies," and " Important Legal Phases of Life Insurance." The first part of the volume is devoted to a discussion of the practical uses to which life insurance may be applied. Separate chap- ters are devoted to each of the leading types of policies sold, with a view to giving a detailed analysis of the contracts and an extended statement of the advantages and disadvantages connected with their use under various circumstances. Spe- PKEFACE cial effort has been made to write and illustrate this part of the volume in a manner so simple as not only to adapt it for collegiate purposes, but to make it suitable also for classroom instruction in commercial and high schools. Life insurance, so vitally affecting nearly every man and woman in the com- munity and so intimately related to the welfare of the masses, should find some place in the curriculum of our high schools. The courses offered must necessarily be simple and untechni- cal, and may be restricted advantageously to an explanation, chiefly by way of detailed illustration, of the reasons why it is a duty to insure under certain circumstances, the prac- tical uses to which life insurance can be put, the distinctive features of the main types of policies, and the advantages or disadvantages of each under certain circumstances. For these reasons it is believed that the first ten chapters of the book will lend themselves readily and advantageously to use in high schools, commercial schools and similar institutions. Part Two of the volume deals with the scientific phases of life insurance and its chapters present the essential considera- tions connected with the measurement of risk, the principles underlying rate-making, the net single premium, the net level premium, the reserve, loading, surrender values, policy loans, and surplus. For beginners in the subject this phase of life insurance is necessarily the most difficult to under- stand and appreciate. Every effort has, therefore, been made to emphasize the importance of these aspects of the business and to explain them in a simple manner. Having in mind again the layman, the student, and the average solicitor, this part of the volume is as untechnical in character as possible and only simple mathematics has been used to make clear the scientific foundation that underlies correct principles. Furthermore, the examples used to illustrate these principles are fully stated, and special emphasis has been given to the proper classification of the respective topics so as to assist the student in grasping the subject. I wish to acknowledge my indebtedness to the many of- ficials of insurance companies who have shown me the utmost PREFACE courtesy in meeting my requests for explanation of the office and field practices followed by their companies and for forms, data, printed circulars and other information. Special ac- knowledgment is due to my colleague, Dr. Bruce D. Mudgett, Instructor in Insurance at the University of Pennsylvania. Xot only did Dr. Mudgett write the first seven chapters of Part Two of the volume, dealing with the science of life in- surance, as well as the chapter on disability insurance, but, throughout the preparation of this volume, he has generously given me the benefit of his advice and criticism. He also read all of the proofs. S. S. HUEBNEE. University of Pennsylvania, July 1, 1915. CONTENTS PART I THE NATURE AND USES OF LIFE INSURANCE CHAPTKR PACI I. NATURE OF LIFE INSURANCE AND THE BASIC PRINCIPLES UNDERLYING IT 3 Definition and extent of life insurance, 3. Com- bination of many risks into a group is necessary to make the law of average apply, 5. Necessity of accumulating a fund for the payment of claims, 7. Necessity of accumulating this fund according to scientific principles and a workable method, 7. Life insurance changes uncertainty into certainty and is the opposite of gambling, 10. II. FAMILY AND PERSONAL USES OF LIFE INSURANCE 13 Capitalization or the value of a human life and indemnification of that value, 14. The duty to insure, 15. Eliminates worry and increases initi- ative, 17. Life insurance makes saving possible, 18. Furnishes a profitable and safe investment, 19. Forces and encourages thrift, 20. Facili- tates the purchase of a home, 22. Furnishes an assured income in the form of annuities, 23. The relation of foregoing advantages to society at large, 25. III. BUSINESS USES OF LIFE INSURANCE .... 39 Close relationship between the home and busi- ness, 29. Life insurance as a means of indemni- fication against loss through the death of officials and valuable employees, 31. The use of part- nership insurance, 34. The insurance of em- ix x CONTENTS CHAPTER PAGE ployees for the benefit of their families, 36. Life insurance as security for bond issues, 38. The use of life insurance as a means of enhancing the credit of business enterprises during times of financial stringency, 40. The use of life in- surance as a means of borrowing without col- lateral, 42. The use of life insurance as a means of making contingent interests marketable, 45. IV. CLASSIFICATION OF POLICIES 47 Policies classified according to the term, 47. Policies classified according to the method of pay- ing premiums, 47. Policies classified according to the inclusion or exclusion of a pure endow- ment feature, 50. Policies classified according to the method by which the proceeds are paid, 52. Special types of contracts, 55. Classification of annuities, 58. Combination of various types of policies, .59. The several types of policies equivalent in net cost, 60. Some policies better adapted than others to meet the special needs of the insured, 60. V. TERM INSURANCE 62 Advantages of term insurance, 63. Disadvan- tages of term insurance, 67. Renewable and convertible features in term policies, 69. VI. ORDINARY LIFE INSURANCE 72 Furnishes permanent protection, 72. Furnishes permanent protection at the smallest initial out- I a 7 73- Combines saving with insurance, 74. Disadvantage of continuous premium payments, 76. VII. LIMITED-PAYMENT POLICIES 79 Necessity for larger premiums under this plan during the premium-paying period, 79. Advan- tages of the limited-payment plan, 82. Paid-up CONTENTS xi PTER PAGE and extension benefits under the limited-payment plan, 85. VIII. ENDOWMENT INSURANCE .87 Definition and types of policies, 87. Analysis of an endowment policy, 88. Premiums charged for endowment policies, 89. Functions of endow- ment insurance, 90. IX. INSTALLMENT POLICIES - 99 The fundamental purpose of installment insur- ance, 99. Ordinary installment policies, 100. Survivorship-annuity policies, 101. Continuous- installment policies, 102. Advantages of the con- tinuous-installment plan, 103. Guaranteed inter- est bonds, 106. X. OTHER LEADING TYPES OF CONTRACTS .... 108 Joint-life policies, 108. Premiums on joint-life policies, 108. The use of a joint-life policy com- pared with the use of separate policies on the same lines, no. Annuities, in. Immediate an- nuities and their advantages, 112. Other types of annuities, 114. PART II THE SCIENCE OF LIFE INSURANCE XL THE MEASUREMENT OF RISK IN LIFE INSURANCE, by Bruce D. Mudgett .119 The theory of probability, 119. The laws of probability, 120. The use of this theory to fore- cast future events, 123. Accuracy of the theory of probabilities the law of average, 124. Mor- tality tables, 129. Sources of mortality tables, 130. Objection to tables based on population data, 130. Description of a mortality table, 131. Construction of the mortality table, 134. Kinds xii CONTENTS CHAPTEK PAGE of tables and important tables used in the United States, 136. Application of the theory of proba- bilities to the mortality table, 137. XII. FUNDAMENTAL PRINCIPLES UNDERLYING RATE- MAKING, by Bruce D. Mudgett 139. Features peculiar to life insurance, 140. As- sumptions underlying rate computations, 142. XIII. THE NET SINGLE PREMIUM, by Bruce D. Mudgett 148 Classification of premiums as single and periodic, 148. Classification of premiums as net and gross, 148. Term insurance, 149. Whole-life insur- ance, 154. Pure endowments, 158. Endowment insurance, 159. , XIV. THE NET SINGLE PREMIUM (continued), by Bruce D. Mudgett 161 Installment insurance, 161. Annuities, 164. Deferred annuities, 168. XV. THE NET LEVEL PREMIUM, by Bruce D. Mudgett , .... 174 The level, or periodic, premium system, 174. Analogy between periodic premiums and annui- ties, 175. Continuous and limited premiums, 177. Computation of the net annual level pre- mium, 178. Premiums paid at intervals of less than one year, 185. Return-premium policies, 187. XVI. THE RESERVE, by Bruce D. Mudgett . . . .191 Financial importance of the reserve, 191. The origin of the reserve, 192. Definition and pur- pose of the reserve, 192. Method of calculating the reserve, 196. Comparison of reserves on dif- ferent interest bases and on different policies, 204. CONTENTS xiii CHAPTER FACE XVII. THE GROSS PREMIUM-LOADING, by Bruce D. Mudgett 209 Classification of expenses, 210. The problem of equitable distribution of expenses, 212. Methods of loading, 214. Loading and the incidence of expense, 219. XVIII. SURRENDER VALUES AND POLICY LOANS . . . 229 Meaning of the term " surrender value," 229. Extent to which policies are lapsed and surren- dered, 230. Non-forfeiture laws, 231. Liberal- ity of companies in the granting of surrender values, 233. Reasons justifying a surrender charge, 234. Various optional forms in which surrender values are granted, 237. Development of policy loans, 238. Nature of policy loans as now granted, 239. Advantages resulting from the loan privilege, 240. Extent of policy loans and the relation of such loans to lapses and sur- renders, 241. XIX. SURPLUS 245 Meaning of surplus and sources from which de- rived, 245. Gain from investment earnings, 246. Saving from mortality, 246. Saving from load- ing, 247. Gains from forfeitures, 248. Methods of apportioning the surplus, 249. Meaning of the terms "divisible surplus" and "dividends," 251. Methods of distributing the surplus according to the time of distribution, 252. How dividends may be used, 255. PART III SPECIAL FORMS OF LIFE INSURANCE XX. FRATERNAL AND ASSESSMENT INSURANCE . . . 261 Extent of fraternal insurance, 261. Organiza- tion, government, and legal status of fraternal xiv CONTENTS CHAPTER PAGE societies, 261. Distinctive characteristics of fra- ternal insurance, 263. Various assessment plans that have been used, 266. Recent tendency to adopt the protective features of old-line insur- ance, 268. Recent legislation concerning rate adjustments, 269. Business-assessment associa- tions, 271. Assessment plans used by such as- sociations, 272. XXI. INDUSTRIAL INSURANCE 275 The purpose of industrial insurance, 275. Mag- nitude of the business, 275. Comparison of in- dustrial with other forms of life insurance, 277. Adjustment of the amount of insurance to the unit of premium, 278. Organization and man- agement of the field force, 279. Distinctive fea- tures of the policy, 280. XXII. DISABILITY INSURANCE, by Bruce D. Mudgett . 284 Development of disability insurance, 284. Rea- sons for the disability clause, 286. Objections urged against the disability clause, 288. The dis- ability clause in practice, 291. Risks not covered by the disability clause, 292. The definition of disability, 294. Age and time limits to the ap- plication of the clause, 297. Benefits granted kinds and amounts, 299. Payment of dividends after disability, 301. Conclusion, 302. XXIIL GROUP INSURANCE, by Ralph H. Blanchard . . 304 The group, 304. The policy, 306. Rates, 306. Benefits, 308. Functions, 309. PART IV ORGANIZATION, MANAGEMENT, AND SUPERVISION OF LEGAL-RESERVE COMPANIES XXIV. TYPES OF LEGAL-RESERVE COMPANIES . . .313 Distinctive characteristics of each type, 313. CONTENTS xv * AGE Comparison of the stock and mutual plans as regards the loading of premiums, 314. Argu- ments urged in favor of each of the plans for charging premiums, 317. The stock and mutual plans compared with reference to the control of companies, 318. Arguments urged in favor of each of the plans of control, 320. The control of mixed companies, 321. XXV. ORGANIZATION OF COMPANIES 324 Home office organization, 324, The board of directors and the committees chosen from its membership, 326. Officials exercising executive control, 328. Officials intrusted with administra- tive functions, 329. Officials serving in an ad- visory capacity, 330. Other departments, 331. Agency organization and management, 332. Re- lation between the home office and the field force, 333. Commissions paid to agents, 334. Types of agency organization, 335. The general- agency system, 336. The branch-office system, 338. Arguments advanced in favor of the two plans, 339. XXVI. LIFE-INSURANCE INVESTMENTS 342 Considerations that should govern companies in making their investments, 342. State regulation of investments, 344. The exjtent and character of investments, 346. Nature and merits of the various types of investments, 348. Rate of in- terest actually earned, 352. Method of arriving at the rate of earnings, 353. XXVII. GOVERNMENT SUPERVISION OF LIFE INSURANCE . 355 State versus federal jurisdiction, 356. Officials intrusted with supervisory control and their duties and powers, 356. Subject matter to which state legislation especially applies, 358. State supervision in practice, 363. State versus na- tional control, 364. xri CONTENTS PART V IMPORTANT LEGAL PHASES OF LIFE INSURANCE CHAPTER PAG1 XXVIII. LEGAL INTERPRETATION OF THE POLICY AND APPLICATION 369 General rules underlying court decisions affect- ing life insurance, 369. The application and its interpretation, 372. Warranties and representa- tions, 375. Definition of warranties and impor- tance of the same to companies, 376. Classifica- tion of warranties and manner of stating the same, 377. State statutes relating to warranties, 378. The incontestable clause, 379. The suicide clause, 381* Other policy provisions, 382. XXIX. INSURABLE INTEREST 384 Insurable interest of the insured in his own life, 385. Creditor's insurable interest in the life of the debtpr, 386. Insurable interest growing out of other business relations, 388. Insurable in- terest of the assignee, 389. Insurable interest arising out of ties of affection, blood or mar- riage, 391. The time and continuity of in- surable interest, 392. XXX. THE LAW PERTAINING TO THE BENEFICIARY . 394 Vested rights of the beneficiary, 394. Reserving the right to change the beneficiary at will claims of creditors where the beneficiary has been thus named, 397. Rights of creditors to life- insurance policies, 402. Transmissibility of the beneficiary's interest, 404. The designation of the beneficiary, 406. Effect of cessation of the beneficiary's insurable interest in the life of the insured prior to maturity of the contract, 407. CONTENTS xvii CHAPTER PAGE XXXI. LAW PERTAINING TO ASSIGNMENT OF POLICIES . 409 Policy restrictions relating to the assignment of policies and the legal interpretation of the same, 410. State statutes affecting assignments by beneficiaries, 413. Assignment of the policy by the assignee a policy of life insurance is not a negotiable instrument, 414. XXXII. THE LAW PERTAINING TO THE AGENT . . . 416 State statutes regulating agents, 417. Policy provisions pertaining to agency, 421. Powers of the agent, 423. Agent's liability to his prin- cipal for injury occasioned by misconduct, 424. Legal effect of agent's opinions on the meaning of provisions in the contract, 424. APPENDIX I. How THE LIFE-INSURANCE SALESMAN SHOULD VIEW His PROFESSION .... 427 APPENDIX II. SPECIMEN COPY OF AN ORDINARY WHOLE- LIFE POLICY, TOGETHER WITH THE FORM OF APPLICATION 438 APPENDIX III. SPECIMEN COPY OF AN ADULT WHOLE- LIFE INDUSTRIAL POLICY 455 APPENDIX IV. SPECIMEN COPY OF A WHOLE-LIFE AN- NUITY CONTRACT 462 APPENDIX V. SPECIMEN COPY OF A FRATERNAL BENEFIT CERTIFICATE, TOGETHER WITH FORM OF AP- PLICATION 464 INDEX 469 CHAPTER I NATURE OF LIFE INSURANCE AND THE BASIC PRINCIPLES UNDERLYING IT Definition and Extent of Life Insurance. Mankind is exposed to many serious hazards such as fire, disability and premature death, the happening of which, from the stand- point of the individual, it is impossible to foretell or pre- vent, but the effects of which, such as the loss of property or earnings, it is highly important to provide against. It is the function of insurance in its numerous forma to enable in- dividuals to safeguard themselves against such misfortunes by having the losses of the unfortunate few paid by the con- tributions of the many who are exposed to the same risk. If the hazard under consideration is that of premature death, the loss suffered is indemnified through life insurance. From the community standpoint life insurance may be defined as " that social device for making accumulations to meet uncer- tain losses through premature death which is carried out through the transfer of the risks of many individuals to one person or a group of persons/' J From the standpoint of the individual, however, life insurance may be defined as con- sisting of a contract, whereby for a stipulated compensation, called the premium, one party (the insurer) agrees to pay the other (the insured), or his beneficiary, a fixed sum upon the happening of death or some other specified event. Life insurance had its origin much later than the leading forms of property insurance and its real rise to importance dates back only about half a century. The first attempts at associated life insurance, as far as is known, were undertaken in Great Britain. In 1699 there was formed the " Society of i WILLETT, ALLAN EL, The Economic Theory of Risk and Insur- ance, 106. 3 4 THE PRINCIPLES OF LIFE INSURANCE Assurance for Widows and Orphans " and in 1706 " The Amicable Society for a Perpetual Assurance Office." It has been estimated that between 1699 and 1720 probably fifty life- insurance schemes were started in Great Britain, 2 but all were conducted under methods very defective as compared with those now in general use; in fact, Mr. Holcombe concludes: " It may be taken as established that no plan of life insurance as we now understand it had been contemplated by any com- pany or society, or had been considered by any legislature in Europe prior to the year 1760." 3 In 1762, when the total amount of life insurance in Great Britain is said not to have exceeded 350,000, the Equitable Assurance Society of London commenced operations, and this society may be regarded as the first to use the modern system of insurance, its policies being issued for fixed amounts and the premiums graded ac- cording to age. But while the institution of life insurance was first care- fully studied and applied in Great Britain, its greatest growth has been in the United States, dating chiefly since the Civil War. A few figures will make clear the extent and rapidity of this development. Exclusive of annuity contracts, it has been estimated that the total number of life-insurance policies in the United States at the beginning of the nineteenth cen- tury did not exceed one hundred. 4 By 1860 the companies reporting to the Insurance Department of the State of New York showed a total of only 56,000 policies with a face value of $163,000,000, while the annual premium income amounted to only $4,700,000 and the assets to $24,000,000. By 1870 the companies authorized to do business in the state of New York showed the following totals : Annual premium income, $90,000,000; number of policies, 740,000; face value of in- surance, $2,000,000,000; and assets $270,000,000. 5 During the next decade the companies experienced a decline, but fol- 2 HOLCOMBE, JOHN M., " Observations on Life Insurance History," Yale Insurance Lectures, i, 18. s Ibid., p. 19. *Ibid., p. 24. c Ibid., p. 25. NATUKE AND PKINCIPLES 5 lowing 1880 the business enjoyed a phenomenal and almost uninterrupted growth. It is possible to present only approximately the total in- surance carried by the numerous corporations and associations now operating in the United States. Some idea, however, of the present magnitude of the life-insurance business in the United States may be obtained from the aggregates for the year 1913, published in the Insurance Year Book. At the close of that year, it appears that as regards 259 companies the amount of insurance in force aggregated $20,564,000,000, the annual premium income $715,000,000 and the total in- come $925,000,000, the annual payments to policyholders $468,000,000, and the admitted assets $4,658,000,000. To these enormous totals, however, it is necessary to add the business of the numerous fraternal orders which grant in- surance. At the close of 1913, 509 such orders carried certifi- cates aggregating $9,622,000,000 while their annual income amounted to $144,000,000, their annual claims to $101,000,- 000, and their assets to $183,000,000. The vastness of these figures can scarcely be comprehended. They testify to the fact that the value of life-insurance protection is rapidly being recognized by the rank and file of the nation's population. At present over 32,000,000 policies and fraternal certificates, aggregating over $30,000,000,000 of insurance, are carried in the United States, and over $569,000,000 is distributed an- nually in claims; yet these enormous figures are small com- pared with what they will be at the close of the next genera- tion. Combination of Many Risks into a Group Is Necessary to Make the Law of Average Apply. Our definition of life insurance, it will be recalled, involved " the transfer of risks of many individuals to one person or a group of persons." Such a combination of risks is absolutely essential if the busi- ness is to be established on a basis other than speculation or gambling. To eliminate the speculative factor it is necessary to proceed on the theory that the larger the number of separate risks of a like nature combined into one group, the less un- 6 THE PKINCIPLES OF LIFE INSUEANCE certainty will there be as to the amount of loss that will be incurred. To insure a single life for $1,000 during a given year, it is clear, is in the nature of a gamble, because the individual must either die or survive that period, with the result that there is either a 100 per cent, loss or gain. If the number of per- sons insured is increased to one hundred the element of un- certainty will still be present to a large extent, although the variations in the number dying or surviving the year will be much less than that noted in the preceding case. But if 500,000 lives of similar physical condition are combined in the same group, and more than that number of lives are now in- sured in each of several American companies, the fluctuation in the rate of death from year to year will vary only by the smallest fraction of 1 per cent., with, the result that the com- pany will be able to determine in advance the amount of its death claims and thus to place its business upon a non-specu- lative basis. In fact, if the number of lives insured by a com- pany were so large as to make the application of the law of average perfect, practically all uncertainty as to the amount of loss that would be experienced during a given period would be removed. As has been well said : When the insurance is furnished by a company with capital or surplus which answers as a given guarantee of stability, it becomes a business, instead of a speculation, the distinction being that while an individual who assumes a single risk either loses or gains thereby the whole amount involved, the company which takes many, by means of the aggregate business reduces the possible variations to narrow limits and really makes of insurance a business attended with less peril than almost any other. . . . During a given year an individual either dies or he survives the year; the result is a 100-per-cent. loss or a 100-per-cent. gain, if one wagers upon the one life. But make one hundred thousand of these bets upon persons of the same age and like physical condition and the variation in the result will not be 2 per cent, usually, instead of 200 per cent. There is nothing more uncertain than life and nothing more certain than life insurance. 8 DAWSON, MILES M., The Business of Life Insurance, 4. NATURE AND PRINCIPLES 7 Necessity of Accumulating a Fund for the Payment of Claims. While all forms of insurance are alike in that they require for their successful operation a combination of many risks into a group, they are vitally different as regards the nature of the risks covered. In this respect the chief differ- ence between life and other forms of insurance is that in the latter the contingency insured against may or may not hap- pen, and as regards the great majority of policies written, does not happen, while in life insurance the event against which protection is granted, namely death, is a " hazard con- verging into certainty." It is necessary, therefore, if a life- insurance policy is to protect the insured during the whole of life, to provide not only against the risk of death each year, but also to accumulate an adequate fund for the purpose, as Mr. Dawson states, " of meeting at the ultimate limit of human life an absolutely certain claim if one has up to that time been escaped." 7 He further adds : " It was failure to see the necessity for providing for an increasing hazard, con- verging into certainty, which has caused many serious errors in the fundamental plans of some institutions formed to furnish life insurance, and the thing which separates plans of insurance into sound and unsound is precisely whether intelligent regard for this principle has guided the company in determining its rates of premium and the management and disposition of its funds." 8 Necessity of Accumulating This Fund According to Sci- entific Principles and a Workable Method. In accumulat- ing the fund referred to in the preceding section it is import- ant for the companies to take into account several other characteristics which differentiate life insurance from other forms of insurance. In the first place, the persons combining for life insurance are not of the same age, and it is clear that on the average those insuring at the younger ages will live much longer before receiving payment on their policies than those who insure at the older ages. Justice, therefore, re- 7 Ibid., p. 5. Ibid., p. 7. 8 THE PRINCIPLES OF LIFE INSURANCE quires that the premium payments should be graded according to the age when the policy is issued. Furthermore, as future chapters will show, a great variety of policies is on the market, some insuring against death for a limited number of years only while others cover the whole of life, some providing for the payment of premiums for a stated number of years only and others for the entire duration of the contract, some promising the payment of the face of the policy in one lump sum and others for the payment of that sum in a fixed num- ber of installments, etc. Here again justice demands that the rates for each type of policy shall be determined not only with reference to the age of the insured at entry, but also according to the nature of the protection promised. These complex conditions cannot be 'treated justly by the companies unless they follow scientific, principles in the com- putation of their rates. Since life-insurance policies promise a definite sum in the event of death, and in some instances in the event of survival at a stated time, it is essential that there be an accurate determination of the liability involved and that an adequate premium be charged which is just as between ages and types of policies. This is especially im- portant because life-insurance contracts, in contrast with most other forms of insurance where the policies are written for only one or at most a few years and are subject to cancella- tion at the option of either party, are unilateral as against the company and usually extend throughout life or for long periods of time. Later chapters will outline the principles underlying the computation of rates, and the matter will there- fore not be discussed in detail at this time. Suffice it to state that the reasons just mentioned make it essential for the com- panies to compute their premiums on the basis of some table of mortality experience which will indicate to the company the probability of death for average lives at any age. In addition to the foregoing, life insurance presents a further problem as regards the accumulation of the fund necessary to pay policy claims. Experience has shown that a workable plan of life insurance requires the charge of a uni- NATURE AND PKINCIPLES 9 form annual premium during the premium-paying period. Mathematically, it is possible to consider a life-insurance policy as composed of a series of one-year renewable-term in- surances and to make each year's premium just cover the cost of current protection. Under this plan, however, since the rate of death increases with increasing age, the premium will become burdensome and at last prohibitive, with the result that the healthy members of the group will withdraw rather than continue to pay the greatly increased rates. From a practical standpoint it is therefore desirable in the great majority of cases to charge a uniform or level annual premium as contrasted with an increasing one. Mathematically, the two plans are the same, since they are computed on the basis of the same table of mortality experience, but the annual level premium has the great advantage of being moderate in amount and the same from year to year, with the result that policy- holders remain satisfied and soon become accustomed to its payment. But keeping the premium the same from year to year, in- stead of increasing it in accordance with increasing age, in- volves the payment during the earlier years of a sum over and above that required to pay the current cost of insurance. In other words during the early years the company is accumu- lating a fund out of excess premiums which will be drawn upon in the later years when the same annual premium becomes insufficient to meet the current cost. This over- charge in the yearly premiums does not belong to the com- pany but is held in trust for the policyholder at an assumed rate of interest for the purpose just indicated. Considering a large number of policies, this overcharge or unearned premium (usually called the reserve) represents that sum which, together with the future premiums paid by policy- holders, will just enable the company to meet its claims ac- cording to the mortality table in use. This method of thus accumulating a reserve fund is fundamental to any sound plan of life insurance. The extent of such accumulations by the companies now in operation in the United States is indicated 10 THE PRINCIPLES OF LIFE INSURANCE by the fact that at the close of 1913 the reserve value of the policies in force in the 259 American legal-reserve companies, reported in the Insurance Year Boole, amounted to $3,903,- 000,000 or nearly 84 per cent, of their total admitted assets. Life Insurance Changes Uncertainty into Certainty and Is the Opposite of Gambling. Although life insurance serves indirectly to increase the productivity of the community by eliminating worry and increasing initiative, its direct eco- nomic function is to change uncertainty into certainty and thus enable the insured to transfer the hazard of premature death to the insurer at the lowest possible cost. The real gain from life insurance is due to the combination of many separ- ate risks into a group with a view to making possible the " substitution of certain for uncertain loss." As already ex- plained, the larger the number of separate risks comprising a group, the less uncertainty will there be as to the amount of loss, and the less the uncertainty of loss the smaller will be the premium that the company needs to collect annually from the insured. This function of insurance is perhaps most readily under- stood in connection with fire insurance. Thus let us assume that each of 5,000 persons owns a house valued at $10,000, that all the houses are alike, and that the annual loss by fire as regards the entire number, although varying slightly from year to year, averages one-half of 1 per cent, of the value, or $50. In the absence of any system of insurance making pos- sible the application of the law of average, it is clear that none of these owners can effect any arrangement which will place them in a position of absolute security. At best they can only anticipate their uncertain losses by practicing self-insurance, i.e. by increasing their rentals by an amount considerably in excess of the average annual loss of $50. But even assuming that they can increase their rentals by four or five times the amount actually necessary under a system of insurance, they will still remain subject to a large gamble. At the end of the year the great majority of these owners, since they suffer no loss, would have the entire extra sum collected from tenants NATURE AND PRINCIPLES 11 as a clear gain, while as regards those unfortunate few who suffer a total loss the extra sum collected would prove woe- fully inadequate to indemnify the value destroyed. But let us now assume that these 5,000 house-owners can combine their risks into a group. By doing this they can substitute for the great uncertainty of loss which confronted them as individuals a certain definitely known loss, amounting on the average to $50 per house and $250,000 for the group. This sum plus a proper addition for expenses, contingencies and reasonable profit, is all that the company needs to charge in order absolutely to secure these owners against the risk of loss by fire. " The risk that an insurance company carries is far less than the sum of the risks of the insured, and as the size of the company increases the disproportion becomes greater." Now just as each house-owner was enabled to use fire in- surance to substitute certainty for uncertainty at the lowest possible cost, so it is also possible through life insurance to hedge against the uncertainty of life by providing for the pay- ment of a definite sum of money at death, whenever that may occur, to replace the economic value of the deceased individual. From a family and business standpoint nearly all lives possess an economic value which may at any time be snuffed out by death, and it is as reasonable to insure against the loss of this value as it is to protect oneself against the loss of prop- erty. In the absence of insurance we saw that property- owners could at best practice only some form of self -insurance, and that it was impossible for them to effect any arrange- ment which would give absolute certainty. Similarly, in the absence of a system of life insurance which makes possible the application of the law of average, no arrangement can be found which will render certain the indemnification of the value of a human life lost through death. The practice of saving such a sum in anticipation of probable death by no means takes the place of insurance as an agency in substitut- ing certainty for uncertainty, because saving requires time and s WILLETT, ALLAN H., The Economic Theory of Risk and Insur- ance, 108. 12 THE PRINCIPLES OF LIFE INSURANCE death may occur before the savings fund has reached an ap- preciable size. Unlike the practice of saving, a life-insurance policy means certainty because it guarantees a definite estate from the moment the first premium is paid. Moreover, it furnishes this element of certainty to the public at the lowest possible cost since the companies are enabled through the combination of many risks to determine the exact average cost of the protection for the entire group. From the com- pany's point of view we have seen that life insurance is essen- tially non-speculative; in fact, probably no other business operates with greater certainty. But it is equally important to remember that from the insured's point of view life insur- ance is also the antithesis of gambling. Nothing is more un- certain than life, and life insurance offers the only sure method of changing that uncertainty, into certainty. Failure of the head of a family to insure his life against the sudden loss of his value through death amounts to gambling with the greatest of all chances, and the gamble is a particularly mean- one since in case of loss the dependent family and not the gambler must suffer the consequences. BIBLIOGRAPHY DAWSON, MILES M., The Business of Life Insurance. New York, 1911, chap. 1. , Elements of Life Insurance. New York, 1911, chap. 1. HOLCOMBE, JOHN M., " Economical Function of Life Insurance With Relation to the Family," Yale Insurance Lectures, i, 26-38. , " Definition of an Insurance Policy and Observations on Insurance History," Yale Insurance Lectures, i, 9-25. Mom, HENRY, Life Assurance Primer. New York, 1907, chap. 1. WILLETT, ALLAN H., Economic Theory of Risk and Insurance. New York, 1901, chaps. 1, 6, 7. CHAPTER II FAMILY AND PERSONAL USES OF LIFE INSURANCE The primary purpose of life insurance is the protection of the family. Every family is dependent for subsistence upon an income which necessarily varies in amount with the par- ticular circumstances surrounding its case. In some in- stances this income is obtained from the return on invested funds which have been accumulated or inherited, but in the overwhelming majority of cases the subsistence of the family depends upon the current earnings of the husband. He is the breadwinner who has definitely assumed responsibility for the support of those dependent upon him, and his wife and chil- dren have a right to look to him for adequate maintenance. His life has a value (and the same is also often true of the mother or son) to the dependent members of the family, and it is this value of one life in its relation to another that justi- fies the existence of life insurance. If a man owns a house or other destructible property he usually allows little time to pass before insuring it in some fire-insurance company. Yet why consider the value of property as more important than the value of the life of the owner, when in the great majority of instances the value of the latter to the family exceeds that of the former? Moreover, the property may never burn or be otherwise destroyed, since it appears that only about one fire occurs to every one hundred and seventy-five fire policies, while death is certain to happen. As Benjamin Franklin aptly stated: "A policy of life insurance is the oldest and safest mode of making certain provision for one's family. It is a strange anomaly that men should be careful to insure their houses, their ships, their merchandise, and yet neglect to insure their lives, surely the most important of all to their families, and more subject to loss." 13 14 THE PRINCIPLES OF LIFE INSURANCE Capitalization of the Value of a Human Life and In- demnification of That Value. Recognizing the value of a human life from both the family and the business standpoint (the two being nearly always closely interrelated), it should next be noted that life insurance constitutes the only safe method of indemnification against the loss of that value through death. Briefly stated, life insurance makes possible the capitalization of that value. By furnishing this capitalized value in the event of death, life insurance may be said to per- petuate the earning capacity of the life for the benefit of those dependent upon it. Through experience and toil the human life may be constantly growing more valuable, the dependent family in the meantime becoming more and more accustomed to a higher standard of living, and suddenly this entire value may be swept away by death. Unless, some substitute some sort of hedge can be found there will be nothing to take the place of the economic value of the deceased. Life insurance constitutes such a hedge and it should be the purpose of every man who has assumed family obligations to take out such an amount of insurance to capitalize himself to such an extent that the principal if put out at the current rate of interest will yield an income equivalent to from one-third to one-half of his earning capacity during life. Nearly all other values are being capitalized in this modern age, and it is entirely proper, in fact essential, that the value of a human life should also be capitalized. This naturally brings up the question as to how much life- insurance protection should be taken out for dependents. While this is a practical question opinions differ greatly and everyone must answer the question according to his opportunities and obligations. One rule which has been fre- quently advanced, and which assumes that there should be a continuance to the family of at least one-half of the current income earned by the insured at the time of death, is to the effect that " A man's life insurance should be large enough, when invested at the current rate of interest, to produce an income half as large as he earned while living." Others try FAMILY AND PERSONAL USES 15 to arrive at some rough answer to this question by ascertain- ing the principal which ought to pass upon death to the fam- ily of the insured in order to purchase an " income equal to the insured's probable earnings should he survive." Assum- ing that a $500 income is under consideration, the following table will serve to indicate the present value, at 4 per cent, interest, of such an income during the expectancy of life at various ages, according to the American Experience table of mortality. Thus, as the management of one company states: " At age 30, a sum of $9,332, computed at 4 per cent, interest, or of $8,187, computed at 5 per cent,, would be required to produce an income of $500 per annum for thirty-five years, which is the life expectancy of a person aged 30, and an insurance of $9,332, or of $8,187, according to the rate of interest, would be required to indemnify his family fully for the loss of $500 income which would be occasioned by his death thirty-five years in advance of his expectancy/' If an income of $1,000 per annum were under consideration the amount of insurance would be twice that indicated. INSURANCE INSURANCE AGE EXPECTANCY VALUE VALUE 4 PER CENT. 5 PER CENT. 25 38 $9684 $8434 30 35 9332 8187 35 31 8794 7796 40 28 8331 7449 45 24 7623 6899 50 20 6795 6231 55 17 6083 5637 60 14 5281 4949 The Duty to Insure. Since life insurance furnishes the surest method of hedging the family against the uncertainty of life, it is essential that all who have assumed family obliga- tions should use it as a means of protecting dependents against the want that may be occasioned by an untimely death. The capitalization of the value of a human life for the benefit of the household depending upon it is a fundamental duty that 16 THE PKINCIPLES OF LIFE INSURANCE should be given the widest publicity through the pulpit, the school and the press. In the great majority of instances, life insurance is the only recourse open to the man of moder- ate income who finds it difficult or impossible by force of cir- cumstances to accumulate a savings fund for those dependents who may outlive him. The growth of life insurance implies an increasing develop- ment of the sense of responsibility. The idea of providing only for the present must give way to a recognition of the fact that a person's responsibility to his family is not limited to the years of survival. Emphasis should be laid on the " crime of not insuring," and the finger of scorn should be pointed at any man who, although he has provided well while alive, has not seen fit to discount the uncertain future for the benefit of a dependent household. As already explained, life in- surance is the only sure means of changing uncertainty into certainty and is the opposite of gambling. He who does not insure gambles with the greatest of all chances and, if he loses, makes those dearest to him pay the forfeit. That the gamble is a risky one is easily demonstrated by any mortality table, and even if life is granted until age 50, let it not be overlooked that less than one in ten of our population succeeds in accumu- lating a reasonable competence, and that through reverses a great majority of this limited number lose the same by the time that age is reached. Woman's rights as well as her duty in the matter of life insurance should also be emphasized. She should be taught that it is not only her husband's duty adequately to protect the family, if that is at all possible, but that it is also her duty, if necessary, to use her persuasive powers to get him to act, and if that does not avail, to insist on action as her right. Not only has she a right to personal protection, but her rights as regards life insurance are further increased by her interest in the children which are as much hers as they are her husband's. In addition to the advantage of life insurance as a direct protection to the family, it also benefits the policyholder per- sonally in a number of important ways. Six advantages de- FAMILY AND PEESONAL USES 17 serve special mention in this respect and all, it should be noted, redound to the benefit of the policyholder's family by qualifying him better to meet its obligations and to protect its comfort and happiness. Eliminates Worry and Increases Initiative. Writers have frequently asserted that life insurance is not to be re- garded as a producer of wealth but that its function is merely to distribute funds from the fortunate to the unfortunate. In reality, however, life insurance will be found to be a powerful indirect force in the production of wealth in that it relieves the policyholder of worry and increases his efficiency. Constant worry is one of the greatest curses that can fall to the lot of man, and life insurance, if universally used, would lift that curse from innumerable shoulders. The knowledge of an assured estate from the moment the premium is paid will enable the insured to feel freer to take the initiative. Let us assume that the head of a family is the possessor of $10,- 000 and is afforded an excellent opportunity for the invest- ment of this capital in a business pursuit. If it were not for life insurance the owner of this capital could not safely afford to invest this sum and assume the speculative hazard con- nected with most business enterprises because of the fear that this capital might be lost, and that in case of premature death , no provision would exist for those dependent upon him. Life insurance, however, furnishes a hedge against such a con- tingency and assures the prospective investor in this instance that in case of his death and the loss of his investment, the insurance company will reimburse his dependents to the ex- tent of $10,000. By thus removing a load of care from the mind life insurance promotes efficiency and makes life hap- pier. For this reason life insurance should be regarded by the average man as one of his most treasured possessions, and premium payments should not be looked on merely as an expense to be grudgingly borne. It may safely be stated that the possession of an adequate amount of life insurance causes the average policyholder to eat better, sleep better, feel better, and as a result of these, to work better. 18 THE PRINCIPLES OF LIFE INSURANCE Life Insurance Makes Saving Possible. One constantly meets with those whose argument against life insurance is that they prefer to save. The habit of saving should by all means be encouraged, but it should be borne in mind that the saving of a competence involves the necessary time to save, and that life insurance is the only certain method to use as a hedge against the possibility of the saving period being cut short. A policy of saving can yield only a small amount at the start, while a policy of insurance from its beginning guarantees the full face value and thus safeguards the policyholder against failure through early death to have sufficient time to save adequately through other channels. Thus, if one is able to save $500 annually it will take nearly fifteen years to accumu- late a fund of $10,000, assuming that the accumulations are safely invested annually at 4 per eent. compound interest. Yet the resolution of the head of the family to protect the home with such a savings fund is contingent upon his sur- viving the full period, and may be defeated by death before the savings have reached any appreciable sum. To depend entirely on saving as a means of providing for the future of the family is, to say the least, a highly uncertain policy to pursue. The first requisite in providing for the future sup- port of dependents is absolute certainty, and this can be secured only by using life insurance as a hedge against the possible failure to continue the annual accumulations to the savings fund because of early death. Through life insurance the suggested fund of $10,000 can be assured in any case. Upon death the insurance company pays the face of the policy, while in case of survival the insured is given the necessary time to accumulate a competence. Moreover, the roseate views which so many hold concern- ing their resolution and ability to accumulate and keep should be tempered by a frank statement of the distressing facts as they actually exist. Eighty-five per cent, of this country's adults leave no estate at all, and about one-third of the widows in the country lack the necessities, and 90 per cent, the comforts, of life. The habit of saving, as already FAMILY AND PEESONAL USES 19 stated, should be encouraged, but the foregoing facts clearly indicate that it is unwise to practice saving to the exclusion of life insurance. Both should be practiced, and, if only one is possible because of limited means, insurance should be selected because of its much greater certainty in leaving a stipulated fund for the support of the family whenever the breadwinner's income-producing capacity is cut short by death. Furnishes a Profitable and Safe Investment. In addi- tion to guaranteeing an estate at once, life insurance contains an investment feature which is absolutely safe and which reaches large proportions in the later years of the policy. With the exception of a few types of policies only, life insur- ance represents an accumulation of savings admirably adapted to put small sums of money to prompt and profitable use, and in this respect has been aptly defined as " compound interest in harness." As will be explained later, nearly all types of life-insurance policies gradually accumulate a so-called sur- render value which may be withdrawn by the insured if he decides to discontinue the policy. This value, as will be shown later, represents an accumulation of a portion of the premiums paid by the policyholder which the company promptly invests at an assumed rate of interest ; and in mutual companies the interest earnings in excess of this assumed rate are returned to the policyholder. In other words this value of the policy represents savings left with the company. Past experience shows that on the average life-insurance companies have earned on the savings left with them by policyholders the largest interest returns consistent with safety. Owing to the mathematical and scientific character of life insurance and the stringency of government supervision of the com- panies, there has not been a failure of a large and well- established life-insurance company in the last quarter of a century, and this is true despite the fact that we have wit- nessed three severe financial panics during the last twenty- five years. Xearly every company devotes the greatest care to its investments, which are spread out over such a large number of securities and other forms of property that a loss 20 THE PRINCIPLES OF LIFE INSURANCE on one investment will be fully counterbalanced by profits on another. The investments of nearly every large company are in the special care of investment managers, and the skill with which they are made may be illustrated by the experience of one of the largest companies in America, which, valuing its securities at the lowest quotations prevailing in the severe panic of 1893, could still show an excess of $20,000,000 over and above the purchase price of those same securities. More- over, an examination of the present earnings of life-insurance companies, shows that the great majority make between 4^/ 2 and 5 per cent, on their total assets, while in some instances the returns exceed this amount. Not only does life insurance thus furnish a profitable and safe investment, but modern policies, also make it possible for the insured to arrange for the safeguarding of the pro- ceeds of the policy upon his death for the benefit of his bene- ficiaries. Too frequently the competence which a husband or father has provided through saving or insurance is quickly lost by the heir OT beneficiary through speculation, unwise investments, or excessive expenditures for unnecessary com- forts. Such a contingency should always be contemplated by the insured and may be prevented in various ways. Modern income policies, especially, furnish a guarantee against such a contingency by providing that the beneficiary shall, follow- ing the death of the insured, receive during the whole of her life, or for a designated number of years as the case may be, an annual, quarterly or monthly income of a stipulated sum. Or, instead of having the proceeds of the policy paid in one lump sum upon death, the insured may arrange to have the company retain the sum upon the maturity of the policy and pay the same in a designated number of installments. Again, the proceeds of the policy may be left with the company for safe-keeping for a designated number of years. Forces and Encourages Thrift. Not only does life in- surance render safe the insured's effort to accumulate a fund through saving by hedging him against early death, or itself furnish a profitable and safe investment, but for the great FAMILY AND PERSONAL USES 21 majority of people it constitutes an excellent means of en- couraging and even forcing thrift. There are few institutions, if any, which have given such excellent schooling along this line. Savings banks, of course, do their share in developing the saving instinct among the masses and building and loan associations have also assumed a prominent position in this respect. But, usually, institutions of this character have the shortcoming that they permit the depositor to withdraw all or nearly all of the funds after giving notice of a certain num- ber of weeks, with the result that a resolution to save over a long period may be broken when the depositor for one reason or another sees fit to withdraw the amount deposited. In life insurance nearly all the types of contracts sold con- tain a savings feature, and this is especially true of the so- called endowment policy which, as will be explained more fully later, promises the payment of a stipulated sum not only upon the death of the insured during a given term of years but also upon his survival at the end of that term. Of course, in order to receive, say, $10,000 at the end of fifteen or twenty years the insured is obliged to pay to the company a sufficient amount in annual, semi-annual or quarterly premiums to enable the company, after improving these payments at compound inter- est, to accumulate a fund by the end of the period which will equal the sum stipulated in the contract. Whatever the policy- holder has accumulated to his credit cannot as a rule be withdrawn from the company during the first two or three years, and it is also the general practice to apply a penalty in the form of a surrender charge in case of withdrawal dur- ing a considerable number of years following the payment of the third premium. Furthermore, the regular payment of the premium from year to year will soon be looked upon by the insured in much the same manner as he comes to regard interest upon a mortgage. Consequently to secure the neces- sary funds to pay the premium his industry will be con- siderably enhanced or his efforts to save the required premiums out of income will be increased. In fact, it is the common assertion of innumerable individuals who were the holders of 22 THE PRINCIPLES OF LIFE INSURANCE endowment policies that at the end of fifteen, twenty, or twenty-five years they became the possessors of a considerable sum of money which, under other circumstances they would never have accumulated, or which, if they had done so, would have been lost or dissipated. Life insurance, in other words, tends to bring about compulsory saving, and represents the accumulation of small sums (which in all probability would not otherwise be accumulated) over a long period of years into a substantial sum. In brief, life insurance generally bears the relationship to thrift that the modern utilization of by- products (largely wasted in former years) bears to many of our leading manufacturing enterprises of to-day. Facilitates the Purchase of a Home. While this advan- tage may be considered essentially a business one, it is men- tioned here because of the enormous yolume of outstanding mortgages on homes and the direct bearing of this situation in nearly all cases upon the welfare of the mortgagor's family. One who has purchased or built a home with funds borrowed on a mortgage which provides for payment at a specified date is exposed to the danger of dying before a fund sufficient for such payment has been accumulated. Let us assume that the head of a family has mortgaged his home for $5,000 and expects to pay off the same through a series of payments at fixed intervals, such payments being made out of current earn- ings. It is apparent that the fulfilment of this purpose is dependent upon the mortgagor living long enough to earn the amounts necessary to make the periodic payments. Pre- mature death, however, after only a few payments have been made, may seriously jeopardize the welfare of the family, since the remaining members of the household may be unable to effect a settlement of the mortgage and thus prevent a fore- closure on their home at a time when troubles are amply abundant. Here life insurance, involving only a moderate cost, affords an excellent protection against such a contin- gency. A $5,000 life-insurance policy may be taken out by the mortgagor to hedge his $5,000 mortgage. If his life is spared he will pay off the mortgage and because of a little FAMILY AND PERSONAL USES 23 extra thrift, will also be the holder of $5,000 life insurance, the beneficent purpose of which as family protection will by that time be appreciated. If death, however, should occur when only $1,000 has been paid on the mortgage, the proceeds of the policy become immediately available for the extin- guishment of the balance of $4,000. The family thus becomes possessed of full title to the home, while the balance of $1,000 of life-insurance money will prove exceedingly welcome as a means of tiding over the period of adjustment that nearly always arises when the breadwinner is removed by death. The same situation also presents itself on every hand among the large farmer and retailing classes of the country. Here a vast volume of mortgages covers the" farms and small retail establishments in which the mortgagors' families have a vital interest. Foreclosure of the property in case of failure to meet the mortgage because of the mortgagor's untimely death, or serious hardship on the part of the heirs in attempting to pay off the mortgage, can easily be obviated through the use of life insurance. The possibilities of the spread of life in- surance among the farmers of this country are exceedingly great, because as a class they stand sadly in need of its pro- tection and at present know comparatively little about its usefulness. Furnishes an Assured Income in the Form of Annuities. Life insurance also proves valuable to a very considerable number of people, who, as the result of a lifework have suc- ceeded in saving only a limited amount of capital, and who have no one to whom they particularly care to transfer this sum in case of death. Thus, let us assume that a person aged 60 has accumulated $10,000, and that this represents the entire estate available for the maintenance of the owner dur- ing his later years. Owing to the limited size of the estate, the owner will be obliged to invest the same in the most care- ful manner, and the current rate of return for such invest- ments would probably not exceed 4 per cent. Consequently this individual's income will be limited to $400, an amount in- sufficient for proper maintenance during old age. Nor can he 24 THE PKINCIPLES OF LIFE INSURANCE afford to take a portion of his principal for living expenses, because this would reduce his annual income. The danger confronting him is just the opposite of that facing the man who wants insurance against death. The latter wants insur- ance because he does not know how long he will live, while the former is confronted with the danger of living too long, i.e. of outliving his income. Just as the man who felt that death might intervene too soon, could hedge himself against that risk, so our owner of the $10,000 fund, who feels that his income is too limited and that he might outlive this income if he should resort to the expenditure annually of a portion of the principal, can pro- tect himself by buying an "annuity." An annuity is a con- tract by which an insurance company promises to pay the holder thereof a certain stipulated income every year as long as he lives, the payment ceasing upon death. Thus, for illustrative purposes, let us apply an annuity to a man aged 60 who has saved $10,000, which sum, as stated, will yield only $400 income a year if invested at 4 per cent. Now, to quote the rates of a certain company for annuities, this individual may deposit $1,066 and receive therefor a promise of an income of $100 a year throughout life. This sum, it will be observed, represents a yield of 9 per cent., or more than twice as much as the assumed current rate of 4 per cent. The older the annuitant is when he buys an annuity the larger is the annual return the company can afford to give. Thus if the individual, assumed in our illustration, should be sixty- six years old this same company promises him $100 a year throughout life for each $888 paid in, or over 11 per cent. At age 70 the $100 annuity will cost only $630, or an annual return four times greater than the 4 per cent, rate used for illustrative purposes. If, therefore, the holder of a limited estate does not particularly care to transfer his property to some individual or institution, life insurance makes it possible for him to pay the same to an insurance company in return for a promise of a certain definite income a year, thus reliev- ing him from all further worry as to the sufficiency of his FAMILY AXD PERSONAL USES 25 future income. The companies can afford to give these large returns at the later years of life because the death rate at age 60 and thereafter is high and because of the understanding that the annuities will cease just as soon as the annuitant dies, in which case the balance of the money deposited with the company goes to the benefit of the other annuitants who may survive. The Relation of the Foregoing Advantages to Society at Large. The many advantages discussed in the preceding pages, it is apparent, will greatly benefit the community as a whole if life insurance is widely used. Mr. Holcombe writes : It is clear that any agency which improves the mental or moral attributes, or the material circumstances of any one of its citizens, raises the condition of the community of which he is a member, and thus benefits the state. Savings banks en- courage thrift and produce accumulations which would in many cases be otherwise wasted, and thus tbey constitute a distinct and tangible benefit to the state. Life insurance promotes a sense of responsibility, strengthens family ties, and thus ele- vates tbe general character of the nation. It lessens those fam- ily discords which end in divorce, it checks intemperance, and often by its requirements brings a realization of tbe benefits of right living. . . . There can be no doubt, furthermore, that life insurance curtails tbe expense to tbe public treasury, of almshouses and police, of criminal courts and prisons, and of the various other necessary branches of the public service which have to do witb the prevention and punishment of crime, and the relief of tbe suffering and unfortunate. ... It is certain that in many cases the proceeds of a life-insurance policy are practically all that remain at the death of tbe one responsible for the support of helpless dependents, and in a vast number of these cases, were it not for this aid, many persons would be forced to accept public charity. 1 The value of life insurance as an agency for increasing the individual's sense of responsibility, and for relieving the com- munity of much needless erpense in supporting members of destitute families, has been recognized for years^J^y the gov- i Yale Insurance Lectures i, 39, 41. 26 THE PEINCIPLES OF LIFE INSUKANCE ernments of all civilized countries. As early as 1840 the state of New York enacted legislation to the general effect that any life-insurance policy taken out for the benefit of a married woman, or assigned to or held in trust for her, or which in case of her death before payment is to inure to the use of her or her husband's children, was to be free from all claims of creditors. A large number of our states have since enacted legislation substantially similar in character, the laws, how- ever, usually providing that if the annual premium on said insurance should exceed a stipulated amount (usually $300) the excess together with interest should be available for satisfying the claims of creditors of the person paying the premium. Many foreign governments liave also done every- thing possible to encourage the taking out of life insurance by adopting a very lenient policy of taxation, although this very commendable method of encouraging the spread of life-insurance protection has been neglected or refused by the several American commonwealths. In conclusion, two general benefits of life insurance not yet discussed should briefly be referred to as vitally affecting the entire community. These are : 1. Through their enormous investments life-insurance com- panies have exerted a powerful influence in the upbuilding of the industrial life of the nation. Two hundred and fifty- nine companies, reported in the Insurance Year Book, 1913, show total admitted assets of $4,658,696,337, of which $1,617,873,512 represent investments in real-estate mort- gages and $1,994,722,971 in corporate bonds and stocks. The significance of these large totals becomes apparent when it is stated that they represent the contributions over a long series of years of millions of policyholders, each of whom has con- tributed his little mite. The companies, in other words, have been the medium through which a vast aggregation of small sums has been devoted to the furtherance on a large scale of the nation's leading business interests. The investments of nearly two billion dollars in bonds and stocks will be found to be fairly well distributed over the principal transportation FAMILY AND PERSONAL USES 27 and other corporate properties of the country and represent a very substantial part of the total funds that have been neces- sary for their development. The $1,600,000,000 of real-estate mortgages also represent investments in properties located in all parts of the country. Because of such loans, owners of real estate have been enabled to erect buildings or otherwise improve their properties. Not only have large sums been furnished for the development of cities and towns, but for many years the companies have granted loans upon western and southern farming lands, thus enabling the purchase, stocking, and cultivation of large areas. 2. By carefully restricting the admission to membership and by requiring answers to numerous questions relating to intemperate habits, the applicant's attention is forcefully directed to the close relationship between temperate living and longevity. Physical ailments are also frequently dis- covered for the first time as a result of the physical examina- tions which the companies require all applicants to undergo. The knowledge thus obtained leads to the application of remedies, and results in the conservation of the value of many lives for the benefit of the community. The movement toward the conservation of health and life is receiving increasing attention on the part of the com- panies, and has been a subject for special consideration by various prominent life-insurance associations. Various com- panies are already pursuing a policy of disseminating advice for the treatment of various diseases and of offering periodical health examinations for the detection of ailments. While the movement is yet in its infancy the tremendous possibilities for good along this line cannot be overemphasized, and the desirability of having life-insurance companies participate actively in a comprehensive conservation movement is appar- ent. The possibilities along this line have ably been set forth by the Life Extension Institute, Inc. In a recent circular on " Life Extension Service for Life Insurance Companies " the promoters of this Institute show clearly the desirability of " checking the life waste that is going on in our country as a 28 THE PRINCIPLES OF LIFE INSURANCE result of ignorance or defiance of the simple laws of health," and express their belief that " by the study of problems relat- ing to national vitality, by disseminating knowledge of per- sonal hygiene and the science of disease prevention, and by offering and encouraging periodical health examinations to detect disease in time to check or cure it, a substantial con- tribution to longevity and to human happiness generally will be made." CHAPTER III BUSINESS USES OF LIFE INSURANCE So-called " business " or " commercial " life insurance has assumed large proportions only within the present decade. "While the primary purpose of life insurance is to protect the family against the loss of the income-producing capacity of the breadwinner, it is becoming clear that the business enter- prises of the country likewise have need of protection against the loss of the valuable lives that give them vitality and suc- cess. During the last few years the business world seems to have discovered this fact, and as a result an enormous amount of insurance has been written on the lives of business men who have had in mind chiefly the stabilizing of their business through the establishment of better credit relations and the procurement of protection against the loss through death of those most valuable to its success. So large is the volume of business insurance becoming, and so rapid is its increase that there is good reason to believe, as one writer on the sub- ject recently stated, that " the time is fast coming when the life-insurance policy will be almost as integral a part of cor- porate and copartnership structure as are the charter, the bond, the stock certificate, and the articles of copartner- ship." 1 The business uses of life insurance afford a boundless field for study and thought, because there are few men, indeed, who do not at some time face a business situation, the solution of which will be made simpler and less hazardous through the medium of some kind of life insurance. Close Relationship Between the Home and Business. Business life insurance should particularly appeal to a busi- i ANDERSON, STEWART, " Commercial Life Insurance," published in H. P. Dunham's The Business of Insurance, I, 387. 29 30 THE PKINCIPLES OF LIFE INSURANCE ness man when it is shown that in nearly all instances there is a very close relationship between his home and the business in which he is engaged. So close is this relation that a policy taken for the special conservation of the business may often prove even more valuable than a policy taken out for the direct protection of the family. The latter policy can seldom do more than alleviate in a measure the financial injury caused by the death of the income-producer, while the former may be the means of successfully continuing in opera- tion the business of the deceased. Had not the former policy been taken out the business might have failed or declined. The family policy usually assures the continuance of a portion only of the insured's income during life, while the business policy, since it conserves the efficiency of the insured's busi- ness, may be instrumental in bringing -about the continuation of a much larger income, viz., the income from a successful business. Moreover, the owner of a business, generally speaking, con- ducts the same primarily with a view to supporting a home, thus again showing that the welfare of the home and the wel- fare of the business are so intimately related as, generally speaking, to be inseparable. On the one hand the advantages of family insurance as discussed in the preceding chapter, such as freedom from worry, increase in initiative, etc., will produce a very wholesome effect upon the welfare of the insured's business, and business success means, as a rule, family happiness and contentment. On the other hand busi- ness adversity practically always means family adversity, and, therefore, business insurance which protects the business against disaster is in reality also family insurance since it preserves the family's interest in the income derived from that business. The speculative risks connected with nearly all business pur- suits and the danger of meeting with business failure need not be outlined to men of experience. Suffice it to say that compilations show that the number of actual business failures is exceedingly large, that the amount of failure liabilities over BUSINESS USES 31 a series of years is about the same as the total fire loss and is equally subject to great fluctuations because of unforeseen contingencies, and that the probability of business mortality is about as great as human mortality at age 41. It is also noteworthy that in a year like 1907 approximately one-fifth of the total number of business failures, involving over 55 per cent, of the total failure liabilities, was due to disasters, failure of apparently solvent debtors and undue competition causes which cannot be considered as due to the faults of those who failed while another 37 per cent, of the failures were traceable to lack of capital and 5 per cent, to inexperience. In every community we meet with instances of once prosperous families reduced to straitened circumstances through failure brought about by the sudden death of the head of the business or of a valued official or employee. At such a time all adverse influences will seem to operate at once against the credit facilities and the competing powers of the business, with the result that the enterprise may go under because of lack of capital and the inexperience of the survivors. But the cruel- est results of business failures become apparent when we note the effects upon the homes of the deceased and surviving part- ners. Here the reduced income may necessitate moving to humble quarters, curtailing expenses, and withdrawing the children from school or college. That such occurrences should be so common is truly a pity when by the employment of life insurance the business might easily have been protected against the dangers referred to. Life Insurance as a Means of Indemnification Against Loss Through the Death of Officials and Valuable Employ- ees. Turning now to a discussion of the numerous business uses to which life insurance lends itself, we find that one field for its application consists of the numerous businesses which depend upon, in fact have been built around, some one man whose capital, energy, technical knowledge, experience, or power to plan and execute make him a most valuable asset of the organization and a necessity to its successful operation. Xumerous examples may be pointed to as illustrating the de- 32 THE PRINCIPLES OF LIFE INSURANCE pendence of successful business upon the personal equation. Thus a corporation or firm may be vitally interested in one of its officers whose financial worth as an indorser, or whose ability as an executive, may be the basis of its bond issues or bank credit. A manufacturing or mining enterprise may be dependent upon someone who alone possesses the chemical or engineering knowledge necessary to the concern. A publish- ing house may have engaged someone who alone can be the author of a proposed work and may be obliged to incur con- siderable outlay before it is written. The sales manager of a large business establishment may have made himself indis- pensable through his ability to organize an efficient body of salesmen, to employ the most effective methods of selling, and to develop profitable markets. Again, some officer of the concern, although not actively engaged in its daily operations, may prove indispensable because he is its principal owner and because his experience and business connections make him its chief adviser. . These are only a few illustrations of the many that might be given to show the importance of a human life as an asset to the successful operation of a business. Now why not insure the business against the loss of that life that asset through death? Surely, the extinction of such valuable lives will in many instances prove a more serious loss than that by fire or any of the other sources of loss in business against which insurance is invariably procured. The death of the officer whose indorsement or executive ability is the basis for the firm's bank and bond credit might result in a refusal on the part of lenders to renew old and make new loans, thus possibly jeopardizing the business because of a lack of capital. If adequately insured, however, for the benefit of the business, the firm would immediately upon his death receive the face value of the policy. Not only would the insurance proceeds help to enable the company to meet any obligations falling due during the period of adjustment, but the mere knowledge that the business was the recipient of a large amount of cash would be a powerful factor in allaying doubt and in restoring BUSINESS USES 33 confidence on the part of creditors. Similarly the death of the person who alone possessed the chemical and engineering knowledge required by his employer might result in the lower- ing of the quality or the volume of the output of the com- modity in question, thus causing much inconvenience and pos- sible loss of business; while the death of the sales manager might involve the disintegration of the selling force and the consequent loss of profitable markets. Furthermore, in many instances an untimely death may leave a special piece of work unfinished and subject the employer to a loss of the advances made, since no one else can be found to bring the unfinished project to completion. Here the amount of life-insurance pro- tection may be made to equal approximately the outlay in- curred, and if the work is known to require only a few years for its completion, the term of the policy may be made to cover only this limited period. Such short-term policies also often prove desirable for the protection of a business against the death of its owner or manager during the first five or ten years required for the business to become firmly established. All losses of a character like those enumerated may be guarded against by making the business the beneficiary of a sufficiently large policy on the lives of the officers or employees under consideration. 2 In the event of death the business will 2 The following may be mentioned as a few of the notable in- stances of business insurance which are commonly cited as illus- trative of the extent to which certain men use life insurance for the benefit of copartnerships and corporations: George E. Nicholson, Kansas City, $1,500,000 in favor of four cement companies of which he is president; H. N. Byllesby, Chicago, $1,250,000 as managing engineer of electric companies; John H. Jones, Pittsburgh, $1,000,000 in favor of the Pittsburgh-Buffalo Co., of which he is president; John H. MacMillan, Minneapolis, $500,000 in favor of the Carigal Elevator Co., of which he is vice-president; F. B. Wells and F. T. Heffelfinger, Minneapolis, $500,000 each in favor of the F. H. Peavey Co.; and Arthur S. Ford, $1,000,000 in favor of the Portland Cement Co., of which he is treasurer. Mr. Edward A. Woods, in a recent address on " The Use of Life Insurance in Bank Credit," states : " Among conspicuous illustra- tions of insurance more or less for the purpose of protecting credit is the insurance, said to be $3,500,000, carried by John Wanamaker, 34 THE PRINCIPLES OF LIFE INSURANCE promptly be indemnified for the loss of the services of the deceased, and the proceeds received will enable it to bridge over the period necessary to secure the services of a worthy suc- cessor. Mr. Stewart Anderson writes: In the conservation of business, many other kinds of insur- ance, highly useful because deeply needed, are employed fire, casualty, surety, employers' liability, title, plate glass, etc. but none of these, except casualty (and that only in case of accident), defends against loss or destruction caused by the death of a man who is the blood, brains, gold, and very life of the business. Curious omission, dangerous neglect, is it not? fire? insurance; embezzlement? insurance; accident to a workman? insurance; title? insurance; broken pane of glass? insurance! but against the staggering loss or the supreme disaster of total ruin following the snuffing out of a man upon whom the whole fabric of the business rests no insurance! and that snuffing out occurs in innumerable cases as quickly and as suddenly as the smashing of a plate glass front. Business has greater need of life insurance than of any other kind, because it is the only form that completely encircles with impregnable protection against utter destruction through death. 3 The Use of Partnership Insurance. To an increasing ex- tent copartners in any line of business find it advisable to insure their lives for the benefit of their firm. This may be done in one of two ways: either each member of the partner- ship may take out a separate policy on his life and make the same payable to the firm, or to the surviving member or mem- bers of the firm; or the insurance may be taken jointly upon all or any number of the partners, the contract in this instance (called a joint-life policy) promising payment to the firm or and the $4,000,000 carried by his son Rodman Wanamaker; the $1,000,000 carried by Harry G. Selfridge in establishing his Ameri- can department store in London; the $500,000 on the late Charles Netcher, the department store manager of Chicago, who died while enlarging his store, the prompt payment of which, after but one premium was paid, largely assisted his wife in continuing the busi- ness and suggested her carrying $1,200,000 insurance herself." s ANDERSON, STbwABT, " Commercial Life Insurance," in H. P. Dunham's The Business of Insurance, i, chap. 23, p. 389. BUSINESS USES 35 its surviving partners in the event of the death of any one of the members covered by the policy. Under either method the premiums will be paid by the firm just as in the case of fire and other forms of property insurance. Should a dissolution of the partnership occur the joint-life policy, if it is so desired, may be converted into separate policies for equitable amounts upon the lives comprising the membership of the firm. If, on the other hand, the partnership insurance originally consisted of separate policies, the death of any partner would cause his insurance to be paid to the firm, the other policies continuing in force as before for the benefit of the business. Moreover, in case of dissolution the firm may surrender the policy for its cash value or the retiring partner may purchase his policy from the firm and continue it as his own insurance for the benefit of his estate or some designated beneficiary. The numerous benefits derived from partnership insurance become apparent upon a consideration of the. many diffi- culties that may confront a copartnership upon the death of one of the members of the firm. In most partnerships the several partners not only have supplied their respective por- tions of the necessary capital, but each is a specialist in some particular department. The death of any member of the firm, therefore, may involve not only the withdrawal of his share of the capital by his heirs but the loss of his skill and active cooperation. If, however, the deceased partner has been in- sured for the benefit of the firm, the proceeds of the policy will enable the surviving partners to pay off his interest to his heirs and carry on the business without delay and embarrass- ment during the time necessary to find a successor. Fre- quently the purchase of the deceased partner's interest becomes highly desirable, especially where the business is a specialized one, in order to prevent that interest from coming under the control of persons in the firm who may be entirely ignorant of the business and possibly hostile to its management. Again, the death of a copartner, usually implying the loss of skill and the withdrawal of capital, often awakens doubt and fear among the firm's creditors with the result that at the 36 THE PRINCIPLES OF LIFE INSURANCE very time when the deceased partner's heirs are clamoring for the withdrawal of their interest the firm is subjected to the embarrassing situation of having its loans called and its requests for credit refused. When bankers and other creditors, however, know that the deceased partner's life was insured for the benefit of the firm, credit is immediately established and confidence takes the place of doubt. The value of life insur- ance in this respect is well recognized by bankers, wholesale houses and commercial agencies. Banks at present almost invariably require prospective borrowers to reveal the amount of life insurance they carry for the benefit of their business. Commercial agencies also consider this matter important when reporting upon the financial standing of business, as was clearly indicated by the late Charles F. Clarke, President of the Bradstreet Company, when he wrote : " It is practically beyond a doubt that corporation insurance strengthens the credit of firms adopting it. The increased confidence which it establishes is recognized in the mercantile community and thus reflected through our reports." This is merely one of many statements which might be furnished to indicate the growing conviction that partnership insurance is an agency which strengthens credit at all times and furnishes a quick asset when credit is impaired, which safeguards the deceased partner's interest and permits its withdrawal without em- barrassment to the firm, which provides ready cash to pay off indebtedness and to replace in a measure at least the loss of the deceased partner's services, and which makes possible the retention of the management and control of the business by the surviving members. The Insurance of Employees for the Benefit of Their Families. Thus far attention has been called to the insurance of officials and valuable employees for the bene- fit of the business with which they are connected. Numer- ous policies, however, are issued to-day which have for their purpose the insurance of the rank and file of the em- ployees in any given line of business for the benefit of their families, although the employer pays all or a portion of the BUSINESS USES 37 premiums. Although such insurance appears to be primarily family insurance, it also serves a useful business purpose in increasing the efficiency of the employer's working force. Long service on the part of employees is deemed desirable by employers as one of the best means of keeping up the quality and keeping down the cost of the product. Frequent change in the labor force not only necessitates constant instruction, but, in the long run, spells loss through inefficiency. It is, therefore, with a view to lengthening the service of its em- ployees that many corporations and firms have adopted the profit-sharing plan or are maintaining for their employees, at considerable expense, comprehensive pension or insurance plans. A great variety of methods is used in this respect, but all have the same general purpose, viz., the elimination of the loss that is connected with frequent changes in the working personnel. Sometimes the employer accomplishes this pur- pose through a plan of self-insurance, while in other in- stances the insurance protection is obtained from a company. Sometimes the plan simply provides for the payment to the deceased employee's family of a stipulated pension or a lump sum of insurance, while in other instances, and this is com- ing to be regarded as preferable, the insurance does not ma- ture as a lump sum payment but the proceeds are paid to the beneficiary in annual, semi-annual, quarterly or monthly in- stallments. Again the employer may seek to bind his em- ployees to himself by rewarding them with an endowment policy which provides for the payment of a stipulated sum either in the event of death during a given period like twenty years, or upon their survival of that period. If the employee dies during this period and while still in the service of the employer, the proceeds of the policy pass to the employee's family either under the lump sum or installment plans of payment. If, however, the employee remains with the busi- ness during the entire twenty years the proceeds will at the end of that period be paid to him directly. Should the em- ployee cease to remain in the business, the employer usually 205098 38 THE PRINCIPLES OF LIFE INSURANCE has the option of surrendering the policy for its cash value, or of permitting the employee, if he is willing to refund the back premiums, to take over and himself carry the policy to its maturity. Life Insurance as Security for Bond Issues. Life insur- ance may also conveniently be used as a hedge against the possible failure to pay a bond issue at maturity. Thus, let us assume that a firm wishes to raise $50,000 on bonds which will mature in twenty years, and that the nature and organization of the business are such as to make it chiefly dependent for its credit and successful operation upon the life of one man. Under such circumstances the unexpected death of this individual might ruin the company to such an extent that the liquidation of its assets might not prove suffi- cient for the full redemption of the bonds. Unless some means can be found which will assure the creditors that the bonds will be redeemed upon maturity, the loan will in all probability not be effected at all or only \under severe restric- tions and at a very high rate of interest. Proper security to the creditors may conveniently be fur- nished in this instance through the medium of endowment insurance. In other words, the head of the business may insure his life for $50,000 under a twenty-year endowment policy. In case of survival, the business is likely to prosper with the result that the security back of the bonds will greatly increase. In that case the endowment policy will serve the purpose of creating a sinking fund which increases year after year until at the end of twenty years it will amount to $50,- 000 or just the sum needed to redeem the bond issue then falling due. On the other hand, should the insured die be- fore the expiration of the twenty-year period, and this is the real contingency that the creditors desire to be protected against, the business at once receives the full face value of the policy. The firm would thus have on hand sufficient funds to pay off the bonds at once if that were possible and desira- ble. But if it is found, instead, that the business can be continued advantageously, such a portion of the $50,000 of BUSINESS USES 39 insurance money may be set aside in a sinking fund as will at the current rate of interest amount to $50,000, or the face of the bond issue, at the end of the twenty-year period. The balance of the insurance money not needed for the sinking fund may be used for the improvement of the business, thus in turn still more enhancing the security back of the bond issue. Similar in nature to the above function is the further use of life insurance as a means of accumulating a sinking fund for the benefit of such institutions as schools, colleges, churches and hospitals. Many times such institutions are largely dependent upon the efforts and generosity of one man or a limited number of men. While he or they live the insti- tution prospers, but in the event of unexpected death, the absence of ample endowment funds compels retrenchment and consequently impairment of usefulness. Such a con- tingency the supporters of the institution may obviate by tak- ing out endowment insurance in its behalf. In case of death the institution receives at once the face of the policy, while in the event of survival the policy will enable the insured gradually to accumulate a sinking fund to be turned over to the institution in question at the expiration of the term. During the last few years the graduating classes of a number of leading universities and colleges have also adopted this method, and it is mentioned here merely as illustrative of the numerous ways in which the principle may be applied, as a convenient method of raising a substantial class fund for their Alma Mater. The plan adopted consists in each mem- ber of the class pledging himself to take and maintain, say, a $250 or $500 twenty-year endowment policy, the university or college being named the beneficiary. In this way one hun- dred graduates by setting aside the small sum of only about 314 or 6y 2 cents a day can during the twenty-year period, using as a basis the present experience of the average Ameri- can company, accumulate approximately $25,000 or $50,000 as a class fund. Ask these one hundred persons twenty years from date to give that sum, and the refusal will be general. 40 THE PRINCIPLES OF LIFE INSURANCE Through the use of the endowment-insurance plan, however, this substantial result can be obtained at a sacrifice so small as to be hardly worth mentioning. It is practically certain that the sum. involved, owing to its smallness, would, in the absence of this plan, have been wasted in daily expenditures for trifles, and the large sum that may be secured through endowment insurance may therefore be regarded as the utili- zation of a by-product odds and ends that would not other- wise have been saved for a noble purpose. The Use of Life Insurance as a Means of Enhancing the Credit of Business Enterprises During Times of Financial Stringency. Just as endowment insurance proves serviceable as a means of accumulating a substantial fund without the insured being conscious of any sacrifice, so nearly all other forms of life-insurance policies, as will be explained more fully later, contain a savings feature, although in none does that feature appear so prominently as in the ordinary types of endowment policies. Nearly all policies are paid for by an annual premium which is uniform throughout life or the premium-paying period, with the result that the company gradually accumulates through overcharges in the early years, when the premium is more than sufficient to meet the current cost of insurance, a fund which when improved at interest at an assumed rate will just enable the company to meet its claims as they mature. On a whole-life policy, for exam- ple, this fund reaches large proportions in the course of years. 4 It follows, therefore, that the taking out of life-insurance policies from time to time, made payable to either the in- sured's estate or to his business, means the gradual accumu- lation of increasing cash or loan values which are obtainable at any time by surrendering the policy or by borrowing against its cash value. It is not intended here to encourage the altogether too common habit of borrowing the loan value of policies, because * The extent to which the cash or loan value of a policy increases in the course of years is indicated by the table on page 75 of this volume. BUSINESS USES 41 in many instances the privilege is exercised unnecessarily, simply because some luxury is desired or because the security market seems low, or because some other apparent opportu- nity to make money quickly seems to present itself. And, even where these considerations are not the motive, the insured frequently uses this asset because it is so easily obtained, never considering at the time the relation of that asset to his beneficiary and often overlooking some other available asset which should have been used in preference to the cash value of his policy. Borrowing under such conditions is not con- templated in this discussion. What it is intended to show is that the surrender or loan value of a policy is a real asset which enhances the credit of the business man because it is available on demand, irrespective of the financial conditions which may prevail, and usually at the fixed rate of 5 or 6 per cent. Bankers and other creditors always regard the cash value of a business man's policies as an additional asset justifying larger extension of credit on his firm's paper. But sup- pose the borrower must have additional credit at a time when the condition of the money market is such as to make it highly inconvenient or impossible for the banks to meet his requirements. It is at such times that the loan privilege contained in insurance contracts affords a convenient and most excellent means of relief, as has been amply testified to by many of the nation's leading business men. During the panic of 1907, for example, when such stringency prevailed in the credit market as to make impossible the floating of loans even on the best collateral, millions of dollars were bor- rowed on life-insurance policies and numerous business men, firms and corporations used their life-insurance contracts as a means of securing funds to make up their payrolls or to meet other pressing obligations. This service of life insur- ance to the business community and the spirit in which it should be used is well exemplified by the experience of one of the nation's leading business men. He writes : 5 B JOHNSON, ALBA B., " A Business Man's Views Upon Life Insur- 42 THE PRINCIPLES OF LIFE INSURANCE Never, except as a last resource, should a man use his insur- ance policies as the basis for borrowing. It should be a source of joy and satisfaction that this sacred investment is kept clear of encumbrance. Whatever advantageous financial operations may offer with reference to other investments, sums set aside for insurance should be regarded as of a different class, to be maintained unimpaired. It is a satisfaction to know that the gradually increasing cash value offers, however, a resource al- ways available and unquestionable. It is a stout anchor to windward holding firm against any storm of family or business misfortune that may arise. In the autumn of 1907, there was a panic, during which there was a practical suspension both of currency payments and of credits. Rates of interest ad- vanced to prohibitory figures, but notwithstanding the enhanced rates, loans were practically impossible to obtain. Three or four years before, one of my partners and I had taken out life-insurance policies for considerable .amounts. These gave the right to borrow from the insurance company at the fixed rate of 5 per cent. We were, therefore, enabled to place this credit at the disposal of the partnership of which we were members, and about $120,000 of cash was instantly available in a time of great need. Of course, these loans were repaid to the insurance company immediately upon the restoration of normal conditions. Such a privilege must in many cases mean the avoidance of actual disaster. The Use of Life Insurance as a Means of Borrowing Without Collateral. Thus far it has been shown that life insurance may be the means of strengthening and safeguard- ing the credit of a business whose tangible collateral might be adversely affected by the death of those who are the brains and the life-blood of the concern. But life-insurance policies may also be used for effecting loans by persons who possess no tangible security whatever but who are trusted by the lend- ers because of their well-known integrity. The usefulness of life insurance in this important respect has been too little appreciated. Thousands upon thousands of young men frit- ter away the best years of their lives and fail to take advan- ance." An address delivered before the Philadelphia Association of Life Underwriters, December 4, 1913. BUSINESS USES 43 tage of the finest opportunities simply because they are labor- ing under the assumption that they are handicapped in doing what they would like to do because they do not actually possess the necessary capital. The serviceability of life insurance in helping such young men to realize their ambition may be illustrated by the fol- lowing example: A young man desires to obtain a college education, yet he himself does not possess the necessary means nor can his parents, owing to their moderate circumstances, assist him, much as they would like. His best interests re- quire that he should take the course of study as soon as possible and pursue it consecutively and without interruption, but this he feels he cannot do. Assuming that this young man is determined to get the education, he will see that one of two courses is open to him. He may first earn the necessary money, but this course is likely to consume some of his best years, and will defer the time of graduation and his entrance into his chosen vocation. Or, he may, as the saying is, " earn his way through college/' but in doing this he is serving two masters, to the detriment of himself. He is in college for the express purpose of preparing himself for his lifework, yet he must give much time and energy that should be devoted to study, to the performance of work in which he has no other interest than the earning of necessary funds. Clearly, it is to the interest of this young man to borrow money, if that is possible, so as to enable him to give all his time to the mastery of his studies, and upon their completion, promptly to begin his vocation with a view to repaying the loan as soon as possible. Xow, as is frequently the case, this young man has some relative or friend who is interested in his welfare, and who can be induced to advance the necessary amount at the cur- rent rate of interest and without tangible collateral if only assurances can be given that the loan will be repaid. Know- ing the young man's reliability, the lender feels certain that the loan with interest will be repaid in due course of time, tut he cannot afford to gamble with the contingency of 44 THE PRINCIPLES OF LIFE INSURANCE death, because he knows that should the borrower be removed by an untimely death the loan would never be repaid. This uncertain element in the transaction may be obviated in one of two ways. Either the young man may insure his life for an amount sufficient to cover the principal of the loan, any premiums that the creditor might have to pay, and all antici- pated interest charges, and then assign the policy to the cred- itor; or, the creditor may, if he so desires, take out a policy on the life of the debtor. Usually it is best for the debtor to take out the insurance and protect the creditor with an assign- ment. Moreover, if the debtor finds it necessary he may arrange to have the creditor pay the premiums and consider these as a part of the loan. Now if the borrower completes hie course and continues to live he will repay the loan with interest and at that time the assigned policy will revert to him and may then be used for family or business protection. Should the borrower die, however, before he has had time to repay all of the loan, the creditor will retain out of the in- surance proceeds the amount still owing and refund the bal- ance to the person or persons designated as beneficiaries by the insured. Numerous other illustrations may be mentioned to show the value of life insurance as a means of making possible borrow- ing without collateral. It may serve as a means of enabling a young man to obtain the initial supply of capital to start in business. It may enhance the value of an indorsement or any other obligation when the indorser or debtor is not the possessor of marketable collateral. It may also advantage- ously be used in that large number of instances where a man already established in business may need more credit for its proper development but where the banker feels that the business, standing by itself, does not warrant the making of a new loan. To the banker the man at the head of the business is a very important asset, and he may feel that while the business itself does not warrant another loan, the business plus the man who manages it would justify the extension of BUSINESS USES 45 further credit. Here, however, just as in the previous illus- tration, the contingency of early death must be provided against, since in that event the last loans are apt to be unse- cured. In other words a life-insurance policy in favor of the creditor is a hedge against the contingency of the loss of the value of the human life upon which the repayment of the loan is primarily dependent. The Use of Life Insurance as a Means of Making Con- tingent Interests Marketable. One of the minor functions of life insurance is its use in making contingent interests marketable. Eeference is had especially to the use of so- called contingent or survivorship policies which expressly provide that the face of the policy will only be paid upon the death of the insured if some other designated person is still living at the time, i.e. the policy is said to insure one life against another. The function of such contracts becomes ap- parent when we reflect that frequently the owners of estates bequeath the entire income to the widow throughout her life, the property itself to be distributed upon her death to certain heirs who may then be living. Such heirs, it is clear, possess a valuable right under the will, but it is a contingent one and may be lost in case of death during the lifetime of the widow. Manifestly, it will be most difficult for any such heirs to give this contingent interest a marketable value for the purpose of a sale or a loan unless some means can be found to protect the purchaser or lender against the loss of the interest through the death of the heir before the death of the widow. Such protection is furnished most cheaply through a so-called con- tingent or survivorship policy. Thus let us assume that A is entitled to property contingent upon surviving B , who is the life-tenant of an estate. Save as a specu- lation, depending largely upon the condition of B 's health, the contingent reversion has no realizable value. But this contingent interest may be converted into a marketable proposition through a life-insurance policy payable only upon, A 's death during the lifetime of B . Such policies may be secured by the payment of a single premium in ad- 46 THE PRINCIPLES OF LIFE INSURANCE ranee, or may be paid for by annual premiums continuing during the joint duration of the two lives. BIBLIOGRAPHY A rery large number of papers and addresses on Business Life Insurance bave been published during recent years. The following may be mentioned as covering essential phases of the subject : ANDERSON, STEWART, " Commercial Life Insurance," in Howard P. Dunham's The Business of Life Insurance, i, chap. 23. COCHRAN, GEORGE I., "Life Insurance as an Aid to Business." An address delivered by George I. Cochran and published in the Proceedings of the Seventh Annual Meeting of the Association of Life Insurance Presidents, 1913. YOUNG, T. E., " The Uses of Life Insurance to the Business Man," in his book on " Insurance," dhap. 10. CHAPTER IV CLASSIFICATION OF POLICIES Despite the numerous forms of life-insurance policies al- ready on the market, each year sees the various companies announcing to the public new contracts containing some spe- cial feature. Ignoring the numerous minor differences that exist, life-insurance contracts may be classified briefly under the following six leading groups. This chapter will merely undertake to define and indicate the nature of the contracts comprising each of these groups ; the discussion of the special uses and the relative advantages or disadvantages of the re- spective policies being deferred to the next six chapters. Policies Classified According to the Term, Under this heading contracts may be classified as " whole-" or " straight- life policies," and " term policies," the first implying that the policy continues during the whole of the insured's life and that the face value is payable only at death, and the second referring to a policy payable only if death occurs during a stipulated period, such as five, ten, fifteen, or twenty years. A whole-life policy may be defined as a " term policy for the whole of life," while a term policy, as understood in life-insur- ance terminology, is one written for a definite period of years. It should be noted, however, that where the company is a mutual one the dividend distributions on the whole-life policy may be allowed to remain with the company with a view to shortening the time of maturity of the contract. In other words, the dividend accumulations, if left with the company, may be used to terminate the policy for its face value at a given date although death may not have occurred by that time. Policies Classified According to the Method of Paying Premiums. Life-insurance premiums are customarily paid 47 48 THE PRINCIPLES OF LIFE INSURANCE on the " annual level premium " plan, i.e. the premium col- lected by the company each year remains the same during the whole of life or during an agreed term of years. As con- trasted with this method there is the "natural premium" plan, according to which the insurance is granted in the form of renewable one-year-term insurance, the annual premium increasing from year to year in accordance with the increase in the cost of insurance brought about by the increased risk attaching to increasing age. This plan is rarely used to-day and, as will be explained in the chapter on the " Reserve," x the success of modern life insurance is dependent upon the charging of a uniform level premium. Annual premiums on any policy may be discounted to their present value, and this discounted amount paid in advance in one lump sum, commonly called the " single premium." Mathematically, the net single premium (i.e. the single pre- mium without any additions for expenses and contingencies) is equivalent, taking into consideration the element of time and an assumed rate of interest, to the net annual level pre- miums paid for the same policy. Annuities are commonly paid for with a single premium in advance, but life-insurance policies are rarely paid for by this method, the policyholder finding the small annual premium much more convenient, and also not wishing to risk the chance, in case of early death, of losing the much larger sum paid to the company under the single premium plan. It should also be stated that companies, as regards the great majority of policies written, permit the annual level premium to be paid semi-annually or quarterly, while in the case of industrial insurance premium payments are made weekly. While such frequent payments may prove a convenience to the policyholder, the aggregate premium paid is somewhat larger because of the loss of interest to the insur- ance company as well as the greater collection expense. Various other premium-payment plans are in use to-day. Thus under the terms of the so-called " limited-payment pol- 1 Chapter xvi. CLASSIFICATION OF POLICIES 49 icy," an annual level premium is charged for a limited number of years, such as ten, fifteen, or twenty years, and upon the payment of the last premium the policy becomes " full paid." This method of paying premiums may under certain circum- stances be applied advantageously to any type of life-insurance contract, except very short term policies. The premium under this plan is, of course, larger than the annual level premium paid throughout the life of the policy. Thus in the case of a limited payment whole-life policy, the ten, fifteen or twenty premiums called for by the contract represent a total payment sufficiently larger than the aggregate amount paid in during the same period under the ordinary annual level premium plan, so that at the end of the designated period the company will have accumulated an amount which will be sufficient, to- gether with compound interest earnings at an assumed rate, to carry the policy to maturity without requiring any further payments from the policyholder. As contrasted with limited-payment policies, there is the so-called step-rate plan which may be either an increasing or decreasing one. Eenewable term insurance is the most com- mon form of an increasing premium policy, the annual pre- mium being level during each term, but the rate for each term rising in accordance with the then attained age. Again, temporary insurance may be combined, for example, with a whole-life policy, the premium being low during the first five years (this period being regarded as term insurance) and the insured possessing the option, at the expiration of the five- year period, to renew the policy as a life policy and at a higher premium. Many fraternal benefit societies also follow the plan of issuing life benefit certificates under various forms of the increasing step-rate plan. The level premium, for exam- ple, may be increased at five-year intervals until age 60 is reached, when an increased level premium is charged for the rest of life. This is done to prevent the heavy withdrawals which would inevitably result if the five-year step-rate plan were consistently followed during the older years when the high mortality would cause the term rates to reach prohibitive 50 THE PKINCIPLES OF LIFE INSURANCE figures. Some of the societies even encourage the accumula- tion of a small sum per week during the earlier years of the policy with a view to building up a reserve which can be ap- plied to a reduction of the annual level premium for the period following age 60. Some companies make use of the decreasing step-rate plan, although it seems that this method has not met with much popular favor. The plan most generally adopted employs four steps. During the first five years, for example, the pre- mium is level ; for the next five years the original premium is decreased 25 per cent., the reduced premium, however, being again level for that period of years; for the third five years the level premium is reduced to 50 per cent, of the original charge ; for the last five years to 25 per cent. ; and at the end of that period the policy becomes full-paid. It will be ob- served that such a decreasing premium plan constitutes a limited-payment insurance, as already explained, except that the premium in the ordinary limited-payment policy is uni- formly level for the entire period during which premiums are paid. Policies Classified According to the Inclusion or Exclu- sion of a Pure-Endowment Feature. A pure endowment is a contract which promises to pay to the holder thereof a stated sum of money if he be living at the end of a specified period, nothing being paid in case of prior death. Term insurance, on the contrary, consists of a promise to pay a stated sum in case of death during the given period, nothing being paid in case of survival. The two promises are, therefore, exactly opposite in their nature. They may, however, be combined in the same contract, in which case the policy goes under the name of "endowment insurance." Thus a $1,000 twenty- year endowment policy may be regarded as a combination of twenty-year term insurance for $1,000 and a twenty-year pure endowment for an equal amount. In other words the policy assures the holder that he will receive $1,000 whenever death may occur during the twenty-year term ; likewise that he will receive $1,000 in case he outlives the said twenty-year period. CLASSIFICATION OF POLICIES 51 In either case the policyholder receives $1,000, the payment at death being provided for under the term insurance feature of the endowment contract, and the payment upon survival being provided for under the pure endowment. The mathematical premium for endowment insurance rep- resents the sum of the premiums for the term insurance and for the pure endowment. The premium paid at a given age will be higher for short- than for long-term endowments be- cause the company must collect a sufficient amount of money so that together with compound interest it will have the face value of the policy at the end of the term. Such policies have be- come very popular during the past twenty years, and now repre- sent a very considerable proportion of the total life insurance written. They may cover any stipulated period, such as ten, fifteen, twenty, thirty, and forty years. In Great Britain the tendency has been towards the selection of the longer terms, while in America the twenty-year period seems to have proved the most popular, although various companies are now strongly urging the long-term period with a view to having the policy, by making it mature at such ages as 60 or 65, afford a con- venient combination of life-insurance protection with pro- vision for old age. Their contention is that a whole-life policy is an endowment policy maturing at age 96, according to the American Experience table, and that by the payment of a slightly higher premium, or by leaving all dividend accumula- tions with the company, the policy should be made to mature at a more logical age, such as 60 or 65. Premiums are usually paid on the level plan throughout the life of the contract. Often, however, long-term endowments for periods like thirty or thirty-five years are paid for on the limited-payment plan, the premiums, for example, being paid during the first ten or fifteen years, although the face of the policy is not pay- able until, say, twenty years after premium payments have ceased. Many types of endowment policies are issued in addition to the ordinary form which promises a stipulated amount in the event of either death or survival. Thus there may be " double 52 THE PKINCIPLES OF LIFE INSUKANCE endowments," in which case the pure endowment equals twice the sum of the amount that will be paid in the form of term Insurance in case of death, or " semi-endowments/' where the pure endowment equals one-half the amount paid upon death. Various special types of so-called " child endowment policies " are also issued. Sometimes these policies provide merely for the return in full of all the premiums paid in the event of the child's death, the face of the policy being paid only upon the child surviving a fixed age. Policies of this character are not life-insurance contracts in the true sense, but have for their purpose the accumulation of a fund for business or educational purposes upon the child attaining a specified age. In other instances a smaller premium may be charged because only the payment of a pure endowment is promised, there being no return of the premiums in the event of tb.e child's death during the specified term. Again, it may be provided that upon the death of the purchaser of a child's endowment policy, usually the father or some other near relative, all premium payments shall cease, the policy becoming full-paid and the principal becoming due when the child reaches a specified age. It. may be added that until recently various companies also extended the pure-endowment feature to the payment of dividends on various types of contracts. This was done under the so-called "tontine plan," whereby the dividends were paid only at the end of a certain number of years, such as ten, fifteen, or twenty years, provided the policyholder was living at that time, these dividends, however, being forfeited in case of death before the expiration of the indicated number of years. Policies Classified According to the Method by Which the Proceeds Are Paid. Eeference is had under this head- ing to the various types of so-called installment policies. Instead of paying the face of the policy in one lump sum in the event of death or maturity, the proceeds are paid in regu- lar installments, either annually, semi-annually, or monthly, over a prescribed period of time, such as ten, fifteen, or twenty years. This installment feature may be applied to the pay- ment of the proceeds of any of the usual types of policies. CLASSIFICATION OF POLICIES 53 Thus it may be arranged that under a $10,000 whole-life policy the principal of $10,000 shall not be paid in full upon death, but the company's liability shall be limited to the pay- ment of $1,000 upon the happening of death and $1,000 each year thereafter until the tenth or last installment has been paid. In case the company's liability should be limited to the payment of the $10,000 in the form of fifteen or twenty installments, each installment would be, respectively, $666.66 and $500. Should the beneficiary die before all the install- ments have been paid, provision is usually made that the unpaid installments may be continued for the original amount to the deceased beneficiary's estate or to a newly designated beneficiary, or may be commuted and paid in one lump sum. If the total installments aggregate the face value of the policy, the cost of the contract will naturally be smaller than if the face value of the policy be payable in full upon ma- turity of the contract. It is apparent that by paying the $10,000 in ten installments the company retains the use of a large part of the policy's proceeds for a considerable period, viz, $9,000 for one year, $8,000 for one year, $7,000 for one year, etc. Mathematically, the company can arrange to give the interest earnings (at an assumed rate) on these balances to the insured during his lifetime in the form of a reduced premium. Many companies, however, follow the plan of charging the same premium that would be required on the same kind of policy when providing for the payment of the proceeds in one lump sum, and then make allowance for inter- est earnings on the proceeds retained under the installment plan by increasing the size of the installments. While the ordinary installment policy, as just described, affords the advantage of giving the beneficiary a definite in- come for a prescribed number of years and thus prevents the possible loss or dissipation of the proceeds of the policy as might be the case if the entire sum were paid at once, it should be remembered that these installments are limited in number, and that upon the payment of the last installment the beneficiary may still be in need of an income. This 54 THE PRINCIPLES OF LIFE INSURANCE shortcoming of the ordinary installment policy may be avoided by arranging for the continuance of such payments through- out the lifetime of the beneficiary. Such an arrangement may be effected under the so-called "continuous-installment policy." Here the company agrees to pay a definite number of installments, irrespective of the death or survival of the beneficiary, and to this extent the continuous-installment pol- icy includes the ordinary installment feature. But after the entire face of the policy has been paid in installments the company gives the further very important guarantee that it will keep on paying these installments if the beneficiary be still living and will continue to do so during the lifetime of said beneficiary. The continuous-installment feature lends itself to a large variety of applications, and almost any set of circumstances requiring a guaranteed income can be met by the contracts of certain companies. The continuous income may be so arranged as to be paid annually, semi-annually, or monthly, as desired. Instead of guaranteeing an income throughout the lifetime of merely one beneficiary, several beneficiaries may be protected. Thus one beneficiary may be assured an in- come throughout life, and following his or her death, another designated beneficiary may become the recipient of the stipu- lated income either during the whole of life or for a specified number of years. Similarly, the continuous-installment plan may be combined with the endowment principle. Thus if the holder of an endowment policy should outlive the endowment period an annual income may be promised to him throughout life. Further arrangement may be made whereby, following his death, an annual income may be paid to his wife or other beneficiary or beneficiaries as long as they may live. Or, the policy may be made to contain a guarantee to the holder of, say, twenty definite annual payments with a further promise that such installments will continue, following the payment of the twentieth installment, during either the lifetime of the insured or of the insured and another beneficiary. Two other types of policies should be mentioned under our CLASSIFICATION OF POLICIES 55 classification of policies according to the method of paying the proceeds, viz, so-called " reversionary annuities " and " gold " or " debenture bonds." The first type of contract, said to be the first form of installment insurance written, pro- vides a life annuity to the beneficiary in case of the insured's death before the beneficiary's death. If, however, the bene- ficiary should die first, the insurance contract is regarded as having expired and all premium payments are considered fully earned. The debenture gold bond plan, like the installment feature, may be applied to any of the ordinary types of policies written. According to this plan, considered in connection with a whole-life policy, the company retains the entire pro- ceeds of the policy upon the death of the insured and issues a bond to the beneficiary bearing an agreed annual, or semi- annual rate of interest. At the expiration of the interest-pay- ing period such as ten, fifteen, or twenty years, the bond is redeemed. Usually the interest rate promised is high as com- pared with the rate of interest which life-insurance companies use in the computation of their rates. This high rate of in- terest on the bond is entirely feasible owing to the fact that the company will have safeguarded itself in advance by charg- ing a higher premium during the lifetime of the insured. Thus, according to the rate book of a certain company, the annual gross rate for a 5-per cent, twenty-year gold bond on the ordinary life plan is given as $25.74, while the annual level premium for an ordinary life policy at the same age is given as $20.14. In both cases the mathematical computation was based on the same assumed rate of interest, and the larger pre- mium in the case of the bond is simply charged to assure the accumulation of a sum of money sufficiently large to enable the company to guarantee the promised rate of interest on the bond. It is thus apparent that any rate of interest, no mat- ter how high, may safely be promised if the difference be- tween that rate and the assumed rate for computation pur- poses is collected in the form of higher premiums. Special Types of Contracts. A very large variety of spe- cial contracts, differing materially from those already men- 56 THE PRINCIPLES OF LIFE INSURANCE tioned, might be described; but special attention will be directed to the following three main classes: 1. Return-premium policies. Such policies differ from the usual forms of life insurance in that they promise upon death to pay not only the face of the policy, but in addi- tion thereto a sum equal to all or to a portion of the premiums paid. The premiums returned may comprise the entire amount paid during the existence of the contract, but usually such return is limited to the premiums paid during a limited period, such as ten, fifteen, or twenty years. A promise of this kind should cause no surprise since the policy merely represents increasing life insurance under a level premium plan. In other words, the face value of the policy increases as the number of premium payments increases, but this in- creasing amount of insurance must be paid for by an extra charge, i.e. the premium on a policy allowing a return of all or a portion of the premiums, is higher than the premium for the same kind of .policy when not containing a return pre- mium privilege. It may be added that pure-endowment con- tracts sometimes provide for the return of premiums paid in the event of death before the expiration of the pure-endow- ment period. 2. Policies which involve more than one life. In addition to the various types of continuous-installment poli- cies, which it will be remembered involve the lives of the in- sured and one or more beneficiaries, there are three other types 'of policies under this heading that deserve special men- tion. One type goes under the name of " ordinary joint-life insurance." Joint-life policies may be taken out on two or more lives, and sometimes prove advantageous to several busi- ness partners who may wish to utilize the same for the protec- tion of their partnership against the withdrawal of capital or other financial embarrassment occasioned by the death of any one of them. The policy promises the payment of the prin- cipal in the event of the first death amongst the two or more persons covered by the contract. This joint-life principle may be applied to any of the ordinary forms of life insurance, such CLASSIFICATION OF POLICIES 57 as whole-life policies, limited-payment policies, term insur- ance, endowment insurance, etc. " Last-survivor " and " contingent " or " survivorship " in- surance should also be referred to briefly, although policies of this kind are used to only a limited extent. The last- survivor policy differs from the ordinary joint-life policy in that the principal is payable in the event of the last death instead of the first death. Contingent or survivorship poli- cies, on the other hand, "insure one life against another" and provide for the payment of the face value in the event of the death of a certain person, but only on the condition that some other person designated in the policy is still alive. In his discussion of these two forms of policies, Mr. Henry Moir indicates their purpose in the following words : Last-survivor policies are seldom required, although some- times when two persons have an income which will be con- tinued to the survivor, and they desire to borrow money on their joint interest, a policy of this nature may enable them to effect their purpose on reasonable terms. . . . Contingent or survivorship policies will be understood more readily if the circumstances under which, they are generally issued be ex- plained. It is common in the will of a wealthy man to provide that the entire income from his property be paid to his widow, and that the property be divided on her death amongst certain heirs or legatees who may then be living. In such circum- stances it is evident that the share of the property would be lost by any heir or legatee who might die during the lifetime of tbe widow. The cheapest form of protecting this share from absolute loss is the survivorship assurance, providing the sum assured at his death in event of its occurring in the lifetime of the widow. Assurance companies occasionally grant loans secured by contingent interests in estates to be divided at some future time, called reversions, and any such loans should be protected by a survivorship policy. 2 3. Policies containing total disability features. Since a separate chapter is devoted to a discussion of total 2MoiB, HENKY, Life Assurance Primer, 1907, 29, 30. 58 THE PRINCIPLES OF LIFE INSURANCE disability benefits 3 in life insurance, it will suffice to indicate here merely the nature of the special benefits offered. With- out special provision a life-insurance policy may not fully protect where the holder becomes totally disabled and is not in a position to keep his insurance alive by further premium payments. Moreover, even granting that the policy can be maintained, no part of the face value can be realized under the contract until death actually occurs, although such payments may be sadly needed at the time. Considerations like these have induced a very large number of American companies to assist the policyholder in various ways in the event of total disability. Such assistance has usually taken one or more of the following forms in the event of total disability : ( 1 ) the premiums will cease and the policy will be considered fully paid during the time of disability; (2) the policyholder may select either this option or may choose to have the value of his policy converted into an annuity, the first payment to begin at once; and (3) the .policy either matures for a stated sum or becomes payable in ten or twenty annual installments, such payments stopping whenever the disability ceases. Classification of Annuities. The ordinary annuity con- tract is an agreement whereby the company promises, in re- turn for a cash payment made in advance, to pay the annuitant while living an agreed amount annually, semi-annually, or quarterly, such payments to cease whenever death occurs. The purchase of an annuity therefore represents the purchase of a fixed income, and the general purpose of the contract is seen to be the reverse of that accomplished under life insur- ance. As was the case with life-insurance policies, annuities may be of various kinds. The annuity may be one for the whole of life (a life annuity) or merely for a stipulated term (a term annuity). Sometimes it is provided that a stated minimum number of annuity payments shall be made under any circumstances, as, for example, that at least ten annual s Chapter xxii on Disability Insurance. CLASSIFICATION OF POLICIES 59 payments are guaranteed although the annuitant may have died before the expiration of that time. So-called " deferred annuities " may also be granted for the purpose of enabling the purchaser to provide an income for himself at some future time, and the purchase price of such an annuity may take the form of a single premium at the time of purchase, a level premium during the entire time between the date of purchase and the commencement of the annuity, or the payment of a limited number of premiums under the limited premium pay- ment plan. Under the ordinary annuity, the first annuity is usually payable three, six, or twelve months following the date of purchase, whereas under the deferred annuity the pay- ments do not begin until the purchaser reaches a certain age, such as twenty or thirty years following the age at purchase. Should death occur during this twenty- or thirty-year period, no refund of the premiums or purchase price is ordinarily made; although it is entirely feasible under the deferred an- nuity plan to provide that in case of death before the annuity payments begin, the premiums which may have been paid shall be refunded to the heirs of the purchaser. It should also be stated that two persons, such as husband and wife, or two sisters, may purchase an annuity payable to them jointly while both live and also continuing during the lifetime of the sur- vivor. As has been well stated : " By this means an income is provided so long as the survivor of the two can possibly require it. The same principle may, of course, be extended to three or more lives, but the circumstances are rare when such annuities are desirable, while for two lives it is a common form of contract." * Combination of Various Types of Policies. A large number of the special contracts referred to in the preceding classification represent in the aggregate only a limited per- centage of the total insurance written. Probably three- fourths of the total life insurance in America, it has been estimated, consists of three forms of policies, viz, whole-life * MOIB, HKNEY, Life Assurance Primer, 1907, 32. 60 THE PRINCIPLES OF LIFE INSURANCE policies on the continuous premium plan, twenty-payment whole-life policies, and twenty-year endowment insurance. The remaining one-fourth of the outstanding insurance rep- resents a vast variety of policies, some differing from others only in minor particulars. In this respect it should be noted that many of the foregoing policy features easily lend them- selves to the effecting of an almost endless number of combi- nations. Thus there may be issued a limited-payment whole- life continuous-installment policy, or a limited-payment en- dowment policy with the proceeds payable in ten or more installments. As already indicated, all the various methods of paying the premium, or of distributing the principal of the contract, may be applied to any. of the ordinary types of policies written. The Several Types of Policies Equivalent in Net Cost. While policies differ greatly in form, it is important to note that the net premium (the premium before any addition is made for expenses or contingencies) for all, as will be shown later, is computed on the basis of the same assumptions. Thus a company in computing the net premiums for all its types of policies may use the same mortality table, usually the American Experience table, and the same assumed rate of interest, usually 3 or 3% per cent. If this is done, it fol- lows that all the policies issued by a given company are equivalent to each other from the standpoint of dollars and cents. Some Policies Better Adapted than Others to Meet the Special Needs of the Insured. Although the policies issued by a given company are usually equivalent to one another in net cost, it is highly important to remember that one form of policy may be much better suited to the needs of the policy- holder than another. Much has been written lately concerning the " fitting of the policy to the client," by which is meant that the various kinds of policies have certain advantages or disad- vantages, depending upon the circumstances surrounding the applicant and the particular purpose that he wishes to realize by the taking out of life insurance. It is therefore highly im- CLASSIFICATION OF POLICIES 61 portant for the salesman, after ascertaining the prospective ap- plicant's financial ability to pay premiums and the object which it is desired to accomplish through insurance, to recom- mend impartially that contract which will best serve his client. The matter may be illustrated by the following example : A merchant may display a large variety of suits of clothes all valued at the same price. But, despite their common value, these suits may differ in color, style, and material. One suit may be totally unfit for the use of a prospective buyer, although inherently worth just as much as another suit which may be selected by him as meeting his requirements. In life insur- ance, likewise, the many policies on the market may from a mathematical standpoint be of equal value. But in selecting a contract the prospective buyer should be careful to see, and in such selection it is the professional duty of the agent to render impartial advice, that the character of the policy is such as to give him what the family or business circumstances surrounding his life require. TERM INSURANCE A term policy in life insurance may be defined as a contract which furnishes life-insurance protection for a limited num- ber of years, the face value of the policy being payable only if death occurs during the stipulated term, and nothing being paid in case of survival. Sometimes such policies are issued for business purposes for a period as short as one year, and at various times such policies have also been issued upon the "yearly renewable term plan/ 7 accprding to which the in- sured could exercise the option of renewing the policy for successive one-year periods, each year's premium being re- garded as the cost of that year's protection, and the premium thus increasing as the policyholder's age advanced. While this plan, also commonly known as "natural-premium insur- ance/' is theoretically sound, it has proved impracticable in actual practice, because it is apparent that under this plan the premium would ultimately become prohibitive. Owing chiefly to the aforementioned fact, the issuance of very short term policies is limited at present to cases involv- ing business and financial transactions. In nearly all in- stances term policies are written by American companies for periods of five, ten, fifteen, or twenty years, although other periods are sometimes used. Such policies may insure for the agreed term of years only, or may be renewable for suc- cessive term periods at the will of the insured and without medical examination. Various restrictions are also imposed by many companies in the issuance of term contracts, such as limiting the size of the policy to a certain amount or the length of the term so as not to carry the insurance period beyond a certain stipulated age. Term insurance may, there- fore, be regarded as temporary insurance, and, in principle, 62 TERM INSURANCE 63 more nearly compares with a property insurance policy than any of the other life contracts in use. If a building, valued at $10,000, is insured for that amount under a five-year term policy, the company will pay this insurance in case of the destruction of the building during the term; but if at the end of the specified five-year period the owner neglects to reinsure the building by renewing the policy and a fire thereafter ensues, the company is absolved from all liability in view of the expiration of the contract. Similarly, if a person insures his life for $10,000 under a five-year term policy, either keeping the policy in force by paying a single premium in advance or by paying, as is nearly always the case, annual premiums from year to year, the company will pay $10,000 in case of the insured's death at any time before the expiration of the five years, nothing, however, being paid in case death occurs after the expiration of the contract period, the term life policy, like the fire policy, having ex- pired at that time. Advantages of Term Insurance. Term policies are es- pecially designed to afford protection against contingencies which either require only the taking out of temporary insur- ance or call for the largest amount of insurance protection for the time being at the lowest possible cost. The advan- tages of this type of contract may be enumerated briefly as follows : 1. Term contracts are often desired by those who need a large amount of family protection at a time when the income is so small as to make impossible the payment of the pre- mium for an equal amount of protection under other types of policies. This is especially the case where family responsi- bilities have been assumed by young professional or business men who are just starting their careers and who, appreciating the necessity of adequately protecting their families against the contingency of early death, feel that they need heavy insurance protection at small cost pending permanent estab- lishment in their profession or business. Persons so situated may feel inclined to subordinate the investment feature in 64 THE PRINCIPLES OF LIFE INSURANCE life insurance to its protective function. Wanting all the protection possible during early years, they may feel that they can more advantageously use all available savings in their profession or business. Or, looking forward to a larger in- come later in life, they may reason that they can then advan- tageously replace or supplement this type of contract with policies of other kinds which have permanent protection as their primary purpose. The extent to which large protection is granted by term policies for a small outlay at a time when such increased pro- tection is absolutely needed at small cost, may be exemplified by the following rates charged by a certain company selected for purposes of illustration. The annual premium charged by this company for a $1,000 whole-life policy at age 25 (the policy in this instance being paid whenever death may occur) is $19, at age 35, $25.45, and at age 45, $36.50. But the risk of death during a limited term of years is less than that under a whole-life policy where the risk converges into cer- tainty. Because of this fact term policies for five, ten, fifteen, or twenty years offer the advantage of a much lower annual premium. Thus in the case of the company referred to a five- year term policy for $1,000 at age 25 requires a gross premium payment of $11.09, and the premiums charged for successive renewals of this five-year contract are : at age 30, $11.65, at age 35, $12.50, and at age 60, $42.21. In the case of a ten-year term policy at age 25 this company charges $11.34, while the renewal premiums at ages 35, 45, 55, and 60 are, respectively, $13.10, $18.27, $34.54, and $51.20. The same principle ap- plies to term policies for fifteen, twenty, or any other number of years. If such policies are renewable at the option of the insured without medical examination, the policyholder may feel that by a number of renewals he may enjoy a large pro- tection for a considerable number of years at a low cost, and discontinue such renewals when the protection is no longer needed, or when the renewal rate becomes too burdensome. It should be noted in this respect that, whereas the rate for a ten-year term policy at age 25 is only $11.34, as contrasted TEEM INSURANCE 65 with $19 for the whole-life policy at the same age, the latter rate remains the same throughout life, while the successive renewal rates for the term policy increase with advancing age until they become practically prohibitive, the rate charged by this insurance company being $3-i.54 at age 55, and $51.20 at age 60. 2. Term insurance may also enable young men to ac- knowledge their debt to parents or relatives of modest means who have given them their education or who have started them in business. Under such circumstances every young man owes this debt to parents and should, as soon as he is able to pay the premium, acknowledge it by carrying insurance for their benefit so that their investment in him will be protected against the contingency of an untimely death. In the same way a term, contract may enable one to provide adequately during the early years of one's profes- sional or business career for a dependent mother, sister, or other relative. Where the age of the parent is advanced the term of the contract may be so arranged as to afford protec- tion during the probable lifetime of the beneficiary. But where the beneficiary is comparatively young, the purpose of the term contract may be regarded as furnishing a large pro- tection at small cost, the insured looking forward to a large income in later years which will then enable him the more readily to make the protection permanent by other types of contracts. Again, the insured may desire additional protec- tion while his children are young and his own estate is small so that in case of early death there will be an adequate fund for educational and maintenance purposes until the children become self-supporting. 3. Such contracts are also well adapted in many instances to furnish protection against some temporary business hazard. Many such contingencies may arise, but only a few need be mentioned to illustrate the usefulness of term insurance in this connection. A business firm may wish to protect itself for a definite number of years against the loss through early death of the highly valued services of an employee or of an 66 THE PRINCIPLES OF LIFE INSURANCE official who is regarded as essential to the continued success of the business enterprise. Or the firm may have engaged the services of an expert in an undertaking which it will require a certain number of years to complete, and as the work pro- gresses may be obliged to make a considerable outlay of capi- tal which might be lost or seriously impaired by the death of said expert before the completion of the work. Under such circumstances the firm might find a term policy, especially in view of its low cost, highly attractive as a means of pro- tecting itself against loss during the period required for the completion of the work. The sum secured under the policy in case of death would, indemnify the firm for any loss in- curred by way of impairment of the capital, or by delay in completing the work, assuming that another expert might be found to continue the project. In .many business undertak- ings it may be found desirable to protect the business during the first five or ten years usually the crucial and experimen- tal stage when .its promoters are confronted with the task, frequently involving great risk, of establishing it on a firm foundation as regards clientele and credit. These are a few instances to illustrate how a firm or corporation may cover any temporary extra hazard, when the low cost of insurance is of chief importance. In the same way an individual may, in many instances, use term insurance advantageously to enhance his opportunities or to make his financial position more secure. A young man may, for example, complete his college course or may start in business on borrowed capital which has been secured by pro- tecting the lender against the possible loss occasioned by early death which would prevent repayment of the sum borrowed. Sometimes a person may have definite assurance of a certain sum of money in the future, such as an inheritance, pension, or death benefit, but is obliged during the interval to borrow money or to obtain insurance protection against death before the stipulated time arrives. In such cases term insurance may be used to great advantage. The lender will be doubly protected, since the loan will be paid out of the inheritance in 67 case of survival and out of the insurance proceeds in case of death. On the other hand, the need for insurance protection may expire when the policyholder is assured protection under the terms of the pension or insurance fund established by the firm or institution with which he is connected, the term policy in the interval of waiting having served its purpose as tempo- rary protection. Again, money may have been borrowed on a mortgage on real estate, the mortgage running for a defi- nite number of years and the mortgagor expecting to pay off the mortgage out of income during that period. While the mortgagee may feel entirely competent to accomplish the pay- ment of the mortgage out of savings from his income, it is highly important to remember, as already stated, that it takes time to save, and that a resolution to save should be hedged with an insurance policy so that if the saving period is cut short by an untimely death the proceeds of the policy may liquidate the balance of the indebtedness. A $5,000 mort- gage, which it is expected to pay in ten years, can, therefore, be advantageously hedged with a $5,000 ten-year term policy. In case of survival and the payment of the mortgage, the policy may no longer be needed and may therefore not be re- newed. In case of early death the unpaid portion of the mortgage can be paid out of the insurance proceeds, the bal- ance of the insurance money, if any, being payable to the insured's designated beneficiary. In fact, any plan for the accumulation of a fund through saving, no matter what the method adopted, should, as already stated, be protected by an insurance policy. Disadvantages of Term Insurance. While the foregoing illustrations serve to indicate the useful purposes that may often be derived from term insurance, it is important to note that this type of contract presents various dangers that are frequently overlooked and that should always be borne in mind by the person contemplating the taking out of such a policy. Although the absolute cost of term contracts is very low in the younger years the sole purpose of such policies is to fur- nish temporary protection. The entire premium represents 68 THE PKINCIPLES OF LIFE INSURANCE payment for this protection and nothing is paid to the in- sured in case of survival at the expiration of the policy. It is a common assertion that the chief objection to this form of insurance is that the insured is apt to feel dissatisfied at the expiration of the contract, and that it is most difficult to make the average holder of such a policy, after he has, paid ten or twenty premiums, appreciate the fact that he has al- ready received full value in the form of protection for the premiums paid and is therefore not entitled to any refund. While the insured may feel that he will be in a financial position later to make the carrying of insurance unnecessary, or to replace his term insurance with policies at a greater cost but which afford permanent protection, there is nearly always the danger that he may have miscalculated the future or may neglect to carry out his original ideas. Hence, if the ordinary term policy is not supplemented with other forms of insurance, such as whole-life or very long term insurance, there may come -a day when the policyholder, upon the ex- piration of the term contract, will be without insurance at the very time when he may need it most. Assuming that he will be able to obtain other insurance at the time by passing the required medical examination, his advanced age will have greatly increased the premium, and possibly at that time, his early expectation of a larger income not having been realized, such increased cost may prove exceedingly burdensome. More- over, other types of policies generally commend themselves in preference to term contracts in that they inculcate in the policyholder to a much greater extent a compulsory spirit of thrift and cause the great majority to have to their credit a large sum, accumulated from small payments promptly in- vested, which otherwise they would not have accumulated or would have lost or wasted. Term insurance, as already stated, represents cost for protection only, and the smallness of the premium should prove an attraction only where large pro- tection is absolutely needed and where the available fund for premium payments makes a more permanent form of pro- tection impossible. TERM INSURANCE 69 Renewable and Convertible Features in Term Policies. Exclusive of the term covered, term policies are of two main kinds: (1) those which grant insurance only for the specified term and are renewable only upon a satisfactory medical examination; and (2) the renewable-term policy, the conditions of which give the holder the option, at the expira- tion of the first-term period or at the end of any subsequent term period, to renew the policy without a medical examina- tion and irrespective of the insured's health at the time of renewal. The renewal of the policy, in other words, can be effected by the insured by paying the premium for the age then attained. Usually, however, the companies limit the age (generally 55 or 60 years) at which such renewal term policies may be issued, and in some instances the number of re- newals permitted is limited. Where the term policy contains no renewal privilege the insured may be placed at the disad- vantage at the end of the term, of being without insurance and of not being in a position, because of poor physical con- dition, to secure a renewal of the contract or to obtain any other form of life-insurance protection. In many instances, also, the particular contingency which the term policy was designed to cover, may still exist at the expiration of the term, thus making highly desirable the privilege of renewing the contract for one or more terms at the will of the insured and without the possibility of denial on the part of the com- pany. Nearly all term policies also contain the so-called con- vertible feature, i.e. the privilege on the part of the insured of converting the policy into another type of contract upon a proper adjustment being made in the premium charge. Some companies extend this conversion right throughout the term period, but the great majority grant the right only for a lim- ited number of years, such as the first four, five, or seven years of the term. Conversion is usually allowed into whole- life, limited-payment, or endowment insurance. The ex- change is usually allowed on any anniversary of the policy during the period when conversion is permitted, and may be 70 THE PKINCIPLES OF LIFE INSUKANCE effected in one of two ways. The new policy may bear the date of the surrender of the original policy and the premium thereon be that required for such new policy at the attained age of the insured. Or, the new policy may be considered as bearing the date of the original policy, in which case the insured is usually required to pay to the company the difference between the premiums which would have been paid on the new policy if it had been issued at the same time as the original policy, and the premiums paid thereunder for the same amount of insurance, with interest on such difference at a certain stipulated annual rate. 1 The advantages of the conversion privilege become apparent if we consider the disadvantages usually attaching to term in- surance. At the time of taking out the policy the insured may not have definitely selected the type of policy best adapted for his needs. Following the issuance of the term policy his circumstances may soon become such as to enable him to take out adequate, permanent insurance. Or he may desire to utilize insurance as a means of accumulating an estate rather than to use it entirely for protection against death. As soon, therefore, as he concludes that term insurance does not meet his present and future needs he may carry out his conclusions by exchanging his term contract for one on the whole-life or endowment plan in either of the two ways already suggested. Moreover, another great value of the conversion privilege also becomes apparent (where the policy does not contain a re- newable privilege) when it is remembered that a consid- erable percentage of the insured lives become physically im- paired to such an extent during even the first five or seven years following the issuance of the contract, as to make im- possible the securing of any other plan of life insurance in a reliable company. Under such circumstances a non-renewable term policy may, because of its expiration before death, fail i According to another method the " exchange may be made as of the age and date of issue of the original policy, regardless of the attained age of the insured, upon payment of the difference between the reserves upon the respective policies." TEEM INSURANCE 71 utterly to protect the insured. If, however, the policy con- tains the conversion privilege, and if the time limit for mak- ing an exchange of the policy for a whole-life policy has not yet expired, the insured will certainly want to take advantage of this privilege and thus protect himself against the possi- bility of his insurance expiring before death occurs. CHAPTEE VI ORDINARY LIFE INSURANCE Ordinary whole-life policies provide for the payment of the face value only upon the death of the insured. Maturing only upon death, such policies are taken out primarily for the benefit of others, and, therefore, represent pure life-insurance protection which the insured has unselfishly provided for those dependent upon him. During, the earlier years of the insured's life this type of insurance in the great majority of cases affords protection at moderate cost for wife and chil- dren or other dependents. In the later years of life when it may be felt that such protection is no longer necessary, be- cause the children have become financially independent, the insurance affords a convenient means of leaving legacies and bequests. As explained in a previous chapter, the premiums on this form of insurance are paid annually, semi-annually, or quarterly, under the level premium plan for the whole of life, while the proceeds of the policy may at the option of the in- sured be paid either in one lump sum or on the installment plan. Furnishes Permanent Protection. Several advantages may be noted as essentially associated with this plan of insurance. In the first place it gives the insured permanent protection at moderate cost, and this is highly important for the average man of moderate salary or daily wage who re- quires considerable family protection and whose limited in- come does not enable him both to pay premiums and to ac- cumulate a savings-bank fund. Term insurance is essentially designed to afford protection against a temporary family or business hazard, and can be recommended safely only when it is definitely known that the hazard under consideration is 72 ORDINARY LIFE INSURANCE 73 temporary in character. But such contracts, as we have noted, contain elements of danger which are inseparable from tem- porary insurance. The chief danger connected with such insurance is that the insured may have miscalculated the duration of the hazard confronting him and his future need for protection, or may neglect to carry out his original pur- pose to convert his temporary insurance into or replace it with policies which afford protection for the whole of life. Under ordinary life insurance all danger as to miscalculations relative to the uncertain future need of insurance or the fail- ure to carry out original purposes is obviated. Such insur- ance is certain in its results in that it provides protection that is permanent, payable in the event of death, whether that occur early or late, and purchasable at a definite and moder- ate premium which remains uniform throughout life. Furnishes Permanent Protection at the Smallest Initial Outlay. As has been aptly stated " the ordinary life policy is of all policies the one which gives the maximum of perma- nent protection at a minimum annual charge." This may be illustrated by comparing the gross premium charged by com- panies for ordinary life policies with those required under the limited payment and endowment plans. For instance, the annual premium charged by a certain company per $1,000 of ordinary life insurance is $19 at age 25, $21.80 at age 30, and $25.45 at age 35. On a twenty-payment life policy at the same ages the annual premiums charged by this company are $26.75, $29.70, and $33.28; while on an endowment pol- icy, maturing in twenty years, the premiums are respectively $44.82, $45.63, and $46.70. It is therefore seen that the or- dinary life policy furnishes permanent protection at the small- est initial outlay, although, as will be shown later, the limited- payment and endowment policies will, if the insured continues to live, ultimately yield certain advantages which probably induced the insured to prefer these forms and which will compensate for the higher premium. In case of early death, however, the insured would realize the same amount under each of the aforementioned policies, yet the outlay on the 74 THE PKINCIPLES OF LIFE INSURANCE part of the insured would have been considerably greater under the limited-payment and endowment plans than under the ordinary life policy. Owing to its moderate annual cost, an ordinary life policy tends to bring adequate protection within the reach of nearly all. It is particularly well adapted to those whose income is small and who find desirable a considerable amount of perma- nent protection. To the rich man, on the other hand, the policy affords ample protection and enables him to use any surplus money to better advantage probably than if allowed to accumulate with an insurance company. The policy is also well adapted to persons who, although having passed middle life, may still desire the largest amount of permanent pro- tection at the lowest cost. Even at ages 45 and 50 the an- nual premiums charged by the aforementioned company are, respectively, only $36.50 and $45.10; while for a twenty-pay- ment life policy at the same ages the premiums are $43.46 and $51.26, and for an endowment policy, maturing in twenty years, $51.45 and $56.55. Combines Saving with Insurance. Besides its moderate cost and the permanent character of the protection offered, the ordinary life policy furnishes the further advantage of combining saving with insurance. In term insurance, as already explained, nearly all of the premium represents pay- ment for the current protection, and the companies follow the practice of not refunding anything upon withdrawal. More- over, under term insurance nothing is paid to the insured in case of survival at the expiration of the term, and it is this fact that constitutes one of the chief objections to this type of insurance, it being most difficult, as previously stated, to make the average holder of such a policy, after he has paid ten or twenty premiums, appreciate the fact that he has al- ready received full value in the form of protection for the premiums paid, and that he is therefore not entitled to receive any refund. As contrasted with this shortcoming, the ordinary life pol- icy presents an entirely different situation. In the early ORDIXAEY LIFE INSURANCE 75 years of such a policy the annual level premium is much in excess of the amount required to pay the current cost of the insurance protection, the balance being retained by the com- pany as a reserve (called the legal reserve) and improved at compound interest at an agreed rate for the purpose of making good the deficiency in the later years of life when the annual level premium is no longer sufficient to pay for the actual cost of the insurance. The overcharges in the early premiums are instrumental in inculcating thrift on the part of the insured and in the great majority of instances, repre- GUABANTEED VALUES Age: 35. Amount: $10,000. Annual Premium: $270. Plan: Ordinary Life. NUMBER OF YEABS AFTER POLICY HAS BEEN ix FORCE CASH OB LOAN VALVE PABTICTPATIXG PAID-UP INSURANCE EXTENSION PARTICIPATING YEABS DAYS 3 $ 397.60 $ 900 4 183 4 537.70 1,190 6 7 5 681.60 1,480 7 182 6 829.40 1,770 8 326 7 981.10 2,060 10 57 8 1,136.80 2,340 11 100 9 1,296.50 2,620 12 87 10 1.460.10 2,890 13 21 11 1,627.60 3,160 13 269 12 1,798.70 3,430 14 108 13 1,973.50 3,690 14 271 14 2,151.60 3,950 15 33 15 2,332.80 4,200 15 128 16 2,516.80 4,450 15 196 17 2,703.40 4,690 15 239 18 2,892.20 4,920 15 259 19 3,083.20 5,150 15 261 20 3.275.80 5,370 15 245 21 3.470.00 5,590 15 215 22 3,665.20 5,790 15 172 23 3,861.40 6,000 15 118 24 4.058.10 6,190 15 54 25 4,254.90 6,380 14 348 The values given above will btf increased by any surplus or addi- tions standing to the credit of the Policv. 76 THE PEINCIPLES OF LIFE INSURANCE sent a saving an accumulation of small amounts promptly invested by the company which would otherwise not have been earned or, if earned,, would have been lost or needlessly wasted. The fund thus accumulated out of the overcharges in the early premiums does not belong to the company, but is held in trust by it for the policyholder. It represents the " cash value " of the policy, and may either be withdrawn by the insured, in whole or to a certain designated percentage, if he decides to lapse the policy, or be made the basis of a loan, usually at 5 or 6 per cent., to be used in time of illness, financial emergency, or business opportunity. The loan privi- lege also is often valuable in that it enables the insured to keep his policy alive for its full amount under temporary cir- cumstances when the payment of the premium would other- wise not be possible. The extent tb which such cash or loan values accumulate may be illustrated by the table on page 75, which furnishes the figures for the first twenty-five years of a $10,000 ordinary life policy issued by a company which grants such values at the beginning of the third year and to the full extent of the legal reserve. Usually cash or loan values are not granted by the com- panies until at least three annual premiums have been paid. Usually, also, the companies do not refund the entire legal reserve during the first ten, fifteen, or twenty years, but retain a fixed percentage thereof as a surrender charge. In the above illustration it will be observed that the cash value of the $10,000 policy has accumulated to $4,254.90 during the first twenty-five years, and this accumulation continues until it reaches the face value of the policy by age 96, the last year in the American Experience table. Disadvantage of Continuous Premium Payments. The chief objection usually advanced against ordinary life insur- ance is the continued payment of the premium throughout life. This objection, however, is more apparent than real, and may at the option of the insured be obviated to some extent by allowing the annual dividends "to accumulate with the com- pany with the view of either shortening the premium-paying ORDINARY LIFE INSURANCE 77 period or hastening the maturity of the contract. Under the first option the contract becomes a paid-up policy for the full amount after a period of years thus requiring no further premium payments the insurance, however, being still pay- able at death only. Under the second option the dividend accumulations on the policy cause it to mature as an endow- ment at an earlier age, thus enabling the insured to realize the proceeds before death occurs. The cash surrender and other options allowed under an ordinary life policy may also, under certain circumstances, make desirable a discontinuance of premium payments. Changing circumstances may cause the insured to desire the taking of any one of three important options customarily al- lowed by the companies. If the policy has served its pro- tective purpose and the insured is satisfied that the change in his circumstances is such as no longer to require insur- ance protection and does not wish the full face value of the policy for legacies or bequests, he may surrender the policy to the company for its cash value. Or, instead of tak- ing the cash value, the insured may choose the option of stop- ping premium payments and taking a paid-up policy, payable upon death to his estate or designated beneficiary. The amount of paid-up insurance which the companies grant after the policy has been in force a specified number of years is indicated in column three of the preceding table, and repre- sents the amount of insurance that can be purchased at the then attained age with a net single premium equal to the sur- render value. The amounts, it will be observed, are very con- siderable in the later years, the face value of the paid-up insur- ance granted on the $10,000 policy, after the same has been in force twenty-five years, being $6,380. Lastly, it may happen that the policyholder contracts some fatal disease or meets with some accident which incapacitates him for the earning of future premiums. Under such cir- cumstances the necessity for insurance is greater than ever, and the policyholder is allowed to avail himself of the option of " extended insurance," which means that he can without 78 THE PKINCIPLES OF LIFE INSURANCE further premium payments enjoy the full benefit of his orig- inal policy for a designated number of years and days. This option may also be chosen, even though the ability to pay premiums continues, when the insured is satisfied that his physical condition is such as to prove fatal before the expira- tion of the term during which extended insurance is granted. The duration of the term of extended insurance as allowed by the companies will again depend upon the cash value of th.3 policy, which is used as a single premium to purchase insur- ance at the then attained age. The respective amounts on the $10,000 policy, used for purposes of illustration, are shown in the fourth and fifth columns of the preceding table. Thus, it will be observed, for example, that after this policy has been in force nineteen years it may be extended for its full face value, without further premium payments, for a term of fifteen years and two hundred and sixty-one days. CHAPTER VII LIMITED-PAYMENT POLICIES Under the terms of these contracts the face of the policy is not payable until maturity, but premiums are charged for a limited number of years only after which the policy becomes paid-up for its full amount. This method of paying premi- ums is applied to-day, if the insured so desires, to practically all of the leading types of contracts sold. Its most popular application, however, has been in connection with whole-life policies, and its nature and advantages will, therefore, be dis- cussed from the standpoint of this type of contract. Ordi- nary whole-life policies involve the payment of an annual level premium until a claim ensues through death. But under the limited-payment plan premium payments, instead of con- tinuing indefinitely, may be fixed at almost any number of years, from one to thirty, or even more. Customarily the payments cease after ten, fifteen, or twenty years, but life policies providing for twenty-five or thirty premiums are not uncommon, and in a mutual company the stipulated term may be further reduced by applying the dividends for that purpose. If premiums are limited to twenty years, for exam- ple, and this seems to be the favorite choice of the public, the policy is known as " a twenty-payment life policy." Necessity for Larger Premiums Under This Plan During the Premium-Paying Period. Since limited-payment poli- cies require the payment of premiums during a term which averages less than the term of the contract, it follows that the annual level premium under this plan is larger than that necessary when premium payments continue throughout the life of the policy. The purpose of the plan is to have the policyholder pay an extra amount annually during the fixed 79 80 THE PEINCIPLES OF LIFE INSUEANCE premium-paying period so that after the termination of this period the policy may be carried to successful completion without further financial obligation on the part of the insured. Thus in the case of a limited-payment life policy, the ten, fifteen, or twenty premiums called for by the contract represent on the average a total sum sufficiently larger than the aggregate amount paid on the average during the same period under the continuous annual level premium plan, to enable the company to accumulate an amount which will be sufficient, together with compound interest earnings at an assumed rate, to carry the policy thereafter to its maturity without further charges upon the insured. While the mathe- matics underlying the computation of net premiums on the limited payment plan is referred to in Chapter XV, the manner of applying the principle ifi. actual practice may be illustrated by the following rates x taken from the rate book of the company already used for purposes of illustration in the two preceding chapters. The rates presented are those charged by the company at various selected ages on a whole- life policy on the ten-, fifteen-, and twenty-payment plans, and the rates on the continuous-payment plan are also given so that a comparison may be made. PREMIUM RATES TO SECURE $1,000 PAT ABLE AT DEATH AGE WHOLE OF Lli'E 10 YEARS 15 YEARS 20 YEARS 20 16.60 38.30 28.06 24.16 25 19.00 42.34 32.06 26.75 30 21.80 46.80 35.50 29.70 35 25.45 52.00 39.60 33.28 40 30.25 58.46 44.74 37.84 45 36.50 65.82 50.80 43.46 50 45.10 75.20 58.94 51.26 55 56.50 86.75 69.52 61.84 60 72.70 101.68 83.98 76.80 i These rates are merely used for illustrative purposes. It should be noted that the gross premiums charged by different companies vary considerably, and that in mutual companies these premiums are considerably reduced through the distribution of dividends. LIMITED-PAYMENT POLICIES 81 An examination of the table shows that the fewer the num- ber of premium payments the larger each payment will be. Thus at age 20 a whole-life policy with premiums payable until the policy becomes a claim will cost $16.60 in this com- pany. If the insured, however, prefers to pay for the policy in twenty installments,, each premium will amount to $24.16 ; while if paid in fifteen or ten installments, the premium will increase, respectively, to $28.96 and $38.30, the last figure, it will be noted, being more than double the premium charged at this age under the continuous-payment plan. Owing to the heavier premiums the limited-payment plan is not well adapted to those whose income is small and whose need for insurance protection is so great as to require em- phasis on the amount of protection rather than the accumu- lation of a fund with the company, especially when there is reason to believe that the income out of which premiums may conveniently be paid will be much greater in the future than it is at present. Furthermore, many policyholders, amply able to pay premiums, may feel that a policy requiring continuous payments will fit their needs better than a limited-payment contract, since it enables them to use the difference in the premiums to better advantage perhaps than if allowed to accumulate with an insurance company. Nor is the use of the limited-payment principle advanta- geous under the circumstances described in the chapter on " Term Insurance." Here we saw that situations may fre- quently arise which require the subordination of the invest- ment feature in life insurance to its protective function to such an extent as to preclude or render disadvantageous the taking out of even whole-life insurance by continuous pay- ments, much less the limited-payment plan. Especially is this true of young professional or business men who are just beginning their career and who, appreciating the necessity for adequate family protection, may feel that their special circumstances require the use of term insurance as a means of securing heavy protection at the least possible cost during the years when they are seeking to establish themselves in 82 THE PKINCIPLES OF LIFE INSUKANCE their calling. Such persons, as was stated, wanting heavy protection during early years, may feel that they can more advantageously use all available savings in their profession or business. Or, looking forward to a much larger income later in life, they may reason that they can then advanta- geously replace or supplement this type of contract with policies of other kinds which have permanent protection or saving as their primary purpose. It is also clear that the limited-payment plan will not appeal to those who desire pro- tection against some temporary business or family hazard, the duration of which is definitely known. Advantages of the Limited-Payment Plan. Having re- ferred to the shortcomings of limited-payment policies when viewed in the light of special circumstances, we may next note the conditions under which this method of paying pre- miums may prove desirable. Certainly, the willingness to pay a larger annual premium must be justified by advantages which will compensate for the sacrifice. Two important ad- vantages present themselves and may be stated briefly as follows : 1. Premium payments may be limited to the produc- tive period of life. Instead of continuing for an indefinite period, the premium-paying years may be so limited in num- ber as to correspond to the income-producing years. Not only is there satisfaction for many people in knowing the maximum amount which they can be asked to pay on a pol- icy, but for the great majority of men between the ages of 25 and 40, engaged in the average walks of life, the next thirty, twenty, or fifteen years, depending upon the age under consideration, represent the really productive period of their working lives. As regards the great majority, these years, and not the years of old age, can through a little extra effort and economy be made the years of surplus. It is therefore argued that the average man should take advantage of that period in his working life when money comes in most freely, to pay a somewhat higher premium, in order to free himself in old age from any payment whatever. Using the rates LIMITED-PAYMENT POLICIES 83 cited above, a person insuring at age 25 is given the option by the company of making his whole-life policy paid-up by the time he becomes forty-five years old by paying an extra annual sum of $7.75 per thousand dollars of insurance for twenty years. As previously stated, less than one in ten of our population succeeds in accumulating a reasonable com- petence by the time age 50 is reached, and through reverses in business or investments a great majority of this limited number lose the same before death. Now why not use the productive years, the supporters of the limited-payment plan argue, to protect one's insurance against such a contingency ? As the management of one company admirably states in re- ferring to a twenty-payment life policy : * The period of twenty years is not so short as to make the dis- count of future payments too heavy, nor so long as to extend these payments far into the future, thereby defeating the wise purpose of avoiding them late in life. . . . After twenty years the insured has completed his side of the agreement and reaps the reward of prudence and persistency. His estate, the value of the policy, is an accomplished fact bought, paid for and standing to his credit. Nothing can take it from him, nothing can reopen the account it is beyond peradventure. At his death the company instantly discharges its side of the contract by the simple transfer of the property. . . . Here then, is a present plan for future security. The ordinarily vigorous and most productive years of life pay toll for the fullness of years sometimes attained without fullness of pocket. Thus the bur- den is put where it can more easily be carried, and the relief in later life always abundantly justifies the earlier foresight. 2. Combines saving with insurance. The limited- payment life policy affords the advantage of combin- ing saving with insurance, assuming that the policyholder desires to accomplish this purpose, to an even greater degree than was noted in connection with whole-life insurance by continuous payments. The extent to which cash or loan values accumulate, for example, under a $10,000 twenty-payment i New England Mutual Life Insurance Co. 84 THE PRINCIPLES OF LIFE INSURANCE life policy at age thirty-five is indicated for the first twenty- five years in the following table of values guaranteed by the same company whose cash and loan values were used for purposes of illustration in connection with an ordinary life policy : GlTAHANTEED VALUES Age: 35. Amount: $10,000. Annual Premium: $367. Plan: Life, 20 Payments. NUMBER OF YEABS AFTEB POLICY HAS BEEN IN FOBCE CASH OB LOAN VALUE PABTICIPA.TING PAID-UP INSURANCE PAETICIPATING EXTENSION YEARS DAYS 3 $ 682.00 $1,540 7 334 4 924.60 2,050 10 212 5 1,175.20 2.560 13 14 6 1,434.00 3,060 15 75 7 1,701.40 3,570 17 28 8 1,977.70 4,070 18 246 9 2,263.10 4,570 20 16 10 - 2,557.80 5,070 21 81 11 2,862.40 5,570 22 93 12 3,176.80 6,060 23 64 13 3,501.60 6,550 24 8 14 3,837.00 7,040 24 307 15 4,183.30 7,530 25 249 16 4,541.10 8,020 26 220 17 4,910.70 8,520 27 247 18 5,293.10 9,010 29 9 19 5,688.90 9,500 31 25 20 6,099.20 10,000 Paid up 21 6,211.80 22 6,325.10 23 6,438.90 24 6,553.00 25 6,667.20 The values given above will be increased by any surplus or addi- tions standing to the credit of the Policy. Comparing the above table with the corresponding table for an ordinary life policy (see page 75) we find that the premium charged on the $10,000 twenty-payment life policy at age 35 is $367 in this company as compared with $270 for the same policy on the continuous-payment plan. But it LIMITED-PAYMENT POLICIES 85 will be noticed that the larger premium on the limited-pay- ment contract results in a much more rapid yearly growth of values under the policy. Whereas the cash or loan value given under the ordinary life policy amounts to $397.60 after the policy has been in force three years, the corre- sponding value equals $682 under the twenty-payment policy. Similarly, the cash or loan values of $1,460.10 and $3,275.80 under the ordinary life policy after it has been in force ten and twenty years respectively contrasts with corresponding values of $2,557.80 and $6,099.20 under the twenty-payment contract. This larger accumulation under the limited-pay- ment plan is the result of the sacrifice necessary to meet the larger premium. Those supporting the plan argue that it encourages thrift and that the extra sum accumulated would not otherwise have been saved in the great majority of in- stances. The increased premium can, it is asserted, easily be paid by many if they only resolve to do so, with the result that a little determination will lead to the accumulation of a fund of large dimensions. Paid-up and Extension Benefits Under the Limited- Payment Plan. As was explained in the previous chapter various contingencies may arise which may cause the insured to view a policy differently from the way he did when he pur- chased it and which may induce him either to surrender it or to discontinue the payment of premiums. This attitude may be caused by any one of several events, such as loss of earning capacity, death of one's dependents, or impairment of health to such an extent as to make death certain during the period for which extended insurance is granted. Under such circumstances the insured may realize the guaranteed values of his contract as they stand at the time. Either he may surrender the policy for its cash value or effect a loan against that value, and this cash or loan value we have seen is considerably larger under the limited-payment than under the continuous-payment plan. Or the insured may exercise the option of taking paid-up or extended insurance, and these benefits, since the larger cash value is used as a single 86 THE PRINCIPLES OF LIFE INSURANCE premium to purchase paid-up or extended insurance at the then attained age, will be greater than under the ordinary life policy. CHAPTER VIII ENDOWMENT INSURANCE Definition and Types of Policies. All the policies dis- cussed in the three preceding chapters provide for the payment of the full amount of the policy only in the event of death. Endowment policies, on the contrary, provide not only for the payment of the face of the policy upon the death of the insured during a fixed term of years, but also for the payment of the full amount at the end of said term if the insured be living. Whereas policies payable only in the event of death are es- sentially taken out for the benefit of others, endowment poli- cies, although affording protection to others against the death of the insured during the fixed term, usually revert to the insured if he survive the endowment period. Such poli- cies, therefore, have become popular in recent years as a convenient means of accumulating a fund which will afterwards become available for the use of the policy- holder. An examination of the contracts issued by different com- panies shows many variations in the use of the endowment- insurance principle. Such policies may be made payable in ten, fifteen, twenty, twenty-five, thirty or more years, or the length of the term may be so arranged as to cause the policy to mature at certain ages, such as 60, 65, 70, etc. When written for such terms the purpose of the policy usually is to combine immediate protection with saving; while if written for long terms or to mature at an advanced age the object is usually to combine protection with old-age provision. Usu- ally the contracts are paid for by premiums (payable an- nually, semi-annually or quarterly) continuing throughout the term, but if desired the premiums may be paid on the 87 88 THE PRINCIPLES OF LIFE INSURANCE limited-payment plan, as, for example, a thirty-year endow- ment paid-up in twenty years. Other applications of the endowment principle have already been referred to in the chapter on " Classification of Policies," but may again briefly be recapitulated. Thus there may be " double endowments " or " semi-endowments," the first meaning that the amount payable upon survival is twice that paid in the event of death, and the last meaning that the sum payable upon survival is only half as large as the amount promised upon death. Various kinds of " child endowment policies" are also issued by certain companies. Sometimes these policies, besides guaranteeing the payment of a fixed amount upon the attainment by the child of a specified age, also provide for the return in full of the premiums paid in the event of the child's death before reaching the endowment age. Or, the policy may be issued without the return of premium privilege in the event of the child's death, the only benefit under the policy in this instance being the amount payable on survival. Sometimes it is provided that upon the death of the purchaser of the policy, usually the father, premium payments shall cease, the policy becoming full- paid and the principal becoming due when the child reaches the endowment age. In still other instances the policy may be issued on a child's life at an early age, say at age five, the un- derstanding being that the policy will not come into full force until the insured reaches a specified age (say age 21) and will then mature as an endowment at, say, age 50. These policies, furthermore, may again be issued with or without the return- premium privilege. Analysis of an Endowment Policy. Two explanations have been offered as an analysis of the nature of endowment insurance. Under the first, and this is the usual analysis, the policy is explained as consisting of (1) "pure-endow- ment" insurance and (2) "term" insurance. This analysis looks upon the contract as a combination of a level term insurance, promising to pay $1,000 in case of death at any time during the term, and a pure endowment of the same ENDOWMENT INSURANCE 89 amount payable only upon survival at the end of the term. Several writers, however, while admitting that the above analysis is correct and convenient for purposes of mathe- matical computation, maintain that the pure endowment does not offer the correct explanation of an endowment-insurance contract ; that there is another and more logical method of ex- planation and one agreeing more closely with actuarial practice. This newer explanation likewise divides endowment policies into two parts. But the investment part of the contract, and this is the fundamental difference, is not considered a pure en- dowment, all of which is lost in case of death before the end of the term, but is strictly a savings-bank accumulation which is available at any time to the insured through surrender or ma- turity of the policy. This investment feature is supple- mented by term insurance, which is, however, not a level term insurance of $1,000 in amount at any time, but an insurance of an amount which added to the investment accumulated at the date of death will make the amount of the policy payable equal to $1,000. The insurance portion of the contract therefore is for a decreasing amount, being nearly equal to $1,000 in the early years of the contract and gradually de- creasing throughout the term. Thus, if at a particular time a $1,000 endowment policy has an investment accumulation of $150, the insured will be protected by $850 insurance against death, but when the accumulation reaches $900 there will be term insurance for but $100. The premium for the policy may be divided into two parts, one part for the investment and one for the decreasing term insurance. Premiums Charged for Endowment Policies. Since the company's liability under an endowment policy involves not only the payment of the insurance upon death but also the full amount of the policy upon survival of the term, it follows that the annual premium on such policies is necessarily much higher, except for very long endowment periods where the rate is only slightly higher, than that charged on an ordinary life policy. An examination of the following table of rates (charged by the same company whose rates were used for 90 THE PEINCIPLES OF LIFE INSURANCE purposes of illustration in the preceding chapters) shows this to be especially true when the endowment period is a short one. The large difference here indicated, although ac- counted for in part by the heavier loading on endowment premiums, is due chiefly to the necessity of accumulating more rapidly the investment portion of the endowment policy in order to have it equal the full face value at the end of the term. Referring to previous chapters, we saw that the reserve value of the $10,000 ordinary life policy at age 35, used for illustrative purposes, was $3,275.80 after the policy has been in force twenty years, while for the same policy on the twenty- payment plan the corresponding reserve value was $6,099.20. The $10,000 twenty-year endowment policy, however, must, according to its definition, have a value of $10,000 at the end of the twenty-year period, and tfre difference between this value and the values noted for the other two policies must be obtained by the company through a higher premium. PREMIUM RATES FOE $1,000 ENDOWMENT INSURANCE AGE 10 YB. END 15 YB. END 20 YB. END 25 YB. END 30 YB. END 35 YB. END 40 YR. END 45 YB. END WHOLE LITE RATE. 20 25 30 35 40 45 99.27 99.90 100.30 100.90 102.14 103 58 62.34 62.70 63.34 64.20 65.67 67 70 44.10 44.82 45.63 46.70 48.64 51 45 33.84 34.67 35.74 37.00 39.46 43.05 27.44 28.38 29.58 31.44 34.47 38.85 23.23 24.35 25.87 28.15 31.70 36.90 20.52 21.80 23.60 26.30 30.40 18.60 20.20 22.40 25.55 16.60 19.00 21.80 25.45 30.25 36.50 50 106 45 71 75 56 55 49 30 47.65 45.10 55 111.58 78.26 64.65 60.05 56.50 60 120.20 89.10 77.60 72.70 Functions of Endowment Insurance. In the past endow- ment insurance was frequently advertised as " investment insurance " without making proper reference to the cost of the insurance protection. But as Mr. Dawson states in con- sidering endowment and limited-payment policies as an in- vestment, "a life-insurance policy, at the best, can be com- pared as an investment with other investments, not accom- ENDOWMENT INSURANCE 91 panied with life insurance, only when a proper allowance is made for the cost of the life insurance. ... It behooves the company as a matter of fairness both to make it plain that at the best the investment is good, only in case the form of the protection is considered, and then to render the handicap as little as possible by loading endowment and limited-pay- ment life premiums justly." 1 The real function of endow- ment insurance is not to yield a large investment return but rather to furnish a means of inculcating the saving instinct and to afford a sure method of providing against old age or some other specific contingency by accumulating a definite sum of money within a definite time. Briefly stated, en- dowment insurance may be defended under proper conditions because of its usefulness in four main ways, namely: 1. As an incentive to save. The argument most generally advanced in favor of endowment insurance is that it constitutes a sure method for systematic saving in that it provides for the laying away of a moderate sum each year with a view to having all the accumulations returned in one sum at the end of a fixed period. This era is recognized as a particularly extravagant one, and vast numbers of young men, because of extravagant habits, never save a dollar al- though receiving good incomes. For such persons an en- dowment policy generally turns out to be a means of forcing thrift, since it compels them to do that which, if left entirely to their own option, would remain undone. By requiring the payment of specific sums at regular intervals during a period of years, endowment insurance enables many to save a sum worth while, without being conscious of the sacrifice, whereas haphazard methods of saving seldom achieve this result. " Such a policy," as has been said, " gives a person a definite aim he must save just so much every year, and experi- ence soon teaches that he can do it easily." It should also be emphasized that in ever so many instances the difference between the premium on an endowment policy and some N, MILES M., The Business of Life Insurance, 231-234. 92 THE PRINCIPLES OF LIFE INSURANCE other kind of contract requiring a smaller payment would not be saved were it not for the voluntarily assumed sacri- fice of paying the higher rate. Endowment insurance, there- fore, as it concerns those who find it difficult to save, rep- resents a means of utilizing the by-product of their earnings the small sums otherwise wasted in needless expenditures for the accumulation of a competence. And even assuming that these small sums are not wasted, it would still be true that in probably the majority of instances, they would be invested injudiciously and would be subject to the hazard of business, or even if carefully invested would be withdrawn under the temptation of speculation or luxury. It is also contended by many that endowment policies maturing in, say, twenty years afford to many young men, especially if they labor under the difficulty of not being able to save or keep their savings, the advantage of yielding a cash capital " at the prime of life when, ripened by years of experience, they can use it to the best advantage/' Strange as it may seem many of the nation's most prominent business men, who we would think could currently use all spare funds to the best advantage in their business, have publicly em- phasized this feature of endowment insurance. Only a few years ago one of the leading merchants of this country in addressing a meeting of life-insurance agents related how he had been induced to take one endowment policy after an- other until he carried a huge amount of this type of insurance. He explained its advantages to him as a means of compulsory thrift, of accumulating sums little by little until a large fund existed, and expressed his belief that if it had not been for the sum realized upon the maturity of his endowments he might never have erected his splendid store. 2. As a means of providing for old age. Endow- ment insurance, if the term is so selected as to make the policy mature at an age like 60, 65, or 70, may serve as an ex- cellent method of accumulating a fund for support in old age. Many who oppose endowments maturing at earlier periods because of their greater cost are ardent supporters of long- ENDOWMENT INSURANCE 93 term endowments maturing at an age when a man's earning capacity usually ceases and when he naturally expects to retire from actual work. Statistics show that less than one man in ten succeeds in laying up a competence by the time this age is reached. Most men are therefore confronted with two contingencies: (1) an untimely death may leave their families unprotected, and (2) in case of survival until old age they may lack the means of proper support. Both of these contingencies may conveniently be provided against by a long-term endowment. If death should occur at any time during the term, the insurance proceeds revert to the family; but should the insured survive to old age, when the need of insurance for family protection has largely or altogether passed away, he will himself receive the proceeds of the fund which his prudence and foresight enabled him to accumulate, to be used for his own support and comfort. In this connection it should be remembered that a whole- life policy, based on the American table of mortality, is an endowment at age 96, since this age according to that table is considered the extreme limit of life. At age 25 a whole-life policy is, therefore, an endowment policy for a term of seventy- one years. Now those upholding long-term endowments take the position that it is most illogical to choose age 96 as the age when the insured shall have completed his savings fund under the policy, and that it accords much more with the real needs of the average man to move the maturity of the con- tract from the ridiculous age of 96 to the more reasonable age of 60 or 65, when the need for insurance protection is usually small while the need of a fund for comfortable main- tenance in old age is usually pressing. Especially, it is argued, should this change to an earlier date of maturity be provided when the difference between the premium on an ordinary life policy and that on an endowment maturing at, say, 65 is so small that its payment does not involve any appreciable sacrifice and would in all probability not have been saved except for the voluntary determination to pay the slightly higher premium. Thus at age 25, using the 94 THE PRINCIPLES OF LIFE INSURANCE aforementioned rates, the premium on a forty-year endowment is $21.80 as compared with the premium of $19.00 for an ordi- nary life policy, or a difference of $2.80. As regards a forty- five-year endowment maturing at age 70 the difference between the two premiums charged by this company is only $1.20. In other words, the payment of this slight extra sum each year during the forty- or forty-five-year period insures the payment of the full amount of the policy in case of survival at age 60 or 70. 3. As a means of hedging against the possibility of the saving period being cut short by death. Reference has been made several times to the fact that the saving of a competence involves the time necessary to save and that life insurance affords the only known method of protecting a person against the possibility, owing to an untimely death, of not being able to accumulate the desired amount. Were it not for the uncertainty of life and the inability of most people to carry out their resolution to adhere to a definite plan of saving the accumulation of an estate could readily be accomplished by the deposit of certain sums at regular in- tervals. But, as we have seen, the effort to save a fixed amount is confronted by two dangers : ( 1 ) death before there has been time to save the desired amount, and (2) failure of the individual to continue his plan of saving or to keep intact what may already have been accumulated. Endowment insurance seeks to protect the individual from both of these dangers. Thus let us assume that it is the purpose of a person aged 25 to accumulate $20,000 dur- ing the next forty years. The accomplishment of this pur- pose might be attempted by saving a certain amount periodi- cally for investment in business, securities, etc., and by se- curing protection against the possibility of the saving period being cut short by death, through the purchase of term or whole-life insurance. But it is also clear that the result can definitely be accomplished by the purchase of a $20,000 forty- year endowment maturing at age 65. On the one hand, this policy by requiring the payment of the premium at regular ENDOWMENT INSURANCE 95 intervals will tend to enforce thrift on the part of the insured, and will place accumulations beyond the danger of loss to which private investments are usually subject. On the other hand, it hedges the insured's savings fund against premature death. In explaining the nature of an endowment policy we saw that it can be regarded as a combination of saving and decreasing term insurance. Thus in the first year of the contract when the investment portion of the contract is small the term insurance amounts to nearly $20,000, but if at a particular time the investment accumulation under this policy is $3,000 the insurance protection amounts to $17,000. When the investment portion equals $19,000 the insurance portion is for only $1,000; likewise when the accumulation of the $20,000 fund is completed and paid at age 65, the insurance portion is reduced to zero. It is thus seen that this policy as- sures an estate of $20,000 and protects the insured from the chief danger death before the fund reaches the desired amount attaching to any plan of saving which is not hedged with a life-insurance policy. This function of en- dowment insurance has recently been presented very clearly by Mr. Albert Lint on, 2 and the following four paragraphs of his excellent address are herewith reproduced : For the purpose of illustration, consider a $1,000 " Endow- ment at 65," a Forty-year Endowment-, taken on the life of a young man aged 25. The purpose of this contract is to pro- vide insurance protection during the years of active manhood and to provide support for the insured during his old age. Under this contract the beneficiary receives the face of the policy upon the death of the insured, should death occur before age 65. If the insured lives to age 65' the age when, accord- ing to statistics, more than 90 out of every 100 men are de- pendent he himself receives the full amount of the policy. It may be mentioned in passing that according to the experi- ence of The Provident Life and Trust Company, 66 out of every 100 men who insure at age 25 do live to the age of 65. - LINTON, M. ALBEBT, " The Endowment Policy." An address de- livered at the Fourth Annual Convention of General Agents of the Provident Life and Trust Company of Philadelphia, January, 1915 96 THE PRINCIPLES OF LIFE INSURANCE The first step in our analysis is to determine what sum, pay- able at the beginning of each year, will accumulate at com- pound interest to $1,000 in 40 years. As the contract is to extend over so long a period, we assume a conservative rate of interest, say S l /2 per cent., and find that the required sum is $11.43. In other words $11.43 paid at the beginning of each year, together with S 1 /^ per cent, interest upon accumulated funds, will produce $1,000 at the end of 40 years. At the end of 10 years the accumulation will be $139, at the end of 20 years, $334, and at the end of 30 years, $611. If, therefore, the contract were merely one of compound interest an ordi- nary savings fund contract the amount payable should death occur within the 40 years, would be simply the accumulation of principal and interest, of which the above three amounts are examples. Suppose, however, we devise as an accompaniment to the above, an insurance policy under which, should death occur before age 65, the amount payable will be the amount by which the accumulation of the annual payments of $11.43 falls short of $1,000. For example, in the tenth year the accumulation is $139. In the tenth year, therefore, the amount of insurance will be the difference between $1,000 and $139, that is, $861. In the twentieth year it will be $666, in the thirtieth year $389, and in the fortieth year zero. Technically speaking, therefore, the policy that we are devising is one which provides for a decreasing term insurance covering a period of forty years. Performing the actuarial computation on the basis of the Amer- ican Table of Mortality, with interest at 31/2 per cent., we find that the uniform annual premium for this policy at age 25 is < W 5 S K ^i|g s 5 " n = (MU5OO51 OIOOOO1 tiot ^ 'CimtMtt ff M fe W P a H ^ : s S w p S o Ed CO Cd M W P-I pq o 5 o <5 O (M-^COCiCOOD-^WO r-.OOCU5-^'t i-c^Hi-i(M0 H u ^5 JM Tl<(Nt b-lt O-Hi-*>-i(Nft w 13 >H a M r a i IT^OOT^IOOOCC USTtt-OiriCOOClCTl' . 2. E e Ed Tf COlt-OTl 1000 i i i i c(M(NeOC5>Oi & <^ o O co us ' loaoicoco-^'Ot^ e- ^ R g H g 1 5 ^ fc M OOOUtOlftOOO g IS CC t rf CO >s f>l TJH CO 1C CO 5 CO CO ?: c: CC 5^1 CC 1C CC o c: !- CS CS & i i i 00 I-H IS t- fM 3 1C Tf CC GO c: ic eo fa o 73 H tH 1C eo co CO 3 IS CO o IS co cs o o s CO TtH O CO c fM CM X Tj< CO CS CM 6- Bfl PH s s IS CO -f US ir- is to CO 1C O t- cs K PH H Y H 1C o co IS CM CO c: c-. CO CM CC t- CO co eo 02 P H PH eo TJH T? 3 s cs Tt" TJH 1C c CC O 1C t- oo (-1 o OS 65 H o 2 t-- O ^ CO CO o CM ic r O CO co o fM T? c: IS t- CM CO 00 HH P fa o 1C CO o CO ?: a c; CO CO t- CM 1C TtH CO w < eo IS CO 70 00 CO CM T? IS 1C O CO GO s ,3 fij: o o r 1 cs CC CO to (M i c CO t- cs CM CO H fc i-H eo CM CO eo eo CO CO -<* IS CO LS TjH CS CO ir- s 1C cT fM 2 r- C: r- IS t^ TtH 1C i I TtH CO 00 CM CO CO eo CO TJH CM IS eo cs CO t 1C g o c: c-. CC CC 00 TtH I-H CS CM 00 M i-H CO CO CO CO l-S eo co CO tr- AGE OF ONE PAKTY O CM 1C (M o CO IS CO o 1C o ie o ic co 110 THE PRINCIPLES OF LIFE INSURANCE the first death and the policy will terminate at that time. An examination of the rates on the preceding page (being those charged by a certain company) shows, for example, that where the ages of the two persons insured are 25 and 30 re- spectively, the rate for the joint whole-life policy is $32.16, while the sum of the rates on two whole-life policies insuring the two lives separately, viz, $19.00 at age 25 and $25.45 at age 30, is $44.45. It will also be noted that the inclusion of an older person in the insured group will materially increase the premium on a joint-life policy. Where the two persons in- sured, for example, are aged 25 and 60 respectively, the joint- life premium will have increased to $79.32, yet this rate is $12.38 less than the sum of the rates ($19.00 at age 25 plus $72.70 at age 60) on two policies taken out separately on these lives. The Use of a Joint-Life Policy Compared with the Use of Separate Policies on the Same Lives. Joint-life policies may be taken by husband and wife in favor of each other or for the protection of their children. Should the husband die first, his wife and children will be properly provided for, while if the wife dies first the proceeds of the policy will also prove a substantial help to the family. Again, such poli- cies may appeal to husband and wife who are receiving a joint income. The most frequent use of such policies, how- ever, is for the protection of a firm against the death of one of its partners. For this reason joint-life insurance is frequently referred to as " partnership insurance," although that term, it should be noted, has a broader meaning since it may also refer to the insurance of the several partners under separate policies for the benefit of the firm. Either plan, it is clear, serves as a means of protecting the business against the withdrawal of capital and the loss of valuable experience that usually results from the death of a partner, of strength- ening the credit of the firm at a time when lack of capital is most likely to prove disastrous, and of making possible the retention of the control and management of the business by the surviving partner or partners. OTHER LEADIXG TYPES OF CONTRACTS 111 Where the firm consists of only two partners the joint-life policy may appeal as a means of protecting one partner against the death of the other, especially since the premium is lower than the sum of the two premiums required if both insured themselves under separate policies for the benefit of the other. The general tendency, however, seems to be towards the use of individual policies rather than joint-life contracts. This is especially true where the partnership consists of more than two partners, because under such circumstances there is a much greater possibility of some one of the members desiring to withdraw from the firm, thus frequently necessitating an intricate settlement as regards the joint-life policy. Such complications, it is argued, can best be avoided by issuing in- dividual policies on the lives of the members of a firm at the regular rates. Under this plan the death of any partner will cause his insurance to be paid to the firm, the other policies continuing in force as before for the benefit of the business. But in the event of the dissolution of the partner- ship, or in case the need for insurance ends, the policy may either be surrendered for its cash value, or be transferred, upon the payment of a proper consideration, to the insured who may then continue it as his own insurance for the protec- tion of his family or estate. ANNUITIES In character the annuity is the opposite of insurance against death, and may be defined as a contract whereby for a cash con- sideration one party (the insurer) agrees to pay the other (the annuitant) a stipulated sum (the annuity) throughout life, or during life within a fixed term, either annually, semi-an- nually, or quarterly. Its purpose it is seen is to protect against a hazard the outliving of one's income which is just the opposite of that confronting a person who desires life insurance as protection against the loss of income through premature death. Technically, however, the two types of contracts are closely related to each other, since the cost of both is computed on the basis of similar data and principles. 112 THE PKINCIPLES OF LIFE INSURANCE Immediate Annuities and Their Advantages. The form of annuity most commonly used is the so-called "ordinary life " or " immediate " annuity. This is purchased with a single cash sum in advance and guarantees the payment of a stipulated sum, annually, semi-annually or quarterly during the lifetime of the annuitant, with the understanding that upon his death such payments shall cease and the consideration paid for the annuity be regarded as fully earned. Owing to the greater longevity of female annuitants the cost of an- nuities for women is slightly higher than for men. Annui- ties of this kind prove serviceable to that considerable class of men and women whose only means of support is an estate so small as to yield an altogether inadequate income, and who have no one to whom they care to transfer this estate in the event of death. For purposes of illustration let us assume that a man aged 65 possesses $15,000 and that this fund constitutes his sole means of support. If invested in the most careful manner, let us say in gilt-edged bonds, so as to avoid any danger of loss, the current rate of return will probably not exceed four per cent., thus limiting the owner's income to $600 a year. This amount may prove woefully inadequate for proper support during old age; yet the owner, not know- ing how long he may live, does not feel that he can afford to take a portion of his principal each year for living ex- penses, because impairment of the principal means a cor- responding reduction in the income. As previously stated, " The danger confronting this man is just the opposite of that facing the man who wants insurance against death. The latter wants insurance because he does not know how long he may live, while the former is confronted with the danger of living too long, i.e. of outliving his income." The difficulty referred to can, however, be remedied by re- investing the $15,000 in a life annuity. By doing this a definite and much larger income, guaranteed for the whole of life, can be obtained. In the event of early death, it is true, the purchase price of the annuity will not be returned, but the necessity for an income will have ceased. On the contrary, OTHER LEADING TYPES OF CONTRACTS 113 in case of long life the return will not only be absolutely certain and regular from year to year but also very remunerative. To quote the rates of a certain company, our owner of the $15,000 fund may use the same as a cash payment for an annuity at age 65 which will yield him an income through- out life of $1,538.10, instead of $600, per annum, or lO 1 ^ per cent, as compared with the current rate of 4 per cent. As the age of the annuitant when purchasing the annuity increases, the greater will be the return, amounting in this company to nearly I2y 2 per cent, at age 70 and to nearly 151/2 per cent, at age 75, the last return being nearly four times that secured at the current rate of 4 per cent. At the same ages the corresponding returns of an annuity in this company on the life of a woman will be O 1 /^ per cent., 11 */ per cent., and 13% per cent. Should the annuitant desire a definite income such as $100, $500, $1,000, or any other round amount, the companies will issue the annuity on that basis. Thus if a man aged 65 desires an annuity of $1,500, he is permitted to deposit the necessary capital with the com- pany whose rates are being used for illustrative purposes, viz, $14,628. These large returns on annuities issued at the later years of life are possible (1) because the death rate following ages 65, 70, or 75 is very high and (2) because, in accordance with the meaning of an annuity, all payments will cease upon death and the unused portion of the purchase price of the annuity will redound to the benefit of those annuitants still living. As will be explained later, the rates for annuities are computed in the same manner as are those for insurance policies, and annuity benefits may, therefore, be granted by the company with equal certainty. With reference to the classes of persons to whom an annuity may appeal should be mentioned unmarried men and women who will leave no dependents and who desire to make the best provision for their own comfort during life, widows or widow- ers without children, parents whose children are comfortably provided for, and employers who may wish to provide ade- quately for old and deserving servants. For persons in these 114 THE PRINCIPLES OF LIFE INSURANCE classes an annuity furnishes a definite life income which is free from the care and danger of loss attaching to the ordinary methods of investing money. The arrangement, however, does not as a rule appeal to those who have children, especially if they are in need of support or if it is desired to leave them an inheritance, because the only benefit derived from an annuity is the income return during life. Other Types of Annuities. Just as life insurance may be offered under various types of contracts, so annuities may as- sume a variety of forms to cover the needs of different per- sons. Special attention should be called to the following : Annuity contract guaranteeing a minimum number of annuity payments. Such contracts may provide, for ex- ample, that in return for a given cash payment an annuity of say $100 shall be paid during the_ lifetime of a designated person, but that irrespective of the death or survival of said person, at least ten payments must be made. It should also be noted that an immediate annuity may be made to provide that in the event of death the company shall pay "a pro- portion of the annual sum, based upon the number of months which have elapsed since the last annuity was paid." Thus, if the annual annuity payment is $1,200 and if death should occur ten months following the last payment, the company will pay $1,000 or ten-twelfths of the annual payment. This arrangement, it is argued, " allows the annuitant to live up to his income, for should his death occur shortly after the regular annuity payment he would have on hand the expended balance of his annuity, while, should his death occur ten or eleven months after the regular annuity payment, the pro rata paid by the company would aid in extinguishing such debts as would otherwise remain unpaid." Deferred annuities. As the name suggests, a de- ferred annuity is not payable to the purchaser immediately, but only upon his surviving a stipulated period. To illustrate, a man 35 years old may decide to save a portion of his earnings each year with a view to providing for himself twenty years from date an annual income of $1,000 payable in semi-annual OTHER LEADING TYPES OF CONTRACTS 115 installments of $500 each, the first installment of $500 to be paid when he becomes 55% years old. This he can do by paying to the company, whose rates were previously quoted, $429 a year for twenty years. Such an annuity may be paid for in a single sum, on the lim- ited payment plan, or by yearly premiums throughout the pe- riod of deferment. It may appeal to persons who wish to utilize their productive years to accumulate a fund for the purchase of an annuity at an age when their income-earning capacity will have declined or ceased. There is usually no refund of the premiums that may have been paid in case the annuitant should die before the first installment of the de- ferred annuity becomes payable. Occasionally, however, de- ferred annuities are made to provide for a return to the annuitant's executors, administrators, or assigns of all premi- ums in the event of his death before the annuity payments begin. Last-survivor annuities. Annuities may also be issued upon the lives of two persons, the payments to be made to them jointly while they are both alive, and to continue for the full amount during the lifetime of the sur- vivor. While this plan may be applied to three or more lives, such instances are very few as compared with two- life annuities. This plan may prove very advantageous to two sisters, or to a husband and wife who have no children or whose children are financially prosperous, as a means of providing an adequate and regular income not only during their joint lifetime but also during the lifetime of the sur- vivor of the two. Thus a husband aged 55 and his wife aged 50 may have an annual income of $1,000, for as long as either may live, guaranteed to them by the aforementioned company upon the payment of $18,337. PAET II THE SCIENCE OF LIFE IXSUEAXCE CHAPTER XI THE MEASUREMENT OF RISK IN LIFE INSURANCE By BKUCE D. MUDGETT THE THEORY OF PROBABILITY Insurance has been defined as the institution which elimi- nates risk or which substitutes certainty for uncertainty. The occurrence of events insured against cannot wholly be pre- vented, but the uncertainty of financial loss through such oc- currences can be eliminated by distributing the loss over a group. Thus a man cannot be sure whether or not his house will burn even if he use all the preventive measures known. If the house burns the property is lost and gone forever that much material value has been actually destroyed. But it is not necessary that the owner should stand the entire loss. Before the fire occurred it was not known whether his house would burn or some one's else and he could agree with other owners of houses that they would all contribute to a common fund from which any unfortunate owner who lost his house by fire should be recompensed. Thus instead of the loss falling on one it can be divided equally among all. This is the essence of insurance and it illustrates the meaning of the statement that insurance is the elimination of uncertainty or the replacement of uncertainty by certainty. The common contribution to the fund above referred to con- stitutes the certain loss and is measured by the premium; the uncertain loss refers to the uncertainty that a particular house will burn. The same situation exists with respect to life insurance. It is not death itself that can be distributed, i.e. parcelled out among a number of insurers, but the financial consequences of death. Man has an earning power during 119 120 THE PRINCIPLES OF LIFE INSURANCE a certain period of his life which is lost to his business or his family by premature death, but it is not known in advance upon whom death will fall prematurely, hence all men can contribute to a fund which will be used to satisfy the business and family needs of those who die early. These two illustrations suggest the possibilities that exist for the application of the insurance principle. In whatever field risk is found to exist, there the principle can be applied. The complete working out of a scientific insurance plan necessitates some method of measuring this risk in order to determine the amount of each individual's contribution to the common fund. The correct measurement of risk, there- fore, lies at the foundation of any system of insurance. This accomplishment is rendered possible through the application to statistical data, covering the phenomenon in question, of certain laws developed in the field of mathematics known as the laws of probability, and it will be necessary to state and explain them before proceeding further. The Laws of Probability. The science of probabilities furnishes three principles of which practical use is made in life insurance. They may be called respectively (1) the law of certainty, (2) the law of simple probability, and (3) the law of compound probability. Their use makes pos- sible the description of risk in terms of mathematical values, and the statement of the three laws is as follows: (1) certainty may be expressed by unity, or one; (2) simple probability, or the probability or chance that an event will happen or that it will not happen may be expressed by a frac- tion; and (3) compound probability, or the chance that two mutually independent events will happen x is the product of the separate probabilities that the events, taken separately, will happen. An illustration will serve to make these statements clear. If a box contains twenty marbles and it is known that five of i There are laws of compound probabilities, for instance, where the separate events are dependent, but they do not enter into the present discussion. AIEASUKEMENT OF EISK 121 the marbles are white and the remainder black, let us suppose it is desired to know the probability that a marble drawn at random from the box will be black. If any marble has equal chances with any other of being drawn, then there are twenty different draws that might be made and if five of the marbles are black then it can be said that there are five chances out of twenty of drawing a black marble, or the chance is in the ratio of five to twenty, or is $. This fraction is obtained in the following manner: The de- nominator equals the total number of marbles in the box; the numerator equals the number that satisfies the condition stated, namely, the quality of being black. In like manner it might be desired to know the chance that the marble will not be black, and by a like method of reasoning it is found that this probability equals |-f. From these facts it is possi- ble to formulate a general statement of the method of de- termining simple probabilities as follows: The denominator will equal the total number of possible trials or chances that a thing may happen or may not happen or the total number of instances dealt with in the example above, total marbles. The numerator will be composed of those instances only which satisfy the conditions imposed in the same example, black marbles. In the illustration here used there are marbles of two kinds only, black and white, and any marble withdrawn from the box must be one or other color. The total existing probabili- ties are therefore two, the probability of drawing a black marble and the probability of drawing a white one. If cer- tainty is represented by unity, then unity, or the value " one," will represent the fact of drawing any marble. But any mar- ble drawn at random may be either black or white and since the probability of drawing the former is -j^, and of the latter |-|, and since certainty must equal the sum of all equals 1, therefore certainty must equal the sum of all separate probabilities, in this case __g I 15 -I 20 I 20 ** This corollary that certainty equals the sum of all separate 122 THE PEINCIPLES OF LIFE INSUKANCE probabilities may be further illustrated by the familiar ex- ample of the coin. It is certainty that a coin tossed into the air will come to rest on one side and this fact is repre- sented by the value " one/' Now, since it has but two sides, the sum of the separate probabilities that it will alight heads up or tails up must equal one. The probability of falling heads up, determined by the above rule for valuing simple probabilities, is -, since there are two possible sides and one is heads; likewise the probability of falling tails up is , and the sum of these two fractions equals one. The probability that both of two mutually independent events will happen is equal to the product of the simple prob- abilities that the events taken separately will -happen. Sup- pose that two coins are tossed up and it is desired to know the chance that they will both fall heads up. By the state- ment of the law above it will be X j or T? since it is known that the chance is that each separate coin will fall lieads up. That this is the correct result may easily be demonstrated. Suppose the two coins are a nickel and a dime. Then the different ways in which they may fall are: Nickel Dime Heads up Heads up Heads up Tails up Tails up Heads up Tails up Tails up These four combinations comprise the only possible ones that can be made with the two coins and the first combination is the only one of the four that satisfies the stipulated condi- tions, namely, both coins heads up. Hence there is one chance in four for this combination to appear, or the probability of its occurrence is j. According to the law of compound probabilities, as stated herewith, the product of simple probabilities equals the proba- bility that two events will happen at the same time, only MEASUREMENT OF KISK 123 when the two events are mutually independent. The happen- ing of the one must have no effect upon the occurrence or non-occurrence of the other, that is, must neither make it necessary for the second to occur nor make it impossible. If the law were valid irrespective of this qualification, such ab- surd results as the following might be obtained. The chance that the coin will fall heads up is -| and the chance that it will fall tails up is likewise -J. Therefore the chance that it will fall both heads up and tails up is \ X i or \. The absurdity results from the fact that the occurrence of the first named event makes it impossible for the second to occur simultaneously. The Use of This Theory to Forecast Future Events. The value of these three laws of probability lies in the fact that they can be used to forecast future events. Future events can be foretold in one of two ways : ( 1 ) by a priori or deductive reasoning, and (2) from knowledge of what has happened in the past under similar conditions. The validity of a priori reasoning depends on the completeness with which all the causes at work in the determination of any phenomenon are known; and the limitations of the human mind are such that a priori reasoning does not furnish a safe basis upon which to develop a superstructure guaranteeing that degree of certainty which is required in insurance. Eeasoning induc- tively, or on the assumption that what has happened in the past will happen again in the future if the same conditions are present, does not require an analysis of the causes of phe- nomena in order to predict future events. There lies behind this statement the assumption that all things are governed by law. In the cases here used to illustrate the principles of probability this is the law of pure chance. It is an even chance one with another that any marble may be drawn from the box or that either side of the coin may be "up." Then if in a great number of trials it has been found that the coin falls " heads up " one-half of the time the conclusion follows that this result will follow approximately if the same number of trials is taken again. 124 THE PRINCIPLES OF LIFE INSURANCE This fact has important bearings upon life insurance. From data showing the length of life and ages at death in the past it is possible to predict probabilities of death and of survival in the future. This prediction is based on the as- sumption that, like the law of chance, there is a law of mor- tality by which human beings die; that certain causes are in operation which determine that out of a large group of per- sons at birth a definite number of lives will fail each year until all have died; and that the force of mortality could be measured if only the causes at work were known. But it is not necessary to analyze this law of mortality completely and to know all the operating causes in order to predict the pos- sible rate of mortality in a group of persons. By studying the rate of death among any group and noting all the circum- stances that might, according to our best knowledge, affect that rate, it is possible to surround any future group of per- sons with approximately the same set of circumstances and expect approximately the same rate of death. Thus without complete knowledge of the law of mortality a working basis is found for predicting future rates of death. It is neces- sary then to have mortality statistics in order to develop a scientific plan of life insurance. Accuracy of the Theory of Probabilities The Law of Average. The accuracy of the theory of probabilities, on which future deaths will be estimated, or the closeness with which the theoretical approximates actual experience has im- portant bearings on the success of any method of insuring lives. This accuracy depends on two factors: (1) the accu- racy of the data, and (2) the number of units or trials taken. For instance, suppose that probabilities of death were com- puted on the basis of population statistics and death registra- tion returns. Population censuses are taken by the Federal Government only once in ten years and these are supplemented in some states by a state enumeration in the year midway between two federal census years. Thus if death rates were to be computed for the year 1914 the last actual count of population would be for the year 1910, and the population for MEASUREMENT OF EISK 125 1914 would have to be estimated. This estimate is certain to contain an element of error. Furthermore, the deaths among the estimated population would be determined from the registered deaths within the given area, but in no section of the United States are all deaths recorded. Indeed the qualification for admission into the "registration area" is the registration of only ninety per cent, of the probable deaths. Therefore death rates based on population and death registration returns may contain two large elements of error and for this reason may fail to measure approximately the law of mortality. Mortality statistics, from whatever source, should be scrutinized searchingly in order to detect inaccu- racies in the original data. ' The second factor which determines the accuracy of the laws of probability is the number of units or trials taken. This may be illustrated by the coin example heretofore used. It was stated that the probability of falling heads up is . There is no inaccuracy in the data on which this fraction is based, for there are two sides only to the coin and one is heads. To illustrate the inaccuracy dependent on the num- ber of trials, the following experiment was undertaken by the writer. An ordinary copper cent was flipped three hundred times and the results, whether heads or tails up, were re- corcjed for each ten throws. If the probable experience had agreed absolutely with the actual, the results would have shown five throws heads and five throws tails for each ten trials. The actual results are recorded herewith : RESULTS OF EACH 100 TRIALS IN GROUPS OF TEN First 100 trials Heads 8 2 6 4 3 4 3 5 6 4 = 45 Tails 2 8 4 6 7 g 7 5 4 6 = 55 Second 100 trials Heads 5 6 5 5 8 g 6 6 o 5 = 53 Tails 5 4 5 5 2 g 4 4 8 5 = 47 Third 100 trials Heads 7 5 j 5 5 6 7 5 5 6 = 52 Tails 3 5 g 5 5 4 3 5 5 4 = 48 126 THE PRINCIPLES OF LIFE INSURANCE to 12 o it CO O 03 ft H O ca o i-H - M 1 r. e ] H 1 4 H O I O O ;. ; 2 M O cc M r- H T o * -* ! i Q t- CO -j > c j ^ M 1 H H H O 7 I 1 * p CO T r- H c I Ck 1 H OQ K! CO pri t 1 (H w J, Tf " c ^ _ H 03 c > 1 1 03 B " r- c< I c i _ P 9 O5 4 H i M H H ! f ^ 4 ( * -J : H e 1 - c< c 1 r- o CO fe B g O J CO u r- - I 4 1 t. : -< f O5 (B M o 001 r vi nnnv 477finfi id o-1'iiofi " " 1A 1TO X 1>VUUX.*1 /OWD 11.J1J1UO ( 4,1/0 2,391 ,, 74,173 xsl ' ~' 46 -^ r-X 1,000 X. 450189=14.858003= " " 2,487 74,173^ ' 74,173" 2 ^501 - i > t ' ul ^ -i nnnv 411 o^? 13 fill ^71 " " 74173 io.oio/i 2 476 1 ^'i nnnv POOOP? 13 3T 1 >i3d ' " 74,173 -^^i-X 1,000 X. 388337=12.727640= " " -^^-X 1,000 X. 377026=12.041775= " " ^~-Xl,OOOX. 366045=11.306123= " " 4 *j I/O 74,173 2,0 Jl , ripi/v., VAXMO n 7Ofj7/| " " 74,173 1 Qfi4 74,173" 1)816 vi nnrtv 39K99R-- 7flfi9fi07 " " 74,173' THE NET SINGLE PEEMIUM 157 - 1 ' 6 * 8 X^OOOX. 315754 7.015526=cost of mortality during age 83 / 4rj -L 4 O y. 1,000 X. 306557= 6.075510= " " " " " 84 i 4, J. 4 O 1 9Q5> r-X 1,000 X. 297628= 5.184304= " " " " 85 1 114 X 1,000 X. 288959= 4.339859= " " " " " 86 74,173 933 74,173 744 74,173 555 74,173 385 74,173 X 1,000 X. 280543= 3.528807= " " " 87 X 1,000 X. 272372= 2.732056= " " " " " 88 X 1,000 X. 264439= 1.978667= " " " " " 89 X 1,000 X. 256737= 1.332611= " " " " " 90 24fi -^ X 1,000 X. 249259= .826685= " " " " " 91 74,173 1Q7 X 1,000 X. 241999= .446980= " " " " " 92 X 1,000 X. 234950= .183721= " " " " 93 X 1,000 X. 228107= .055356= " " " " " 94 X 1,000 X. 221463= .008957= " M " " " 95 74,173 58 74,173 18 74,173 3 74,173 Net single premium=$504.584931. This amount, $504.59, is the discounted value of all the death claims payable from age 45 until the mortality table assumes that all persons will have died and is, therefore, the net single premium which will purchase a whole-life policy issued at age 45. It is a matter of common observation that there are men who outlive their ninety-fifth year, but since the computations assume that the insured will not have sur- vived this age and since sufficient money will have been ac- cumulated to pay the claim at the close of the ninety-fifth year of life, it is the general practice to consider the policy matured at this time and to pay the claim whether the insured be dead or alive. 158 THE PRINCIPLES OF LIFE INSURANCE Pure Endowments. A pure-endowment contract prom- ises to pay the insured value in case the holder survives a cer- tain fixed period. Thus, a ten-year pure endowment issued at age 45 will pay the holder the amount named in the con- tract if he be living ten years from the date of issue. The mortality table shows that 74,173 persons are living at age 45, and that 64,563 are still living at age 55, leaving 9,610 as the number dying during the ten years. A policy thus in- suring against survival during this period must itself provide 74173 of the amount of the contract at the end of the period. Or it may be stated in this way: the probability insured against is 74173, and since the money paid as a single pre- mium will be held ten years before the policy matures the formula for determining the net single premium is : fSfff X 1000 X .744094 = $647.69 The decimal, .744094, is the present value of one dollar discounted for ten years at 3 per cent. A clear distinction must be made between a pure endow- ment and a savings-bank account which is left to accumulate at an agreed rate of interest. The insured cannot get pos- session of the money invested in a pure endowment before the expiration of the endowment period. If he should die dur- ing this period all the money paid is lost, i.e. it goes to swell the fund which will be paid to the survivors. A savings-bank account on the other hand is not lost through death of the investor. This fact makes it possible to divide the $1,000 which will be paid in case of survival through the endowment period into two funds, one of which might be called the in- vestment fund, and the other the speculative fund. The in- vestment fund in a ten-year pure endowment, issued at age 45, will equal $647.69 plus interest compounded for the ten years at 3 per cent, thus: 647.69 X 1.3439 = $870.43 This $870.43 is the amount which would be obtained by investing the net single premium of this pure endowment policy at 3 per cent, interest for ten years. The remainder of the $1,000, or $129,57, comprises the survivor's share of THE NET SINGLE PEEMIUM 159 the amounts forfeited by those policyholders who died before their policies matured. The latter amount is here called the speculative fund. The possibility of thus losing the entire amount of one's investment by death before the endowment period has expired, makes the pure endowment a policy that finds little favor with the insuring public. For this reason it is usually combined with, or constitutes a feature of some other kind of policy. Endowment Insurance. The most usual combination in which pure endowments figure is technically known as endow- ment insurance. This policy is popularly referred to as an endowment. It promises to pay a certain sum to the insured in case he should die within the term of the policy or a like sum at the end of the term in case of survival. Analysis of this contract shows that it includes the pure-endowment fea- ture just discussed and, in addition, insurance against death during the term of the endowment. For illustration, a five- year endowment-insurance policy issued at age 45 will pay the sum insured if the policyholder die during the first, the second, the third, the fourth, or the fifth years, and it will pay the same sum if he survive the fifth year. The cost of this insur- ance, therefore, will equal the following : 828 X 1,000 X. 970874= 10.837955, cost of 1st. year's insurance. 1 4, 17 o 848 X 1,000 X. 942596= 10.776447 " " 2d. 1,000 X. 915142= 10.734007 /4,173 ^ X 1,000 X. 888487= 10.732805 " "4th. 027 r-X 1,000 X. 862609= 10.780723 " " 5th. 1 4,1/3 ^4?l>< MOO X. 862609=811.798884 " of 5-year pure endowment. 74, 1 / o Net single premium=5$865.660821 for 5-year endowment insurance. Contracts known 'as " semi-endowments " or " double en- dowments " are sometimes issued. They differ from the pol- 160 THE PRINCIPLES OF LIFE INSURANCE icy just explained only in the fact that the amount due in case the insured should survive the term of the policy (i.e. the endowment element) is one-half, or is double, the amount paid in event of maturity by death. The cost of a five-year semi-endowment insurance of $1,000 at age 45, therefore, would differ from the cost of the policy just computed only by the cost of the pure endowment, which in this case would be as follows: fjffj- X 500 X .862609 = $405.899442 This amount, added to the cost of the five-years' term insur- ance, would give the net single premium for the semi-en- dowment. BIBLIOGRAPHY The bibliography on Premium Computation is deferred to the end of the chapter on The Net Level Premium inasmuch as the bibliography quoted does not analyze separately the net single from the net level premium. CHAPTER XIV, THE NET SINGLE PREMIUM (CONTINUED) By BBUCE D. MUDGETT The premiums computed thus far relate to contracts which embody only two kinds of risks, the risk of death and the risk of survival. These two types are sometimes referred to as insurance and endowments, since insurance as such is gener- ally needed against premature death while endowments have the character of investments accumulated for the future. Every life-insurance contract covers one or both of these features, viz, protection against death or accumulation in case of survival. Installment Insurance. In the policies studied thus far it has also been assumed that the face value of the policy (generally $1,000 or multiples of that amount) is payable at maturity in a single sum. But it has become a common practice to make provision for the payment of policies in periodic installments. Thus there are policies paid in monthly installments extending over a period of years, or in ten, fifteen or twenty yearly installments. These contracts differ in cost from those paid in a single cash sum and it is necessary to determine wherein this difference lies. Such in- stallment contracts are of two kinds ; one stating that the face value, $1,000, will be paid in a definite number of install- ments, and the other maturing regularly as a single-payment policy but giving the insured or his beneficiary the option of choosing the installment-payment plan. A policy which promises payment of $100 on the death of the insured and $100 per year thereafter until ten payments have been made is an example of the first; the contract in the second 161 162 THE PKINCIPLES OF LIFE INSURANCE case would mature for $1,000 payable at once, but would allow the beneficiary to receive in lieu thereof a certain sum annually for ten years, this sum not being $100 but rather the amount which can be purchased by $1,000 in hand at maturity. In the case of the first contract it is evident that the com- pany is going to pay out a total of only $1,000, but during the ten years given the company in which to pay this sum, it will be earning interest on the funds in its possession. It must have on hand, therefore, at the time of maturity, only such funds as, with interest added, will yield $100 at each of the ten annual periods. The payments are made as follows: $100 immediately, $100 at the end of one year, $100 at the end of two years, etc., the tenth payment being made at the end of nine years. The first $100 will be paid at once upon the maturity of the contract and therefore earns no interest. A part of the funds will draw interest for one year, another part for two years, etc., the last portion drawing interest for nine years. Consequently the funds which must be available at the maturity of the contract will equal $100 plus such amounts as with interest for one year, two years, three years, etc., will respectively equal sums of $100. These amounts are the dis- counted values of $100 for one, two, three years, etc. The present value of these ten payments is found as follows : $100 paid immediately 100 one year hence = 100 two years hence = 100 three years hence = 100 four years hence = 100 five years hence = 100 six years hence = 100 seven years hence = 100 eight years hence = 100 nine years hence = Present value of $1,000 If the company therefore has $878.61 on hand at the time the policy matures and continues to earn 3 per cent, interest PRESEXT VALUE = 100.00 100 X .970874 = 97.0874 100 X .942596 = 94.2596 100 X .915142 = 91.5142 100 X .888487 = 88.8487 100 X .862609 = 86.2609 100 X .837484 = 83.7484 100 X .813092 = 81.3092 100 X .789409 = 78.9409 100 X .766417 = 76.6417 in ten installments =$878.6120 THE NET SINGLE PREMIUM 163 on all funds in its possession it will be able to pay the ten installments of $100 each as they come due. To determine the net single premium for a policy so paid, it is necessary to regard the policy as having a face value of $878.61, instead of $1,000. Thus, a term policy, a whole-life policy, a pure- endowment or an endowment insurance might be paid in ten installments, and the only change from the computations al- ready made would consist in the substitution of $878.61 for $1,000 as the amount of insurance. Where the policy matures for $1,000 but gives the further option of receiving payment in installments, it is clear that the premium must provide for $1,000 payable in a single cash sum at maturity since the insured or beneficiary may choose this option. There will be no difference therefore in the computation of the net single premium for this policy from the usual $1,000 policy. But since $878.61 only is nec- essary at maturity to provide ten installments of $100 each, $1,000 in hand at maturity will enable the company to pay ten installments, each greater than $100. A single proportion will show how the amount of these payments may be deter- mined. Since $878.61 will provide installments of $100 each, $1,000 will provide installments greater than $100 in the same proportion that $1,000 is greater than $878.61. Thus, letting x equal the amount of the installment to be found, we have : $1,000:878.61 ::*:100 or L 878.61 1.00 ~ _ iooooo ~ 878.61 X= 113.81 A policy maturing for $1,000 and giving the option of receiv- ing it in ten annual installments could therefore pay $113.81 in each installment. By the principles here laid down the cost can likewise be determined for a contract paid in any number of installments, such as five, fifteen or twenty. The contracts explained thus far have invariably involved but one life. Life-insurance companies, however, will issue 164 THE PRINCIPLES OF LIFE INSURANCE policies covering risks on two or more lives, or joint-life poli- cies as they are called. Especially in the field of partnership or corporation insurance has the joint-life policy been used in recent years. But the computation of costs on joint-life risks will carry us more deeply into actuarial science than it is de- sired here to enter, since the purpose of our premium analyses is merely to give an adequate idea of the risk involved in the most usual types of policies. Premium computations there- fore will not be made for ordinary joint-life, last-survivor and contingent or survivorship insurances. 1 Annuities. The remaining class of contracts to be anal- yzed are known as annuities. Annuities promise to pay the possessor a stated income, usually at intervals of one year dur- ing the lifetime of said person. It will be seen, 'therefore, that they furnish a type of investment whereby the recipient whose sole dependence is upon invested capital, can be assured of an income for life. And since the income is payable only during the life of the one person, the annuitant, a single annuity on one life does not furnish group protection, but each life must necessarily be covered by a separate contract. Annuities covering a single life are of two kinds, immedi- ate and deferred. Immediate annuities, sometimes referred to as the ordinary life form, may be temporary, i.e. limited to a term of years, may continue for the whole of life, or may promise a certain number of payments irrespective of the question whether the recipient be living or not. The latter contracts are sometimes spoken of as guaranteed annuities or annuities with a guaranteed minimum number of payments. The cost of each of these contracts will be considered in turn. An immediate temporary annuity of $100 purchased, say, at age 70 and continuing for a period of ten years, will promise to pay the annuitant one hundred dollars one year from date i The computation of costs for joint-life contracts is effected by the application to the mortality table of the law of compound proba- bilities in determining the probability that joint-lives will fail, that they will survive, etc. The results are equally scientific with those obtained in dealing with single lives, but the development of joint- life formulae cannot be undertaken within the scope of this book. THE NET SIXGLE PREMIUM 165 of purchase if then living, and one hundred dollars at each anniversary of that date if still living until ten payments have been made. The cost of this contract will be the sum of money paid at the time of purchase, namely age 70, which will furnish these annual payments, and the net cost, which it is proposed here to determine, will be the amount necessary to provide merely for the payments of the sums promised to the annuitant without assessing against the contract anything for expenses. The formula used in computing net single pre- miums on insurances can again be used here, namely, net cost will equal the risk or probability insured against multi- plied by the sum insured (the amount of the annuity) multi- plied by the value of $1.00 discounted for the time the money is held. Since therefore a payment is made to the annuitant, if surviving, at the end of each year, the cost for each year must be determined separately and these sums added to Obtain the total cost. The probability insured against is the proba- bility that the annuitant will survive through the first year, through the second year, the third year, etc. It will be seen therefore that the annuity under consideration is equivalent to a series of ten pure endowments, one maturing in one year from date of purchase, one in two years, one in three years, etc., until ten have been paid. The probability that the first annuity payment will be made, if determined from the American Experience table, will equal the probability that a man aged 70 will survive one year, or expressed in the form of a fraction, Hg^. The $100 paid in case of survival is paid one year from the date of purchase of the annuity and there- fore the net cost of the first payment will be the value of this sum discounted for one year at 3 per cent, and multiplied by the probability of survival. Thus the total operation for the first year is as follows : HfffXlOOX .970874 = $91.07 = net cost of first an- nuity ^payment. Irf like manner the net cost for the remaining nine pay- ments will be found by multiplying the probability of surviv- ing through two, three, four years, etc., by the amount of the 166 THE PRINCIPLES OF LIFE INSURANCE annuity of $100, discounted respectively, two, three, four years, etc. The entire computation for the ten years is as follows : ' x 100x.970874=$91.06S681=net cost of 1st. annuity payment. 38,5o9 oo 790 . 942596= 82.433465= " " " 2d. qi 243 'XIQOX. 915142= 74.131508= " " " 3d. oOjOby 28,738 38,569 26,237 38,569 23,761 38,569 21,330 38,569 18,961 38,569 16,670 38,569 14,474 38,569 X 100 X. 888487= 66.201715= " " " 4th. X 100 X. 862609= 58.679956= " " " 5th. X 100 X. 837484= 51.594434= " " " 6th. XlOOX.813092= 44.966819= " " " 7th. X 100 X. 789409= 38.808328= " " " 8th. X 100 X. 766417= 33.125493= " " " 9th. X 100 X. 744094= 27.924023= " " "10th. Net cost=$568.934422 for a 10-year term annuity. The temporary annuity at age 70, therefore, will cost net, $568.94, which sum is composed of the net costs of each of the separate yearly payments. If the contract issued at age 70 promises to pay an annuity for the whole of life the computations must continue until the life surely fails' and this occurs, according to the American Experience table, during the ninety-fifth year. The net cost of a whole-life annuity, or an ordinary life annuity as it is usually called, will, therefore, equal the net cost of a series of pure endowments, the first maturing at age 71 and the last at age 95, since all lives are assumed by the table to have surely failed before the beginning of the ninety-sixth year. The computation of the cost of this annuity is as follows, the first ten years being the same as for the term annuity just computed : THE NET SINGLE PEEMIUM 167 -* I O k . f /\/v . . rv"- nn * .1 o /> n -i ___A . _ .ff i_j. J_ . IJ 38,569 A 33.730 pai.uooDoi net cosi CO 4QQJ.fi^ " " f OI ISt. " 2d. " 3d. " 4th. " 5th. " 6th. " 7th. " 8th. " 9th. " 10th. " llth. " 12th. " 13th. " 14th. " 15th. " 16th. " 17th. " 18th. " 19th. " 20th. " 91 at 38,569 A 38,569 28,738 Rfi 90171 ^ " " 38,569 26,237,, 38,569 A A ' 23,761 21,330 51.594434= " " AA_ QfifiBI Q " " 38,569 OQ Qnso.9S " " 38,509 A A ' 16,670 38,509 ^ xs ' 14,474 - ' 1 nn - - TAAf\QA 97 Q9in9Q " 38,569 Al A - /44 12,383 ^ n ^ oo, i q^ 1 10 847 191 <^Qn8 " " 38,569 A A ' U= 2.425354 78,106' 5 ' 48 ^ X 100 X .264439= 1.857025 78,106 rrr> 1 r\n ^"\ -" ^N *< .OOUYOO 78,10o Total $155.935608=N"et Single Premium. total obtained equals the net single premium for the annuity purchased at age 40 with benefits deferred until age 70. Comparison of this result with that found by the first method used will show that they are identical. For analyt- ical purposes the former method has an advantage over the latter in bringing out in a more striking manner the pure- THE NET SINGLE PKEMIUM 173 endowment nature of the period of deferment from age 45 to age 70 wherein the insured loses all in case of death before age 70. Of course, a deferred annuity can be computed on a differ- ent basis to eliminate the speculative element whereby all accumulations are lost through death before age 70. The old- age pensions issued by governments and private corporations sometimes include a proviso that in case of death or with- drawal before the first annuity is paid, the insured may re- ceive a return of all his individual contributions with interest compounded at a nominal rate. Likewise the old line com- panies arrive at a somewhat similar result by attaching a pro- vision that in case of prior death the insured shall have re- turned to him all the premiums paid in, without interest. Thus, if a particular annuity such as is here considered were costing $15 a year between ages 40 and 70 and the insured died after having paid fifteen premiums his estate would re- ceive fifteen times $15 or $225. This return premium fea- ture would, of course, cost an extra premium beyond what was necessary to purchase the deferred annuity by itself. BIBLIOGRAPHY The bibliography on Premium Computation is deferred to the end of the chapter on The Net Level Premium inasmuch as the bibliography quoted does not analyze separately the net single from the net level premium. CHAPTER XV THE NET LEVEL PREMIUM By BEUCE D. MUDGETT The Level, or Periodic, Premium System. Insurance policies may be purchased by a single cash sum or by periodic payments made weekly, monthly, quarterly, semi-annually, or annually. The method of computing the net single premium has been described in Chapters XIII and XIV. Therein it was explained that policies are ordinarily purchased by an- nual or periodic premiums but that the determination of the latter is possible -only after the single premium has been as- certained. It requires but a brief comparison to show why most insured persons choose the annual- rather than the single-premium method of paying for insurance. The net single premium on a $1,000 whole-life policy issued at age 35 (American Experience 3 per cent, basis) is $419.88 while the net annual level premium is only $21.08. Two reasons favor the choice of the latter method of payment. In the first place most persons insure to protect an income the con- tinuation of which during their lifetime enables them to as- sume certain definite family or business responsibilities, the cessation of which income by death would leave these obliga- tions unfulfilled. It is a man's earning power which enables him safely to marry or to engage in business, for the majority of people do not obtain their capital by inheritance. It is from current income, therefore, that insurance premiums must ordinarily be paid. If the protection of a $4,000 in- come requires $10,000 of insurance, this amount on the sin- gle-premium plan for whole-life insurance at age 35 would cost $4,198.80 while on the annual-premium, plan it would 174 THE XET LEVEL PREMIUM 175 mean an outlay of $510.80 per year. The former sum is clearly impossible of payment from a single years income, while the latter would occasion no special hardship. A second reason for the choice of annual- rather than single- premium payments for life insurance lies in the reduced cost of a policy purchased by the former in case of early death. If the insured in the above illustration should die within one year after the issue of his policy this insurance would cost him $4,198.80 under the one plan and but $210.80 under the other. This difference cannot be lightly overlooked. It will require the payment of twenty annual premiums before the amount paid in will equal the single premium and therefore the annual plan of premium payments is the cheaper to the policyholder whenever death occurs before the twentieth year of insurance is begun. There is a corresponding disadvan- tage in the annual-premium plan if the insured lives beyond the payment of his twentieth premium for he will then pay more than would have been the case with the single premium. In other words among the policyholders of an insurance com- pany for even-one who pays in less than the amount of the single premium there must be someone who pays correspond- ingly more than that amount. Analogy Between Periodic Premiums and Annuities. If a policyholder is given the choice of paying for his insurance by a single or an annual premium the amount of the latter must be determined on such a basis that in a large group of policyholders the company will receive the same amount of money under the one plan as under the other. Since, there- fore, the manner of computing the net single premium is known, the problem in hand at this point will be solved by finding a net annual premium mathematically equivalent to the net single premium. In order to do this it is necessary to inquire into the circumstances affecting the payment of an- nual premiums. They are paid regularly during the life of some person, generally the insured, or for a limited number of years, but always cease upon his or her death. This is the definition of an annuity, as stated in the previous chapter. 176 THE PEINCIPLES OF LIFE INSURANCE Annual premiums, therefore, are annuities but they differ in three important respects from the annuities thus far con- sidered. (1) In the first place they are annuities paid by the insured to the company, while regular annuities are paid by the company to the insured. To be sure both annual pre- miums and annuities are based on the life of the same person, viz, the insured, but this does not affect the principle involved. (2) Annuities, moreover, were found to be purchased, ordi- narily, by a single premium, i.e. a single cash sum. If an- nual premiums are analogous to annuities, how, then, are annual premiums purchased? Or, to state the proposition- directly, in what way does the company return value received for the annual premiums it collects? Obviously, not by a cash sum to the insured upon the issue of the policy. Eather it pays for them, with the policy which promises cash upon the happening of some future event and this future promise of money has a present value which can be expressed in money. This " present value " is comparable to the cash payment for annuities. (3) A third and fundamental difference between annual premiums and annuities exists with reference to the time when they respectively begin. It will be remembered that the cost of an immediate life annuity is computed on the assumption that the first payment of annual income is received one year from the date of issue of the contract. But it is impossible to issue a life-insurance policy, allowing the premium to be paid on any such basis. The law of contracts requires the payment of a consideration as a necessary preliminary to the creation of the contract and the policy states that it is issued " in consideration of the payment of $ and a like amount annually thereafter/' Hence the first annual premium is al- ways payable when the policy is issued, and not one year later, as is the case with annuities. The series of annual premiums is, therefore, equal to the usual annuity plus one payment made immediately. The distinction between the two is ex- pressed by calling the annual premium a life annuity due. Life annuities due are not sold as annuity contracts and the THE NET LEVEL PKEMIUM 177 sole purpose of this term is to have a convenient expression to describe an annual premium in terms of an annuity. The problem stated on page 175 may now be restated in the fol- lowing terms : The net annual level premium will be a life annuity due equivalent to the net single premium. Continuous and Limited Premiums. It was found in the discussion of life annuities on page 166 that the cost of a whole-life annuity based on the American Experience table provides for the payment of annuities in some cases as late as age 95, for according to the table there will be three of the ^assumed group alive at that age. Are we to assume therefore, since annual premiums are life annuities due, that they are invariably paid to age 95 if the insured lives to that age? Of course this is not the case. Annual premiums are never paid after the termination of a contract, whether it terminates by expiry or by maturity; and a large majority of insurance contracts are certain to be closed before the holder reaches age 95. The whole-life policy is the sole contract insuring against death which may continue until the insured is age 95. Term and endowment contracts usually do not extend beyond age 65 or 75 of the insured. Therefore the majority of an- nual premiums will be life annuities due, not for the whole of life but for a temporary period, the maximum length of which will be the maximum length of the insurance contract. With respect to the period during which premiums are paid insurance policies are of two kinds: policies with continuous premiums payable throughout the life of the contract; and so-called limited-payment policies, where the premiums are limited to a term shorter than the maximum life of the con- tract. For instance, a whole-life policy with continuous pre- miums, technically known as an ordinary life policy, will re- quire payment of premiums until the contract matures by death or until the insured reaches age 96, at which time the policy matures irrespective of death. A thirty-year endow- ment-insurance policy with continuous premiums will necessi- tate their payment for thirty years only or for a shorter time in case the contract matures by death in less than thirty 178 THE PRINCIPLES OF LIFE INSURANCE years. But a policy such as the following is often sold for example, a twenty-payment life or a twenty-payment thirty- year endowment insurance. A twenty-payment life policy will mature and its face value be paid only upon death or at age 96 but premiums will continue for a maximum of twenty years and fewer than twenty will be paid in case of death within this limit. In the two illustrations here cited annual premiums will be life annuities due, not for the term of the insurance contract, but limited in each case to twenty years. It is pos- s sible, therefore, in view of these facts again to modify the definition given for the net annual premium. The new state- ment will be: The net annual level premium is a life an- nuity due for the premium-paying period which is equivalent to the net single premium on the particular policy. Computation of the Net Annual Level Premium. 1. Term Insurance. In computing net annual level premiums it is first necessary to ascertain the net single premium. This has been done in Chapters XIII and XIV for the more usual types of policies. The second step will be to define carefully the premium-paying period over which the annual premium is to be paid and for which the life annuity due is to be ascer- tained. Suppose it is desired, therefore, to compute the net annual level premium which will purchase a five-year term insurance of $1,000 at age 45, American Experience 3 per cent, basis. It was found on page 154 that the net single pre- mium on this policy was $53.86. Beginning at date of issue the annual premium will be paid over a five-year period, or until prior death, and is therefore a five-year term annuity due. Since the amount of the annual premium is the unknown quantity it will be impossible to proceed directly to the com- putation of its present value, but it is feasible to take any assumed premium, such as $1.00, and compute the present value of an annuity due for this amount. An annuity due of $1.00 on the policy in question will be equal to a term an- nuity for four years plus $1.00 paid immediately and its pres- ent value is computed in the following manner : THE NET LEVEL PREMIUM 179 $1 due immediately=$l. 000000 r*'^ X 1 X .970874= .960036 74,1/3 79 407 ,7', - XlX. 942596= .921297 1 4,173 !!'?!! XlX. 915142= .883811 (4,1*3 ^''^XlX. 888487= .847256 74,1 1 3 Present value=$4.612400 The present value of a five-year term annuity due of $1.00 at age 45 is, therefore, equal to $4.6124 and the annuity due, or annual premium, of $1.00 for this period will purchase any policy the present value, or net single premium, of which is equal to $4.6124. But the net single premium on the pol- icy in question was found to be $53.86. If now the present value of the $1.00 annuity due be divided into the net single premium on this policy the resultant factor will show how many times the annual premium of $1.00 must be taken to obtain an annual premium the present value of which will equal the net single premium, or $53.86. Stated in other words, the annual premium desired is as many times $1.00 as the net single premium on the policy is times the present value of a $1.00 annuity due for the premium-paying period. From this analysis it is possible to state a general rule for as- certaining the net annual level premium on any policy as follows : Divide the net single premium by the present value of a life annuity due of $1.00 for the premium-paying period. Performing this computation, it is found that the net annual level premium on a five-year term insurance of $1,000 issued at age 45 is $11.68, thus : 53 - 86 , 4 =$11.68 4 .6 1 : 2. Ordinary life insurance. The net single premium for a whole-life polic}" of $1,000 issued at age 45 is $504.59 according to the figures on page 157. To find the net annual level premium this sum must be divided by the present value of a life annuity due for the whole of life, since premiums 180 THE PRINCIPLES OF LIFE INSURANCE are paid continuously through the life of this policy. The method of ascertaining the present value of the life annuity due of $1.00 follows herewith : $1 due immediately= 73,345 , xl 1.00000000 .96003604 .92129727 .88372961 .84725674 .81179888 .77729192 .74367997 .71090765 .67892893 .64768771 .61714484 .58725552 .55798634 .52930975 .50118940 .47360288 .44652894 .41995816 74,173 ~ 72,497 74,173 ~ 1 ~' 94 " 5?fifi9rin 74,173" 47,361. 45,291 vx rroiono 74,173 43,133 -x*s, OT> j 50fi60'"^ 74,173" 40,890 74,173 38,569 _ 74,173" 36,178 74,173 AlA ' 46369 33,730 74,173" " 31,243 vx ^07^77 74,173 AlA ' 437 77 - 28,738 74.173" 1 "' 74,173 " 23,761 74,173" 21.330 74,173 " ! "- 38 74,173" 16,670 74,173 AlA ' 36 74,173 " 1 "" 355383 ~ 12,383 10 ' 419 --1-- 334003 74,173 AlA ' 33 8,603 74,173" "' 6,955 -4 i-o A 1 X.O1O(O4 (4,173 182 THE PEINCIPLES OF LIFE INSUEANCE ^^ XlX. 297628= .01682491 74,17 o O A7Q 'XlX. 288959= .01199499 i TC j 1 i J 2 ' 146 XlX. 280543= .00811677 74,173 1,402 XlX. 272372= .00514831 74,173 f* 7 XlX. 264439= .00301969 7*4^17 o -. 4 ?L XlX. 256737= .00159913 74,17o ,, 2 !!L XlX. 249259= .00072587 74,17J 79 ^r XlX. 241999= .00025775 74,173 21 XlX .234950= .00006652 I ~ f i lid XlX. 228107= .00000923 ^ j 1- / O Present value=$17.00925376. If, therefore, $17.0093 is the present value of a life annuity due of $1.00, it is possible for an annual premium of $1.00 paid continuously throughout life to purchase any whole-life policy the present value, or net single premium of which is $17.0093; and the net annual level premium necessary to purchase a life policy for $1,000 will be found, according to our formula, by dividing this sum into $504.59, the net sin- gle premium, as shown herewith: 5 i 7 4 o 5 o 9 93 0= $ 29 - 67 net annu al level premium. The net annual level premium for an ordinary life policy of $1,000 issued at age 45, American Experience, 3 per cent, basis, is therefore $29.67. 3. Limited-payment life policy. If it is desired to pay for the above whole-life policy in twenty annual payments instead of allowing them to continue throughout life, it is re- quired to compute the annual premium, which, continued for twenty years, or ceasing upon prior death, will purchase this THE NET LEVEL PREMIUM 183 policy. In accordance with our formula the annual premium in this case will be found by dividing into the net single pre- mium the present value of a temporary life annuity due for a term of twenty years following age 45. If from the whole- life annuity computed on page 155 heretofore, the sum of the first twenty terms be taken, this amount will equal the present value of a twenty-year term annuity due. This is found to be $13.5095. The net annual premium therefore for a twenty-payment life policy at age 45 is iV^^s' or $37.35. 4. Deferred annuity. Deferred annuities are ordi- narily paid for by means of annual rather than single pre- miums, and the premium may continue through the entire period of deferment or, as in the case of the whole-life policy above, may be limited to a stated number of years. As with premiums on insurances, the annual premium on these con- tracts is paid only during survival. If, therefore, the deferred annuity issued at age 40 begins the payment of an annual income of $100 at age 70 if living, and if the net single pre- minum for it is $155.947 * as determined on page 170, the continuous annual premium on this policy may be paid until one year prior to the beginning of the annuity, or until the holder of the contract is aged 69. In this case the annual premium becomes a temporary annuity due for a term of thirty years, ages 40 to 69 inclusive. The amount of this net annual premium will be found therefore by dividing the net single premium by the present value of an annuity due of $1.00 computed for the term stated. This annuity value is computed as follows : $1.00 due immediately=$l. 000000 77,341 78,106 76,507 78,106 75.782 78,106 XlX. 970874= .96136489 XlX. 942596 .92402309 XlX. 915142= .88791246 i The result obtained on page 172 was $155.936. The difference of approximately one cent is due to the failure to carry decimals suf- ficiently far in the two separate methods of ascertaining this result. 184 THE PRINCIPLES OF LIFE INSURANCE 74,985 , .85298438 .81917263 .78643464 .72392644 .69404963 .66500317 .63673606 .60920186 .58235582 .55615982 .53056788 .50554828 .48106309 .45708756 .43359581 .41056068 .38796219 .36578481 .34401809 .32266124 .30171251 78, 106 X x '. 888487- 74,173 78,106 AlX - 8G2G09 - 78,106 XlX ' 837484 - 72,497 781 06 X X ' ' ' 89409= 70,731 78,106 ^ lA ' 766417 - 69,804 78,106 A X-WMM- 68,842 78,106 X IX. 722421= 67,841 78)106 xlX. 701380= 66,797, 78,106 A! A. 680951-^ 65,706. 78,106 A 1 A. 661118- ^4,563. 78,106 AlA ' 4 63,364. 78,106 AlA ' G ^ 31C ' ~ 62,104 78,106 AlA.GOOOlC- 78,106 A ! A- 587395- 59,385. 78,106 A 1 A. 570286- 57,917. 78,106 A J A- 553676- 56,371. 78,106 A 1 A. o3/549- 78,106 A 1 A. 521893- 53,030 78,106 A 1 A. 506692- 51,230 78,106 A 1 A. 491934- 49 341 ^, 1 . ^ 4"Trn/> 78,106 X X- 4776 06- 185 47,361 _, _ Aonon -_ 28116993 4^ 2Q1 'XlX. 450189= .26104922 /8,10o 43,133 78,106 40,890 78,106 XlX. 437077= .24136996 XlX. 424346= .22215333 Present value=$17.00033116. The result obtained represents the present value of an annual premium of $1.00 paid over the same term as the pre- miums on the deferred annuity and this figure divided into the net single premium for the deferred annuity will give a net annual level premium of $9.173 -f-, as follows: 155.947 Q i ly Q | 17.0003 ! T The annual level premiums computed to this point should afford a sufficiently clear analysis of the subject of the level premium. The principles thus developed can be applied in ascertaining annual premiums on all policies involving risks on a single life. There remain still to be considered two special instances of the periodic premium, or two modifications of the annual premium, namely, premiums paid at intervals of less than one year, and premiums on policies which promise in the event of certain contingencies to return to the pur- chaser the premiums paid in without interest. Premiums Paid at Intervals of Less than One Year. By an extension of the principles laid down heretofore in computing single and annual premiums, it would now be pos- sible to ascertain weekly, monthly, quarterly, and semi-annual premiums. It would be necessary to make the time unit the proper fractional part of a year instead of one year. The difficulty with this method lies in the fact that none of the mortality tables in existence are graded for periods of less than one year. To illustrate, it is impossible to determine from any of the tables in use the probability that a man arriving at age 25 will die within one week, one month, or six months. We can only say that the chance that he will die within one 186 THE PRINCIPLES OF LIFE INSURANCE year equals -g^fy. Because of this fact the true weekly, monthly, or quarterly premium cannot be ascertained, and some method of approximation to the correct result must be used. The usual method is to make a percentage addition to the annual premium, more or less arbitrary in amount, and then divide this result into the requisite number of parts. By this plan the premium is looked upon as an annual pre- mium paid in installments. That is, at the beginning of any policy year the entire premium for the policy is considered to be due and payable, but the insured is given the privilege of paying it in installments ; then if the contract should mature by death before the total installments for the year are paid, those remaining still due will be deducted from the matured value of the policy and the balance only will be paid to the policyholder. Thus, a policy for $1,000, being paid for by quarterly premiums of $10.00, might mature by death shortly after the payment of the first $10.00 installment of the year's premium. The .beneficiary under the policy would, therefore, be required to pay the three remaining installments of $10.00 each before receiving the proceeds of the policy, or this would be equivalent to the settlement of the claim in force by the payment to the beneficiary of $970.00. The percentage added to the annual premium to obtain the semi-annual premium varies with different companies. Some add 2 per cent., some 2y 2 P er cent., 3 per cent, or even 4 per cent. Thus one company quotes a gross annual 2 premium on an ordinary life policy, age 45, of $37.08. Adding 2 per cent, of this amount, or $.74, gives $37.82, and this result divided by two equals $18.91, the semi-annual premium quoted in this company's rate book. Another company quotes an annual premium of $37.57 for the same policy and a semi- annual premium of $19.54. This latter figure is obtained by 2 It will be noted that the premiums here quoted are gross or office premiums. The methods of loading for expenses to obtain the gross premium are taken up in Chapter xvii, but these methods in no way affect the problem here discussed and therefore a knowledge of them is not necessary to an analysis of the principle here involved. THE NET LEVEL PEEMIUM 187 adding 4 per cent, and dividing by two. The same method is used likewise on twenty-payment life policies. At age 45, the annual premiums of the two companies referred to are respectively $45.73 and $45.30. If 2 per cent, be added to the first and 4 per cent, to the latter and these results be divided by two, the amounts obtained for the semi-annual pre- mium will be respectively $23.32 and $23.56. These are the quotations found in the rate books. The same method is- used in computing quarterly, bi- monthly, or monthly rates, of course varying the percentage added in each case. The rate books do not ordinarily quote bi-monthly or monthly rates. From 4 to 6 per cent, is usually added to the annual premium and this result divided by four to obtain the quarterly premium. Thus to the annual rate of $37.08 quoted above for an ordinary life policy is added 4 per cent., or $1.48, making a total of $38.56 and this sum divided by four gives $9.64, the quoted rate for quarterly payments. The increase in the rate on premiums paid more frequently than annually is justified on three grounds: (1) the greater expense of collection, where collection must be made two, four, or more times yearly instead of only once; (2) the loss of interest, due to the assumption made in computing annual premiums that the premium is paid in at the beginning of the year and draws interest until paid out at the end of the year. On the basis of a 3 per cent, interest assumption in computing premiums the interest lost in case of semi-annual premiums will be 3 per cent, on one-half of the annual premium for a period of six months. (3) Some of the companies justify this increased rate because of the greater tendency to lapse policies where premiums are paid twice or four times yearly instead of only once. The temptation to lapse comes twice or four times a year likewise, and thus results in a greater lapse ratio among these policyholders than in the case of those who pay annually. Return-Premium Policies. Policies sometimes will in- clude a provision whereby on the occurrence of certain speci- 188 THE PRINCIPLES OF LIFE INSURANCE fied contingencies the premiums paid in will be returned to the payer. This privilege is usually added to policies to balance some objectionable feature in the contract that mili- tates against its ready sale. For instance, much objection is found to the pure-endowment policy because of the possibility of losing one's entire investment in case of death before the maturity of the endowment. By means of this new feature the company can say : " We will give you your endowment in case you outlive the period and if you are willing to pay a slightly larger premium we can promise that in case of your death before the endowment period is completed, all the pre- miums paid in will be returned to your estate or to any speci- fied beneficiary." These policies sometimes promise the re- turn of the exact premium paid and sometimes a specified amount slightly less than the premium. For instance, if a certain pure endowment costs $50 per year, the company might promise a return of $40 for every premium paid to date of death. Suppose now a company issues a ten-year pure endowment for $1,000 to a person aged 45. It was found on page 158 that the net single premium for this policy is $647.69. The net annual premium for the same policy will be found by dividing the above sum by the present value of a temporary life annuity due of $1.00 limited to a term of ten years, beginning at age 45, and this latter value can be found by adding the first ten terms of the whole-life annuity due as computed on page 180. This value is $8.33495701. If, therefore, the following computation is made, neglecting un- important decimals, 647-69 __ iv iv iv -1 8 .3349 it is found that the net annual level premium for the ten- year pure endowment is $77.71. Suppose furthermore that the company promises in event of the death of the policy- holder 'before the ten-year period has elapsed to return to his estate $70 for every premium paid. It is desired to find the extra premium that must be paid to obtain this benefit. The benefit consists in the return of a single $70 if the insured should die during the first year after the contract is issued ; if THE NET LEVEL PREMIUM 189 he should die during the second year he gets twice $70 ; in the third year three times $70 and so on, his death between the payment of his tenth premium and the time when the endow- ment would have matured entitling his estate to a return of ten times $70 or $700. The chances that any of these payments will be made therefore consist in the separate chances or probabilities that he will die the first year, the second year or the tenth year. It is equivalent to the addition to the pure endowment of an increasing insurance of $70, i.e. an insurance of $70 the first year, $140 the second year, etc. The method of computing the cost of this increasing insurance is, there- fore, as follows : The net single premium for an increasing insurance of $70, American Experience 3 per cent., age 45: QOQ " X 1X70X.970874=$ .7586569 / 4,1/3 848 , ,.,X 2 x70x. 942596= 1.5087026 1 4,1 1 o ,f'!?,X 3 X 70 X. 915142= 2.2541416 7417J 896 .-_X 4 X 70 X. 888487= 3.0051854 -, .-_ 74,1 i 6 9' 7 7 ,, " X 5 X 70 X. 862609= 3.7732529 74,1 1 3 962 ,., " X 6 x 70 X. 837484= 4.5619974 74,1/3 - 1 ;,-l x 7 X 70 X. 813092= 5.3768015 / 4,1 i o 8 X 70 X. 789409= 6.2222113 74,173 - 1 ,' . 9 - 1 , X 9 x 70 X. 766417= 7.1020640 74,1 1 9 1 1 4^1 ' X 10 X 70 X. 744094= 8.0265003 74,173 $42.5895139 The net single premium for the return-premium feature, namely, $42.59, will be divided by $8.3349 to ascertain the net annual level premium, as follows: = $5.1097 This result, $5.11, is therefore the amount to be added to 190 THE PRINCIPLES OF LIFE INSURANCE the net annual level premium for the pure endowment, or $77.71, giving $82.82 as the net premium for the pure en- dowment with the return premium feature included. It would be possible now to compute the net annual pre- mium which would return the total or gross premium paid by the insured instead of some arbitrary sum, as was used above, but this would involve processes more complicated than it is desired here to discuss. The principles here developed are applicable to any kind of policy, but the return-premium feature is ordinarily added to policies only in cases where it may be balanced against some seemingly objectionable charac- teristic whereby the insured apparently loses. Thus any policy containing the pure-endowment provision and not hav- ing a corresponding insurance element offers a good oppor- tunity for the return-premium privilege. Policies involving survivorship likewise make use of it. Cases in point are the deferred annuity and the reversionary annuity. BIBLIOGRAPHY DAWSON, MILES M., Elements of Life Insurance, ed. 3, 38-75, 84-92. FACKLER, EDWARD B., Notes on Life Insurance, chaps. 3, 6, 7, 9, 10, 11. (An excellent elementary discussion of formulae and commutation columns.) Horn, HENRY, Life Assurance Primer, chaps. 7, 8, 10. (A brief explanation of commutation columns.) WILLEY, NATHAN, Principles and Practice of Life Insurance, re- vised by Henry Moir, ed. 7, 36-59. (An excellent statement in brief mathematical form of interest, life contingencies, commutation columns, net val- ues, and costs of insurance.) CHAPTER XVI THE RESERVE By BRUCE D. MUDGETT One of the most difficult subjects for the layman to under- stand in connection with the administration of a life-insurance company is the existence of the enormous assets possessed by the different companies and the reasons why these funds must be held. That a single company should hold over half a bil- lion dollars strikes many persons as unnecessary and as an opening to the possible misuse of such funds. The fact is not generally known, or clearly understood, that a major portion of these assets represents liabilities held by the company for its policyholders and subject to call by them at any time upon the surrender of their policies. This portion of the funds is held in trust by the company and is known as the reserve. Financial Importance of the Reserve. The Insurance Year Book for 1914 shows that thirty-four companies doing business in New York State in 1913 held on December 31 of that year total admitted assets amounting to $4,351,042,584 and of this sum $3,677,450,917, or over 84 per cent., was held as reserve. A comparison of the total admitted assets and the reserves of the five largest life-insurance companies in the United States is also furnished in the following table : COMPANY ADMITTED ASSETS DEC. 31, 1913 RESERVES (ORDINARY BUSINESS ) DEC. 31, 1913 PER CENT. OF RESERVE TO AD- MITTED ASSETS New York Life $748,497,740 $625,747,810 84 Mutual Life 607,057,045 493,043,566 81 Equitable of New York. Metropolitan Life .... Northwestern Mutual . . 525,345,619 447,829,229 310,556,962 429,689,154 396,744,033 282,173,211 82 89 91 191 192 THE PKINCIPLES OF LIFE INSUKANCE These figures likewise show that 80 to 90 per cent, of the total funds held by these companies is included in the reserve. The possession of these vast resources justifies a careful analy- sis of the sources and purposes of the reserve. The Origin of the Reserve. The life-insurance reserve arises as a result of the method of paying premiums. In the three chapters immediately preceding, an analysis of net or mortality premiums has been undertaken and the statement is there made that life-insurance policies may be purchased by a single cash payment or by annual premiums paid during life. The fact was demonstrated furthermore that mortality rates increase with increasing age and that the annual cost of insurance therefore augments rapidly with advancing age. This results in the creation of a surplus from the annual level premiums paid in the early policy, years when mortality costs are low, and this surplus is available in the later years of high mortality when premiums are inadequate. The purpose of this fund is to. average the varying yearly costs so that the burden of insurance premiums can be carried at all times. These level premiums thus bring into the possession of the company, funds which are not used immediately to pay policy claims but which must be accounted for by the company and placed to the credit of the policyholder until needed at some future date. In like manner when a policy is purchased by a single premium this premium becomes the total contribution of the insured toward claims paid under contracts of this class, and in the early years of the policy contract a large share of this single premium must still be in the possession of the com- pany. Definition and Purpose of the Reserve. In Chapters XIII to XV, premium rates were computed on the assump- tions that a specified rate of interest would be earned on funds in the possession of the company and that the mortality ex- perienced among policyholders would be at the rate shown in the American Experience table. If these assumptions are realized in practice the premiums will be adequate. From the standpoint of premiums there are two ways of viewing the re- THE RESERVE 193 serve. It may be considered as the difference between the pre- miums collected in the past and the policy claims paid that is, the surplus premiums on hand at any given time ; or it may be looked upon as that fund which together with future pre- miums to be collected, if any, will enable the company to pay future estimated claims. The former is called the unearned premium reserve, or the reserve is said to be valued retrospec- tively, that is, looking backward to past accumulations; the latter is the reinsurance reserve, or the reserve is valued pros- pectively looking forward to future requirements. The word " reserve," however, has come to have a technical mean- ing in life insurance, due to the fact that most of the states have passed laws requiring some definite method of valuing this fund, and when the term is now used this technical or legal reserve is ordinarily meant. The legal reserve required by state laws to be held is in- variably the prospective reserve, or the fund which with future premiums, if any, based on assumed rates of interest and mortality will pay estimated future claims. If the actual experience of a company as regards interest and mortality exactly coincides with the expected or assumed experience the reserve fund will always be the same whether valued as un- earned premium or as a reinsurance fund, but such coinci- dences do not occur in practice. If premiums are redundant the unearned premiums will be greater than the legal reserve ; if they are inadequate the surplus left from them after pay- ment of claims accrued will be less than the legal requirement. That the legal reserve shall be determined on the basis of future requirements is necessary because of the fact that the life-insurance contract is written for a long term and cannot be cancelled by the company and the premium rates can never be changed. Therefore, the assumptions as to future interest earnings and mortality must be made on a safe basis, and the reserve must be valued with one object in mind, viz, the continued solvency of the company. The state, in establish- ing a method of valuing life-insurance contracts, sets certain standards of interest and mortalitv that can safelv be realized 194 THE PRINCIPLES OF LIFE INSURANCE and then says, in effect, that any company is solvent if on the basis of estimates made with these standards its future pre- miums plus its reserve fund will enable it to pay all claims. The standards set by state law in most instances are a 3^ per cent, interest rate and mortality according to the American Experience table. This fixes the minimum reserve required, but a company may usually value its liabilities by a higher standard if it so chooses. Many companies to-day value their reserves on new policies on a 3 per cent, interest basis and thus hold a larger reserve than required by law. The solvency of a company is thus guaranteed if the assumptions made are adequate, and years of experience with insurance under Ameri- can conditions have shown that they are. Method of Calculating the Reserve. Inasmuch as the legal reserve looks to future requirements, and is based on the assumption that a certain interest rate will be earned and must provide for mortality equal to that of the American Experience table, these factors must form the basis for calcu- lating reserves on any policy. Likewise since insurance may be purchased by a single or by an annual level premium, re- serves will differ according to the method of paying premiums, for in the latter case credit may be taken for premiums still due. Suppose therefore it is desired to calculate the reserves on a whole-life policy for $1,000 issued at age 45, based on the American Experience table and 3 per cent, interest and paid for by a single premium. The net single premium for this policy was found in Chapter XIII to be $504.58493. The simplest method of showing the operation of the reserve on this policy will be to make the assumption that a company insures a group of 74,173 persons, the number living at age 45 according to the mortality table, and trace the disposition of the entire fund contributed by them, showing how the total fund paid at the start is increased year by }'ear through inter- est accretions and decreased at the same time by payment of death losses occurring within the group. According to the table, therefore, 74,173 persons will in- sure at age 45 and each will pay to the company $504.58493, THE RESEKYE 195 giving the company a fund of $37,426,578.013 at the begin- ning of the first year of insurance. This sum is paid at the beginning of the year and, since death claims are assumed to be paid at the end of the year, will earn interest for one year before any claims for death payments will be made upon it. Three per cent, of the above sum is $1,122,797.340 and this added to the original sum gives a fund of $38,549,375.343 at the close of the year. Death claims for $828,000 are now due and when paid leave a net surplus of $37,721,375.34. This latter sum represents the funds belonging to policyholders still living from among the original group, or 73,345, and if the insurance were cancelled at this time and the share of each returned to him there would be available $514.30 for each policyholder. In continuing the insurance, however, this $37,721,375.343 again earns interest and the process here described is repeated for the second year. The accompanying table, showing the net reserves on a single premium policy at age 45, traces the operation of the fund for the group until at age 96 they will all have died according to the mortality table, and in the last column shows the reserve standing to the credit of the individual policyholder for each of the fifty-one years of insurance. The table shows the total sum on hand at the beginning of each year of insurance, the amount of interest earned during the year, the total of these two amounts, the death claims paid during the year and the reserve fund re- maining at the close of the year for the group as a whole and the pro-rata share belonging to each survivor. Since this policy is paid for by a single premium, this individual reserve constitutes the total sum available per policyholder for the payment of future claims and therefore must equal the net single premium at each age later than forty-jfive for a whole- life policy at that age. If these figures are correct the ter- minal reserve at age 94 (i.e. the reserve at the end of the year) will be the net single premium at age 95 and this sum in- creased at 3 per cent, interest for one year will just equal the amount payable at the close of age 95, for the mortality table shows that the last person of the group insured will certainly 196 THE PKINCIPLES OF LIFE INSURANCE oe^'e<9^'tiH^iooo^io>'*t-t-'oooo COCOCOCOCOCOCOCOCOcOCOCOCQCOCOCOCOCOCQCO liM< *$>'. oooooooooooooooooooo OOOOOO'OOOOOOOOOOOOOO O-OOOOOOOOOOOOOOOOOOO 1- co oo m o w i-T os of cOO5OOOOOOOOOO>OOOOOt- t-t--lOO)'*COlllt-iH^ to to t' ^<" IH" oo o IH" TjT ^<" *" to" m" "*" o>" cocococococococococococococococococococo THE EESEEVE 197 T)t-incotHO!t-^CTcoiniHt-CTt-in co-^mtot-cooOr-iCTco-rjiintocot-oocnOO'HCTcoco'^inintotot- tot-aoOiOiHCTCOTiiincot-cooo'HCTeo i 'jiincot-ooo>oiHCTco''tin COCOCOCDt-t-t-C-t-t>t-t-t~t-aOCOOOaoOOOOOOOOOOOOC>CJO>OO>C> inOTj'^iH^ < int* > oocOTHOOin'^iHo>toc-ito^j*coto^J 1 T-p TJ! o> co c i r-i t-^ tt> CT T)! t- i> CD IH a! CT in o> co i a> m' in ! *' in i a> T* CT CT t- oo t-' in Tj t* to ^T co CM" CT H COCOCOCOCMCTCMCTlNCTr-liHlHiHrHiH OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOo ooooooooooooooooooooooooooooooo OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOo o o" oo" co" IH" IH" oo" t-" m" IH" to" IH" o>" IH" so" IH" nT to" oo" o" CT" -^" co >* in" m" to t-" oo oo i< c> co' o IH i- in CT Tj! t-' t-' to IH o> CT in 01 CT o> in m' <* in o> r)J CT CT t- oo t- m TtlrHOOtOOJtOiHCOt-COOlTHCOt-COOOOCOiniHOCOCOCTTtlCOCOlHIM inc^r^rH"coto"ort-^to"HTcMT-rc7rin"TjrtOTHcooo"co"ootHcooinTj4CTCocooco to" m" TjT co" CT" o" 01" t-' m" ^jT of o" 00" to" TJI" CT" IH" of t- to" in" co" CT" CT" IH" COCOCOCOCOCOCTCTCTCTCTCTlHiHiHlHtH incoint^ooooiOicooeotoOicoiHTHotoOiHto^iHOrHt^CTOiHinoo OOinCOt~lHint^tOiHCOOO3Tt*(>COCOTpCMt~tOO5C>rH^Tj(OOO>Tjinmoo3Tj*cotOCT m" in" aT co" ao" t- m" IH" o" IH" co" co" o" o if co" in" t-" t-" o" oo" to" t-" cT to" o" of to" to o" CT ioHicocM!Horoo"coincoiHa3t-coTi" t-" in" co" o co" co co" IH" co" co" co" IH" oo" to" *" CT" o" oo" to" m" ** co" CM" IH" intot-oociOiHCTco-*intot-ooo>OiHCTco-*intoi>ooo>c5THCTcoT)iin tOtOtOCOtOt^t-C^t>t-C*t't-'t-t-OOOOCOOOCOCOOOOOOOOOOiOiOJC7>O5O5 198 THE PKINCIPLES OF LIFE INSURANCE have died by this time. The fact that the fund payable for the last three deaths equals $3,015.61 (see column 6) or a sur- plus of $15.61 above the amount of the claims accruing is due to failure to carry results to a sufficient number of decimal places in the computations for earlier years. The true ter- minal reserve at age 94 is $970.87 instead of $975.92 as shown in the table. This slight inaccuracy in no way affects the principle involved and does not appear in the figures for the individual reserve until age 87, in which instance a dis- crepancy of one cent is found. This table shows that the reserve at the close of each year of insurance is adequate for the payment of all future claims against such a policy if the assumptions as to mortality and interest are realized. The company,, therefore, which holds this reserve against a single-premium whole-life policy issued at age 45 is solvent. It is not necessary, of course, to insure 74,173 persons under this identical policy to guarantee the adequacy of this reserve. But if a sufficient number of per- sons are insured under all policies and at all different ages to insure the operation of the law of average, the reserves so determined will be adequate for any policy. The above policy may be issued as an ordinary life policy, payable by annual level premiums of $29.665318. The table on page 200 shows the operation of the reserve under this policy in a manner similar to the case where the premium was paid in a single sum. The assumption is made, viz, that a group of 74,173 persons is insured at the moment they enter upon their forty-fifth year of age. The main difference be- tween the two tables arises from the methods of paying premi- ums. Whereas the entire contributions of the policyholders are paid at the beginning in the first case, in the latter instance the first annual installment only is paid and the company therefore does not hold so large a fund. Tracing the method of the second table more in detail, it shows the total premiums paid in at the start, interest earned during the year, the total sum on hand at the end of the year, before deducting death claims, and after the latter have been paid, and finally the in- THE RESERVE 199 dividual reserve or proportionate share of each survivor in the total reserve fund at the end of the year. In the second year the fund on hand, namely the total reserve fund at the close of the previous year, is increased by the premiums paid at the be- ginning of the second year. This fund is then increased by interest accruing during the year and reduced by death pay- ments at the end of the year in the same manner as in the previous instance. This process is repeated for each year of insurance until according to the mortality table all will have died, and in the last year, with three persons to pay premiums, their payments plus the total reserve fund on hand from the previous year increased during the year by interest should at the close of age 95 just equal $3,000. Again the figures in the table miss the correct figure by a small amount, $19.73, due to the failure to carry the results to a sufficient number of decimal places. Disregarding the slight inaccuracy as explained, the table shows the adequacy of the net annual premiums to pay death losses according to the American Experience table, providing the surplus from early premiums is preserved until needed in the later years. This surplus is represented by the figures in column 12 of the second table and is called the reserve. A comparison of the individual reserves for single-premium and for annual-premium policies will show a great difference between them. For instance, at the close of the fifth insurance year in the illustrations used, when the insured will have reached age 50, the single-premium reserve is $555.22 while the annual premium reserve is but $102.20, a difference of $453.02. Likewise after thirty years the two reserves are respectively $824.93 and $646.62, differing by $178.31. A simple test of the accuracy of the annual-premium reserve is possible from these figures. It was found on page 198 that a company is solvent and can pay future claims if it holds the single-premium reserve. The annual-premium reserve there- fore being much smaller does not in itself assure solvency. But in the latter case the company will receive regular yearly premiums in the future and it is proper to take credit for these 200 THE PRINCIPLES OF LIFE INSURANCE THE RESERVE 201 _ t. *? L- t- W* -- c? t- X S = K S 5S t > "* *" _, S /_' 2 7< *o 5c .-^ "= X r ^ ^ r. o x s 5 S 5 f; :? ~ = i fe i = K S 1 i - 3 *S 5 S '1 - x 7 7 g K i r i? B B> 5 s S ^ 5' S X ^ gg si = P - 2 r i H| = ill H S TJ r; ^r o :o c: x re H = r* ', =. Z 2 S x ~ " Sl ~* 7. 2 I VI i i 1 i I 1 5 si2 111 HI 11 1 1 1 HI x ^ 5 X t; L- t- c* ?* till fj L^ VC X ft X 5 S, S X. X_ _ Is t _ X cc r? _ S_ x_ 500 . ", ^- '*. '" ~ X 5 ^ =T :- ^: * S 5 II c - ~t rr 5 ~ ? 2 S_ 55_ =, 5, 5, x. i 55 S C^ S H 2 2 S = L - S =c rs = 1 Is li 2 i? tC rT tC -T V S ~ t> ^ ^ c; t- ^ x P-i-l Srt ^ o x 3 r g li ?- f: cl ~ f; ff x X L;' O r- F ~- ii 5 75 5. ^. -. i f5 x S ' -Q 1 S S 3 X ,7sri,20i.sn;ios. r . .'i-.'ii,ii'.).:i2l7s:i ,iS|,. r ili'J. (101072 x 2 S i S Z X ^ ~ 20,HI2.7S. r .. r )IS 8,01(.7:! Ill IV "> 5 ?< t ii ii ij ij ZJ ITi S i ' S ~ Ei - -. x O i?] X :_t llii >= x S ?: 1 1 1 in i -r ^ = ? : X L- P S S S = ^ 5 III ii r 55 x ^ g i H ^ 1 ?. 1 1 S "* S ;; i? S S S ft S 2 H 5 s g s 1 1 H = S t- e- 2 ^ I 1 | | X g S S f; = 2 c- ?c ^ 3 S ? i- ?f C5 X S j? ?< N 50 5* (17(1,600.108784 aiO,5l7.7!2:t!i 809,719.400404 .W.lOS.tiSWM i. r >s,s:ii.S2i!M7 S2:i,C.ll. 710(125 :i;il,4,si.siiifi(i (i:::t,tHil.2:M)ii;. ? S x" t;' o -v ^. ' X t ISj |i. |s| 016,994.876000 270,271. H8:U!I11 778,5(X1.5(i448(l 4:l(),Wi7.i:W;lH7 2o;i,s!)i.sc,ii7r) 76.:ir)2.177U12 20,2:15.714121 2,081.781602 "i\ 5 S a fj II 2? ~ Sj 5 ii 5 t2 u - = X t- ia T e; -* - 2 II 140 I6. r > lilts X X -r O py 1| '; ^ ^ i' | 1 1; 111 JJ T< ii| 1 1 ? S * ?> S 2 g g 2 ? *' ^ 2 = CT ^ k^ g 3 ESS = i"> o r: x - 7 r-, i- tX 1 i 5?1 f: S H 2 S L J g ^ S t^ ^r gi e T- i H ci =1 B 1 ' g g ^l T ill ii 1 S 5" a 3 ; S S * * X ?( 1 1 1 i I 1| ill ||| ill || ?; ?: ^ - X ft r I - S 7J t~ 5 x K g S S ^ i* C s y i! = ^ 5? 5 s r X = = 55 - : 4 ' Z 'f x S X 3 111 H 1 II 5 ^ x ^2 5 = ti: egi X T( > ^ = *^ S w 3 Illl s -. S. ?>. III 5 ^ P I- 1} =- x =" i S S =; 2J i- . ^ * 5S S K SS ?*-Ss S l- t- p t^- t- i^ t- t- P 30 DO 30 B> SSS asgg S 2 2 S - 10 t- 30 ~ - S. =0-0 50 S S =? o - ce -- 10 e t- 00 CS O -H W CO W o> CO SO J 202 THE PKINCIPLES OF LIFE INSURANCE premiums in ascertaining its solvency. If, therefore, the annual premium reserve is $453.02 short of the amount neces- sary at the close of the fifth year of insurance to guarantee solvency, this figure must represent the present value of future premiums to be collected if $102.20 is the correct reserve. By the method of computing the present value of a life annuity due of $1.00 as shown on page 180 such values can be computed for any age such as 50, 55, 60, etc. The present value of a one-dollar annuity due at age 50, so determined, is $15.2710. If the net annual premium on the ordinary life policy at age 45 is $29.665 then the present value of future premiums receivable on this policy after age 50, or of an annuity due of $29.665, is $29.665 X 15.2710 or $453.02. This is the exact amount by which the annual-premium re- serve fell short of the single-premium reserve and $102.20 is therefore correct. This justifies the definition of the legal reserve previously given, as that sum of money which with future premiums, if any, will enable the company to pay future claims. The following table has been arranged to make comparisons similar to the one described above for different years during the term of the ordinary life policy issued at age 45 and shows the difference between the single- and the annual-premium reserves for every fifth year until age 80 as well as the present value at each selected age of the future net annual premiums still to be collected on the policy issued at age 45. Compari- son of columns 4 and 7 will show that the present value of future premiums in each instance just equals the difference between the two specified reserves. THE EESEKVE 203 K H Si *i S II c 5 = I ? 1 i c = i. 5j 8 C ^ - * I " *" ~ ^ S < s *" S fe 2 = - 7" -= ^ c i J -=: - U ; = .t i. S a: Cao ?lfii CQ O i^ c: O CO ^ GC 1-1 CS rf CO CO * * i = -^ T ^ < * ?5 K c jr * * Lt Ct CO OC b- OC CO M t^ CO - So < =2 cs H SE fe, O GC t^ Ol ^^ (N Ol ^1 I"* C5 Vf _ CM eo rf is a oc o O O IO CS Si cs o <* | K H ^ ^ -, t- CS rf -.- z = ^ < p w o uo C O " ~ H E W i o w W t O O M O'H g 55 ^ ^j PS s _p^ ^^ ^ " I ^2 J; w 1 2 514.30 524.23 19.61 39.65 27.62 56.00 35.48 72.05 7.08 14.05 3 534.37 60.12 85.17 109.78 20.89 4 544'.70 80.98 115.13 148.66 27.51 5 555.22 102.20 145.86 188.73 33.83 6 565.89 123.74 177.37 230.02 39.78 7 576.71 145.59 209.67 272.59 45.25 8 587.67 167.70 242.78 316.50 50.15 9 598.74 190.06 276.72 361.81 54.38 10 609.92 212.62 311.52 408.62 57.78 11 621.18 235.35 347.21 457.04 60.22 12 632.51 258.22 383.84 507.19 61.53 13 643.89 281.18 421.49 559.24 61.51 14 655.30 304.22 460.22 613.40 59.96 15 666.72 327.27 500.15 669.88 56.60 16 678.13 350.30 541.38 728.99 51.13 17 689.50 373.26 584.08 791.06 43.19 18 700.83 396.12 628.45 856.55 32.37 19 712.08 418.83 674.73 925.98 18.18 20 723.24 441.35 723.24 1000.00 00.00 21 734.27 463.62 734.27 22 745.16 485.61 745.16 23 755.88 507.25 755.88 24 766.41 528.51 766.41 25 776.73 549.34 776.73 26 786.82 569.69 786.82 27 796.67 589.57 796.67 28 806.28 608.98 806.28 29 815.69 627.98 815.69 30 824.93 646.62 824.93 31 834.01 664.95 834.01 THE EESEEVE TABLE V. Continued 207 1 2 3 4 5 YEAB OF IN- SUBANCE WHOLE-LIFE [SINGLE PREMIUM] WHOLE-LIFE [CONTINUOUS PBEMIUMS] WHOLE-LIFE [TWENTY PBEMIUMS] TWENTY-YEAB ENDOWMENT INSUBANCE [CONTINUOUS PREMIUMS] TWENTY-YEAB TEBM [CONTINUOUS PBEMIUMS] 32 842.97 683.03 842.97 33 851.80 700.85 851.80 34 860.49 718.41 860.49 35 869.06 735.70 869.06 36 877.42 752.58 877.42 37 885.60 769.08 885.60 38 893.63 785.29 893.63 39 901.59 801.35 901.59 40 909.51 817.34 909.51 41 917.32 833.10 917.32 42 924.88 848.36 924.88 43 932.02 862.79 932.02 44 938.75 876.37 938.75 45 945.23 889.45 945.23 46 951.58 902.26 951.58 47 957.49 914.20 957.49 48 962.31 923.93 962.31 49 966.83 933.05 966.83 50 970.87 941.21 970.87 51 1000.00 1000.00 1000.00 Table V affords comparisons of the reserves on different kinds of policies issued at the same age. Single- and annual- premium reserves have already been compared * but no refer- ence has been made to reserves on limited-payment life, en- dowment or term policies. Column 3 of the table shows that the reserves on a life policy paid for by twenty annual pre- miums increase much more rapidly than in case of premiums paid continuously throughout life, and in the twentieth year of insurance the reserve on the limited-premium policy is identical with the single-premium reserve. This is necessary, of course, since the insured cannot be required to make further premium advances after this date, and to guarantee solvency i Page 203. 208 THE PRINCIPLES OF LIFE INSURANCE the reserve must, therefore, be of an amount sufficient in itself to pay all future claims accruing against the policy. The reserve on the twenty-year endowment insurance is largest of all and becomes $1,000 at the end of the twenty years. This shows how it is possible under such a policy to guar- antee to pay the face value whether the insured be living or dead, for at the expiration of the designated endowment period an amount equal to the face value of the policy stands to the credit of the insured. The reserve on the twenty-year term policy is at all times small, and reaches its maximum at the end of the twelfth year; thereafter it decreases until at the end of the twentieth year it is entirely exhausted. An interesting contrast is thus afforded between the term and the endowment policies. The latter guarantees to pay the face value of the policy at some time and therefore, in case death does not occur before the twenty years have elapsed, accumu- lates the amount payable. The term policy on the other hand promises the face value only in case of death within the twenty- year term and at the close of this period the policy value is entirely exhausted and nothing will be paid to the policy- holder. BIBLIOGRAPHY FACKLER, EDWARD B. : Notes on Life Insurance, chap. 4. (Probably the best adequate presentation of the subject for the beginner.) CHAPTER XVII THE GROSS PREMIUM LOADING By BBUCE D. MUDGETT In Chapter XV premiums were classified in one case as net or gross. The net premium, or that portion which cares for policy claims was analyzed at length. The gross, or office, premium includes the above plus an amount called load- ing, the purpose of which is to pay for expenses incurred in writing and caring for insurance policies and to provide a margin for possible contingencies. Chief among the latter are errors in the net premium, due to failure to realize ex- pected mortality or interest, losses arising from forfeitures, and the creation of a fund from which dividends may be paid. The practice of paying dividends has become so firmly estab- lished that the loadings on participating policies are almost invariably made with the further idea of creating a surplus for future dividends. The subject of loading shares with that cf distribution of surplus the distinction of furnishing insurance actuaries some of the most difficult problems with which they must contend. This is due to the complexity of the expense item and the difficulty of charging it proportionately against any policy- holder in such a way as to obtain substantial equity. With the enormous size attained by many of our largest life-insur- ance companies, with the various activities carried on by them, with agency organizations covering the entire United States and in many cases European countries as well, the aggregate of expenses incurred within a single year totals to a vast sum. This money, of course, must come from the policyholders through their yearly contributions of premiums. The prob- 209 210 THE PKINCIPLES OF LIFE INSURANCE lems arise in large part through the difficulty of determining what portion of particular items of expense shall be charged against one policyholder as compared with another. Classification of Expenses. Many classifications of life- insurance expenses have been made, often in a more or less formal way or with no other purpose than to abbreviate a long and complex list of items. But classifications of any sort can be justified only on the ground that they serve to clear up points at issue, and the purpose of a classification of life-in- surance expenses should be a clear statement of the problems of loading. The following division of expenses into five groups was made by an actuary x and based on a scrutiny of companies' statements: 1. New business expenses Examination fees, medical expenses OA . x , ,, . 80 per cent, of first Agents first year commissions , Advertising, printing and salaries yea ^ s P remiums - incurred in getting new business J 2. Collection expenses Agents' renewal commissions Collection fees Exchange Taxes on premiums 3. Settlement of claims Investigation of death claims Resisting unjust claims 4. Investment expenses Cost of making, handling and pro- tecting investments Bad debts Losses over gains Taxes and repairs on assets 5. General expenses General supervision Actuarial Clerical Salaries 10 per cent, of re- newal premiums. per cent, of face value of death claims. l /2 Per cent, per an- num on assets. $1.00 per $1,000 in- surance per year. i WHITING, WM. D., "Provision for Expenses," Yale Readings in Insurance, Life, 176-177. THE GEOSS PEEMIUM LOADING 211 The estimated amounts of each group of expenses, as shown at the right-hand side of the page, is intended to be approxi- mate only and will vary with different companies. The value of these estimates lies in the fact that each group of expendi- tures is thus related to, and its amount dependent upon, some other factor, such as premium, assets, etc. New business ex- penses fall heavily on the first premium and vary in direct ratio to the amount of the premium, due largely to the neces- sity of paying agents' commissions as a percentage of the pre- mium. Collection expenses likewise vary with the amount of the premium but are incurred in approximately equal amounts over a series of years. The cost of settling claims falls at the close of the policy term, and bears a close relation to the amount of the claim. Investment expenses vary with the amount of the total assets and can with fairness be deducted from the gross income on investments. General expenditures are for the benefit of all and probably bear as close a relation to the amount of insurance as to any other single item. In summarizing these different factors of expense it is found that some vary with the size of the premium charged, some with the amount of insurance carried, some have no rela- tion to either. One group of expenses is incurred wholly within the first year of insurance, other groups annually dur- ing the policy term and still others only at the time when the claim is finally satisfied. This statement sets in relief the factors that determine expenses attributable to any policy and makes possible a statement of the two great problems of load- ing, aside from the mere matter of collecting sufficient money to pay all expenses. These problems are respectively (1) the equitable distribution of expenses between different classes of policies and between policyholders at different ages the problem of making each policy pay its own cost; and (2) the incidence of expense, or the problem of meeting the expense when it is incurred. The solution of these problems is complicated by the necessity of maintaining a level office premium, of living up to statutory requirements as to reserves, of maintaining a consistent policy regarding surrender values 212 THE PRINCIPLES OF LIFE INSURANCE and dividends, and finally of meeting the competition of other companies. The Problem of Equitable Distribution of Expenses. The above method of establishing a relationship between each group of expenses and some other factor, such as premiums, face of policy or total assets, furnishes a means of estimating the effect of age or kind of policy on the actual cost of writing and caring for any policy; for with two groups of expenses dependent on the size of the premium and two on the face amount of the policy, it is necessary only to know the premium charged and the face amount of the policy in order to ascertain approximately the expenses incurred in handling any particu- lar contract. The two tables shown on the following page are based on policies for $1,000, the premiums < used being the office pre- miums charged by a well-known company. As the premiums increase with age and for the more expensive policies, it will be noticed that the expense of writing the policy be- comes greater (column 1 either table) since this expense varies with the amount of the premium; on the ordinary life policy this cost is $14.72 at age 21 as compared with $76.11 at age 65. The same variations are found by compar- ing ten-year term and twenty-year endowment policies. Col- lection costs likewise vary with the increase in premium due to advancing age or kind of policy. Settlement expenses and general expenses, however, remain the same on every policy and for every age irrespective of changes in premiums. Since investment expenses are incidental to the handling of invest- ments they are usually deducted from the gross earnings on total assets and no attempt is made to charge them in any way against particular policies. They do not, therefore, enter into the problem of loading. The four groups of expenses that must be provided for by loading the net premium may thus be combined into two classes: those which vary with the amount of the premium and those which remain constant for each $1,000 of insurance, or vary with the face value of the policy. THE GEOSS PREMIUM LOADING 213 <= J - " Cd i i a %& O P 00 O 00 -i So^ 3 W p 3 H t E s 1C >O O UO ift U5 F-< C^l CO ^ t~ C5 o la TI< m co -^ * co c * oq ^H OO CM O id CM id >-" CM CO * t- O o O 63 kn a 1*1 3 w f^ n M D S. S g P O O O K ^T OJ 7) H (H ^ sSmajfBa ^sa -aa^ut snidans KPENSES S H ' ^ iitl O H s |II| id i 10 >o id ^H w * ^j *"* ""^ *""* (H o ^ w ^\ o &r 03 *> CQ < fe H >-i ej O - 1 ,? PH C> CD r,J jj SBg % O3 ^2 - giB - wg gs (M CO * (M CO 'O CO CO I-H i-! i CO o fe '-' ^^ P5 05 H W -H "H (M (M * O w W SC 05 ^- H g p^ 5 PH J*J ^. JVj B K ^ GO H 9 .. K ^ 5 P Ci t^^ lO CM r 1 a r-< CM CO > od o> 3J c oS " ^^ W S < s 9 = ; S Z s is ^ ^ *3 Z) % S H 2 5 B ^ rz-P.^ 2 H yi d - 5 fi r r- < is. ij *j ^ X ^5 J H o 2 ^ u ^"* " S ~ ^ ^ f ^ ^ 55 ^ ^ P^ k. >* &* 5 -ji !=( CH S IB I 12.88 6.19 34.59 21.99 28.35 2 26.13 13.42 22.32 70.40 37.10 5827 66.92 3 39.76 27.23 38.04 107.50 75.53 95.85 105.93 4 53.77 41.42 53.33 145.91 115.32 134.77 145.50 5 68.16 56.00 68.16 185.71 156.53 175.08 185.71 6 82.94 70.97 226.93 199.24 216.84 7 98.11 86.34 269.66 243.49 260.12 8 113.68 102.12 y. 313.94 289.36 304.99 p 9 129.65 118.29 00 5 359.85 336.91 351.49 a 3 10 146.01 134.86 ST ^ 407.45 586^2 399.71 Is 11 162.76 151.83 1- * 456.84 437.38 449.71 12 179.87 169.17 ^ 508.08 490.46 501.66 sg 13 197.35 186.87 S- 561,28 545.57 555.55 p. ; ! 14 215.16 204.92 r" r 616.55 602.81 611.54 cr 3 3 17 274.34 260.82 2 s 796.05 788.74 793.37 ?l 18 289.22 279.95 ej 861.01 856.03 859.18 d 19 308.32 299.29 = 928.91 926.36 927.96 3 20 327.58 318.81 1,000.00 1,000.00 1,000.00 BIBLIOGEAPHY DAWSOX, MILES M., Business of Life Insurance, chap. 17, " Anomalies in Loading." Shows the glaring inequity in methods of loading practiced by American companies. GIBB, J. BURNETT, " The Calculation of Life Office Premiums." Annals American Academy of Political and Social Science, Sept., 1905, 59-62. A brief discussion of methods of loading to obtain equity between different policies and different ages. Tables re- ducing results to a percentage basis show the advantages or defects of the different methods very clearly. HOLCOMBE, JOHN M., " Expenses for Agents." Yale Readings in Insurance, Life, chap. 18. Presents arguments by the 228 THE PKLNCIPLES OF LIFE INSURANCE president of an American company justifying expenses in- curred through agency systems on the ground that in- surance cannot be written without agents. Mom, HENRY, Life Assurance Primer, chap. 9, to page 121. WHITING, Wm. D., "Provision for Expenses." Yale Readings in Insurance, Life, chap. 12; reprinted from The Transac- tions of the Actuarial Society of America, v. 214-19. An excellent discussion, by an actuary, of a scientific and equitable method of assessing expenses. Contains a classification of expenses that affords an unusually good analysis of the problems of loading discussed in this chap- ter. CHAPTER XVIII SURRENDER VALUES AND POLICY LOANS SURRENDER VALUES Meaning of the Term " Surrender Value." It was ex- plained in Chapter XVI that the level-premium plan involves the charging during the early years of the policy of a net premium which is larger than necessary to pay for the insur- ance in those years, with a view to accumulating a fund suffi- ciently large to enable the company to meet the cost of insur- ance in the later years of the life of the insured when the net premium is insufficient to pay for the current cost of protection. These overcharges, we saw, are credited to the policy from year to year at an assumed rate of interest and constitute the reserve. The manner in which this reserve accumulates was illustrated (page 200) in connection with a $1,000 ordinary life policy at age 45, issued on the basis of the American Experience table and 3 per cent, interest. It was seen that the net annual premium of $29.67 on this policy results in a reserve of $19.61, at the end of the first year, and that thereafter the accumulation to the credit of the policy continues to increase until, at the end of the fifty- first year of the contract, or the extreme limit of the insured's life according to the mortality table, it equals the face value of the policy. Xow what shall be done with this fund in case the in- sured wishes to surrender his policy or fails to pay his pre- mium when due? It is clear that under such circumstances the company, since its future liability under the policy ceases, no longer requires the reserve the accumulated over- charges in the net premium for the purpose originally intended. Experience has shown that it is not necessary for 229 the protection of the company or the other policyholders to insist that the insured upon failing to continue his premium payments shall forfeit the entire reserve value of his policy. It has therefore become a universal practice of the companies to permit the insured, in case he surrenders or lapses his policy after it has been in force for several years, to receive all or a designated percentage of its reserve value. This allowance constitutes the so-called " surrender value " of the policy ; while the portion of the reserve which the policyholder forfeits is known as the " surrender charge/ 7 Extent to Which Policies Are Lapsed and Surrendered. The importance of allowing surrender values and retain- ing surrender charges becomes clear when we observe the great extent to which life-insurance policies are terminated by lapse or surrender. Thus, during the year 1913, a typical year for illustrative purposes, the total number of policies issued by all the companies reporting to the Insurance Depart- ment of the State of New York amounted to $1,015,788 with an aggregate face value of $1,840,577,945, while the number of policies terminated during the year totaled 564,577 with a face value of $1,043,413,871. The various ways in which these policies were terminated are indicated in the fol- lowing table : TEBMINATED BY No. OF POLICIES AMOUNT OF INSUBAXCE Death 69,442 $ 152,764,980 Maturity 26,568 52,083,622 Expiry 69,696 106,246,598 Surrender 172,823 339,861,747 Lapse 225,051 363,606,021 Change or decrease 999 28,850,903 564,579 $1,043,413,871 An examination of the table shows that of the 564,579 poli- cies terminated during 1913, 397,874 were lapsed or surren- dered, and that the amount of insurance thus terminated equaled $703,467,768. In other words, the number of lapsed and surrendered policies during 1913 was equivalent to over SUEEEXDEE VALUES AXD POLICY LOAXS 231 39 per cent, of the total number of policies written and over 70 per cent, of the total number of policies terminated dur- ing the year. Slightly over twice as much insurance was terminated by lapse and surrender as in the regular ways, i.e. by death, maturity, expiry or change. As regards twenty- nine of the largest companies reported in the Insurance Year Book, termination by lapse and surrender during the two decades from 1894 to 1913, inclusive, averaged annually 6.79 per cent, of the mean policies in force, while during the five years 1909-1913 the percentage averaged annually 5.09 per cent, Non-Forfeiture Laws. Although the practice of allow- ing a surrender value in some form is an old one, it should be noted that for many years the matter was entirely op- tional with the companies. But while a few companies exer- cised their discretionary powers in a liberal manner, prac- tically all the companies doing a general business pursued a policy so illiberal, in nearly all instances allowing no value whatever upon surrender, that there developed on the part of the public a demand for legislative control of the matter, and as a result the several states have enacted so-called "non- forfeiture laws." * Mr. Elizur "Wright is given credit for having started the first important campaign for such legisla- tion in the United States. As a result of his efforts the state of Massachusetts enacted a law on May 10, 1861, which re- quired the companies of that state upon the surrender of a policy to apply the terminal reserve by the Actuaries' table and -i per cent, interest, less a surrender charge, as a net sin- gle premium to purchase extended insurance for the original amount, such extensions to attach automatically upon the fail- ure of the insured to pay his premium when due. Following the enactment of this law other states soon followed suit, and at present such legislation is general. 2 1 For a treatment of the historical development of non-forfeiture legislation and policy provisions see Miles M. Dawson's Elements of Life Insurance, chapter on " Surrender Values." 2 The general nature of non-forfeiture legislation is indicated by 232 THE PKINCIPLES OF LIFE INSURANCE All the laws now in force base the surrender value upon the amount of the reserve at the time of lapse or surrender, and all allow the companies to retain a surrender charge. In most instances this charge takes the form of a stipulated per- centage of the amount of insurance ; but sometimes it consists of a percentage of the reserve, or a percentage of the reserve or of the insurance, whichever is greater, or, as in Massachu- setts, a percentage of the present value of the future net pre- miums to be paid under the terms of the policy if continued. As summarized by Mr. James M. Hudnut : No law has ever required a surrender value of any kind unless at least two years' premiums have been paid. No state now requires non-forfeiture provisions until three years' premi- ums have been paid, but all allow companies to pay surrender the terms of the New York law applicable to poHcies issued after January 1, 1907. The law reads as follows: "If any policy of life insurance (other than a term policy for twenty years or -less), issued on or after January first, nineteen hundred and seven, by any domestic life insurance corporation, after being in force three full years shall by its terms lapse or become forfeited by the nonpayment of any premiums or any note therefor or any loan on such policy or of any interest on such note or loan, the reserve on such policy computed according to the standard adopted by said company in accordance with section eighty-four of this chapter, together with the value of any dividend additions upon said policy, after deducting any indebtedness to the company and one-fifth of the said entire reserve, or the sum of two and fifty one- hundredths dollars for each one hundred dollars of the face of said policy if said sum shall be more than the said one-fifth, shall upon demand not later than three months after the date of lapse with surrender of the policy be applied as a surrender value as agreed upon in the policy, provided that if no other option expressed in the policy be availed of by the owner thereof, and if the policy itself does not direct what option shall become operative in default of selection by the owner, the same shall be applied to continue the insurance in force at its full amount including any outstanding dividend additions less any outstanding indebtedness on the policy but without future participation and without the right to loans, so long as such surrender value will purchase nonparticipating tempo- rary insurance at net single premium rates by the standard adopted by the company, at the age of the insured at the time of lapse or forfeiture, provided in case of any endowment policy if the sum 8URBENDKB VALUES AXD POLICY LOANS 233 values earlier at their option. Canada, on the other hand, re- quires policies to be non-forfeiting after three years and does not allow the issue of policies guaranteeing surrender values until three years' premiums have been paid. The laws of every state base the surrender value upon the reserve, either by a specified standard or by the standard upon which the policy is issued, and all allow a surrender charge that is to say, a de- duction is allowed to be made from, the reserve and the balance is the cash value which may either be received in cash or used to purchase paid-up or temporary insurance. The surrender charge allowed under most state laws is 2^ per cent, of the amount insured. In one state it is 3 per cent, of the insur- ance. Sometimes it is 20 per cent, of the reserve; and in Massachusetts it is " 5 per cent, of the present value of the future net premiums which by its terms the policy is exposed to pay in case of its continuance." 3 Liberality of Companies in the Granting of Surrender Values. "While the foregoing non-forfeiture laws define the applicable to the purchase of temporary insurance shall be more than sufficient to continue the insurance to the end of the endow- ment term named in the policy, the excess shall be used to purchase in the same manner pure endowment insurance payable at the end of the endowment term named in the policy on the conditions on which the original policy was issued, and provided further that any attempted waiver of the provisions of this paragraph in any appli- cation, policy or otherwise, shall be void, and provided further that any value allowed in lieu thereof shall be at least equal to the net value of the temporary insurance or of the temporary and pure endowment insurance herein provided for. The term of temporary insurance herein provided for shall include the period of grace, if any. In every case where a contract provides for both insurance and annuities, the foregoing provisions shall apply only to that part of the contract which provides for insurance, but every such con- tract containing a provision for a deferred annuity on the life of the insured only (unless paid for by a single premium) shall pro- vide that in the event of the nonpayment of any premium after three full years' premiums shall have been paid, the annuity shall automatically become converted into a paid-up annuity for such a proportion of the original annuity as the number of completed years' premiums paid bears to the total number of premiums re- quired under the contract." sHtiDNUT, JAMES M., Studies in Practical Life Insurance, 20. New York, 1911. 234 THE PRINCIPLES OF LIFE INSURANCE amount that must be returned upon the surrender of a policy, it should be noted that many of the companies grant surrender values greater than those required by statute. The chief factor in bringing about this situation was competition be- tween the companies. " The agents of the various companies, in the heat of competition," as explained by Mr. William Alexander, "have stimulated the public to demand large surrender values, and the companies are vying with one an- other in the liberality of their offers." 4 In fact, some com- panies allow cash values equal to the full reserve at the end of the second or third year, although the loading on the premium is only for the usual amount. With the great majority of com- panies, however, the non-forfeiture provisions of the policy become operative only after the payment of premiums for two or three years, and then provide for a surrender charge which is greater during the early years of the policy and which di- minishes year by year until the tenth, fifteenth or twentieth policy year, the surrender value thereafter being equal to the full reserve on the policy. Reasons Justifying a Surrender Charge. Three promi- nent reasons have been advanced why the company during the earlier years of the policy should make the surrender al- lowance less than the full reserve. The most important of these relates to the initial expense incurred by the company in securing and issuing a policy. This expense to-day con- siderably exceeds the amount allowed for expenses in the first year's premium, and the company expects to reimburse itself out of the margin for expenses in the future premiums which the insured is expected to pay in accordance with the terms of his contract. Unless the policy therefore remains in force for several years it will actually prove a source of expense, in- stead of advantage, to the company. To allow the return of the full reserve to a policyholder who lapses or surrenders his policy in the early years would be an injustice to remaining policyholders since they would be obliged to reimburse the * ALEXANDER, WILLIAM, The Life Insurance Company, 214. SURRENDER VALUES AND POLICY LOANS 235 company for the amount it expended in securing the policy in question and which it failed to get from the insured because of his early withdrawal. Justice to remaining policyholders, it is argued, requires the application of some form of penalty for early withdrawal, and this penalty we have seen assumes the form of a complete forfeiture of the reserve in case of lapse or surrender before the payment of the first two or tiiree premiums, and as regards the great majority of companies, the retention, following the payment of the second or third premium, of a decreasing surrender charge during the next ten, fifteen or twenty policy years. Obviously, as the policy grows older more liberal surrender values may be granted. Not only has the company had time to reimburse itself for the original cost of obtaining the polic}^, but the contract is now self -supporting. Furthermore, the policyh older has become sufficiently accustomed to paying his premiums to warrant the belief that he will continue the policy to its maturity. It should here be stated that by far the greatest number of lapses and surrenders take place during the first and second policy years. Another reason advanced in favor of not allowing the in- sured to obtain the full reserve on the policy at pleasure is the possibility that during periods of financial stringency or business depression so many policyholders may avail them- selves of the privilege of surrendering their policies as to greatly weaken the financial standing of the company to the detriment of remaining policyholders. In commenting on this phase of the subject, Mr. Edward B. Fackler states : In times of business depression, such as this country has seen more than once, even the best securities will suffer serious depreciation though their certainty of payment remains un- questioned. Such a financial crisis is just the time when pol- icyholders, in need of cash, are most likely to demand sur- render values from the company, thus not only reducing its premium income, but also forcing the sale of securities at less than their true value, and perhaps crippling the company. In such a case the persons exercising these options should pur- 236 THE PRINCIPLES OF LIFE INSURANCE posely not be allowed a greater proportion of the reserves on their policies than the company is able to realize on the true value of its securities sold to provide cash for retiring policy- holders. This matter, however, cannot be regulated by any set of rules, but depends on the amount of the company's as- sets, the character of its business and investments, and the form of its organization. 5 Such statements have in view the fact that, unlike the re- strictions imposed by savings banks on the withdrawal of deposits, most life-insurance policies now outstanding do not provide for the right on the part of the company to defer payment in time of financial stringency. "Within recent years, however, many companies have reserved the right in their contracts to defer payment of the. cash value, or the making of a loan except for the purpose of paying renewal premiums, for a period not exceeding sixty or ninety days. Still another argument in favor of a surrender charge, al- though some writers question its correctness or importance, refers to the "adverse mortality selection" which it is as- sumed will be brought about by the allowance of very liberal surrender values. The position taken by the supporters of this view is as follows : A life-insurance policy is a unilateral contract to which the company must always adhere but which the insured may break at any time by simply discontinuing his premium payments. Whenever, therefore, the payment of premiums seems a hardship, the healthy policyholder, not feeling the immediate need for insurance, will have no hesi- tancy in lapsing his policy. Policyholders in poor health, on the contrary, will appreciate fully the value of their insurance and will exert themselves to the utmost to pay the premium. Hence, according to this view, the good risks are likely to lapse on a large scale if surrender values are liberal, while impaired risks will stay with the company. The result is a great re- duction in the average vitality of the policyholders remain- ing with the company. It is therefore argued that retiring policyholders should forfeit a portion of the reserve value of B FACKLEB, EDWARD B., Notes on Life Insurance, 97-98. SURRENDER VALUES AND POLICY LOANS 237 their policies in order to provide a fund to meet the higher death rate among the poorer risks that remain. Various Optional Forms in Which Surrender Values Are Granted. Life-insurance policies almost invariably give the insured the option of taking the surrender value guaran- teed to him in his contract in one of three forms. The val- ues under each form, and the conditions under which they are granted, are stated fully in the contract. Moreover, the val- ues allowed under the several options are usually equivalent to one another as measured by some standard. Briefly out- lined, the options referred to are the following : 1. Settlement by receiving cash payment. Upon re- quest, accompanied by a full surrender of the policy, the com- pany will pay the then cash surrender value thereof, less any indebtedness to the company. By accepting this option the insured terminates all connection with the company as regards the policy in question. 2. Settlement by accepting paidrup extended term in- surance. Under this option the face amount of the policy and any existing dividend additions, less any indebtedness to the company on account of the policy, will be extended as paid-up term insurance for such length of time from the date of default in the premium payment as the then surrender value will provide at the net single premium rate for the at- tained age of the insured according to a certain mortality table with interest at a stipulated rate. It is usually this value which is extended automatically upon the failure to pay a premium; while the other options are usually granted only upon request. At the expiration of the term, the policy, like any other ordinary term contract, will have no further value. 3. Settlement by accepting paid-up fractional insur- ance of the same Tcind as the original policy. Under this op- tion such an amount of the original policy will be continued as paid-up insurance as the cash surrender value will provide at the net single premium rate for the attained age of the in- sured according to a given mortality table and an assumed rate of interest. 238 THE PRINCIPLES OF LIFE INSURANCE In addition to the above customary options there are occa- sional instances where the policy offers' the privilege of using the surrender value for the purchase of a life annuity, a tem- porary life annuity, or a temporary annuity certain. Many policies also provide that upon the request of the insured, made prior to default in premium payment, the premium or pre- miums thereafter falling due during the time such request shall remain unrevoked, will be advanced as a loan against the policy at a stipulated rate of interest, provided the then cash surrender value shall be sufficient to cover the loan. Under this plan any premium loan may be repaid at any time. POLICY LOANS Development of Such Loans. The so-called " premium- note " plan constituted the first important form of loan which participating companies made upon the security of a life- insurance policy. According to this plan, used quite gener- ally as far back as 1845, the company required the insured to pay only one-third or one-half of the premium in cash, and accepted his note for the balance. The notes, which bore in- terest, were considered a lien against the policy, and it was expected that the annual dividends upon the policy would prove sufficient to extinguish both interest and principal of the notes at the end of a certain time. Although issued usu- ally in the form of a personal obligation, attempts were rarely made to enforce payment of the notes, the same being consid- ered as cancelled when the policy became void upon the in- sured's failure to pay a premium. For all practical purposes, therefore, this plan was equivalent to granting a surrender value, because the sole security back of the loan was the re- serve value of the policy. The dividends actually realized, however, failed to take care of the notes as expected with the result that, since the notes were deducted from the face of the policy at death and the interest on the indebtedness was added to the cash part of the premium, the insured was really carrying decreasing insurance at an increasing cost. As a consequence much dissatisfaction resulted among policyhold- SURRENDER VALUES -AND POLICY LOANS 239 ers, and the entire plan was generally abandoned during the decade following 1870. Although some companies granted individual loans to pol- icyholders during the period just referred to by accepting an assignment of the policy as collateral, this practice did not become general until after 1890. In 1884 one of the leading American companies issued a contract in which it guaranteed loan values up to 50 per cent, of the reserve. At first, also, a considerable number of companies sought to limit their pol- icy loans to such advances as would enable the insured to pay his premiums. But this plan proved unsatisfactory, partly because of the public's demand for larger loans to meet per- sonal as well as business requirements and partly because of the willingness of many companies, in the race for business, to meet the desire of the public in the matter. Following 1890 the loan privilege manifested the same rapid develop- ment towards liberality on the part of the companies that was noted in connection with the granting of surrender values. " Companies, in their struggle for size and in their desire to- issue policies that could be readily sold by the agents," to quote Mr. A. E. Childs, "became more and more liberal in their offers, and even went so far as to instruct their agents to use these liberal policy conditions as the principal talking- points in their efforts to sell insurance." 6 Nature of Policy Loans as Now Granted. Although the loan privilege is granted to-day by all companies, a consider- able variance exists as regards the size of the loan. Some companies limit the loan at all times to a stated percentage of the reserve, while others lend the full terminal reserve less the interest on the loan. Still other companies lend the full terminal reserve of the policy at the end of the next year less interest in advance and the premiums payable before the expiration of the next policy year. Nearly all policies also make provision, as already indicated, for the advancement to 6 CHILDS, A. E., "The Ultimate Effect of an Unrestricted Right to Borrow on Life Insurance Policies," Proceedings of the Seventh Annual Meeting of Life Insurance Presidents. 240 THE PKINCIPLES OF LIFE INSURANCE the insured, upon request, of any premium or premiums fall- ing due, provided the cash surrender value is sufficient to cover such loans. If the cash value allowed under the policy is less than, the reserve, such value is almost invariably made the basis of the loan, the insured being allowed to borrow all or a designated percentage thereof. Under such conditions the policy provision guaranteeing the loan usually reads to the following effect : Upon request and the sole security of this policy properly assigned, the company, unless extended term insurance be in force, will advance at a rate of interest not exceeding 6 per cent, per annum, an amount which with the interest, and any unpaid premium or premiums, for the then current policy year shall equal, or at the option of the insured be less than, the cash value of the policy and of anjs existing dividend additions at the end of such year. Failure to pay either loan or interest shall not avoid the policy unless the total indebtedness to the company on account thereof shall equal or exceed the cash sur- render value of 'the policy and any existing dividend additions, nor until thirty-one days after notice shall have been mailed to the last known address of the insured and of any assignee. Advantages Resulting from the Loan Privilege. While the granting of a policy loan is frequently the equivalent of giving to the insured the surrender value of his policy, there is nevertheless a vital difference between the underlying purposes of the two. Policy loans were originally granted by many of the leading companies with a view to enabling the insured to obtain the necessary funds in time of financial need to pay his premiums, and thus avoid the necessity of surrendering his policy for its cash value. In this connection, reference may again be made to those provisions in modern policies which allow, either automatically or upon the re- quest of the insured, for the advancing of premiums as a loan against the policy as long as the surrender value is sufficiently large to protect the advances. In fact, some of the largest companies first adopted the loan feature in their contracts during periods of crises, such as in 1893, SUEEENDEB VALUES AND POLICY LOANS 241 with the result that much of their insurance in force was maintained by thus temporarily assisting their policyholders. Xot to grant loans in times of financial distress, and at the same time offer cash surrender values, may cause the surren- der of many policies in order to realize much needed cash. For many persons, therefore, the polic}* loan is the means not only of preventing the loss of their insurance but also of temporarily protecting the family from want. Furthermore, the loan privilege has frequently served a very useful purpose in enabling business men to realize additional cash at a time, especially in the midst of a panic, when it is impossible for bankers to meet their requirements. It is at such times, as we have seen, that the loan value of life-insurance policies is a real asset which enhances the credit of the business man because it is available on demand, irrespective of the conditions which may prevail, and usually at the fixed rate of 5 or 6 per cent. 7 In fact, the extent to which policy loans were obtained during the panic of 1907 demonstrated their usefulness as a means of helping in time of need to such an extent as to raise promi- nently the question whether it is not advisable for life- insurance companies to follow the practice of savings banks in protecting themselves against a possible run at a time when interest rates are excessive and when it is impossible, except at a great sacrifice in values, to realize upon their se- curities. It is for this reason that many companies have in recent years reserved the right to defer the making of policy loans, except for the purpose of paying renewal premiums, for a period of from sixty to ninety days. Extent of Policy Loans and the Relation of Such Loans to Lapses and Surrenders. While the loan privilege fre- quently serves as a means of maintaining policies which would otherwise be surrendered, or at times fulfils a real business need, ft is also true that the privilege is grossly abused by many for purposes that should never be allowed to endanger the protection which it is the function of life insurance to af- 7 See pages 40 to 42 of this volume. 242 THE PRINCIPLES OF LIFE INSURANCE ford. Owing largely to the emphasis placed by companies and their agents upon liberal loan values as an inducement to sell insurance, a large element in the insuring public has come to regard the value of policies as little more than an accumu- lation of deposits to be obtained by way of surrender or a loan upon the slightest provocation. With many, borrowing on policies has become a habit. This conclusion seems war- ranted by a consideration of the enormous increase of such loans in recent years. Whereas the percentage of policy loans and premium notes amounted to 3.32 'per cent, of the total reserves of the various companies reported in the Insurance Year Book for the year 1888, that percentage has increased to 16.9 per cent, during the year 1913. At present policy loans for 260 companies aggregate $657>994,947 as compared with a total reserve value of policies in these companies of $3,903,- 615,175. Between 1903-1913 the policy loans of these com- panies increased 313 per cent, as compared with an increase of only 106 per cent, in total admitted assets and 73 per cent, in total insurance in force, i.e. policy loans increased nearly three times as fast as assets and about four and one-half times, as fast as the volume of insurance. During the last four years of this decade the increase in such loans amounted to approxi- mately $212,000,000, or over 20 per cent, of the increase in admitted assets and nearly 31.4 per cent, of the increase in the reserve value of policies during the same four years. This alarming increase in the volume of policy loans fur- nishes ample evidence of the careless manner in which many mortgage the monetary value of their policies for purposes of speculation or needless expenditures. To again quote Mr. A. E. Childs : " The very people who are living up to and even beyond their incomes, depending upon their insurance for the future protection of their families, are the very people who are mortgaging their insurance just as soon as the depos- its are large enough to satisfy some of their more expen- sive desires. They either forget the original purpose for which they took the insurance or they allow their selfish de- sires for temporary enjoyment to outweigh their appreciation SURRENDER VALUES AND POLICY LOANS 243 of the necessity for providing for the future." 8 Too fre- quently policyholders effect loans on their policies simply be- cause they are so easily obtained, never appreciating at the time the vital relation of life insurance to the beneficiary and often neglecting some other available asset which should have been selected in preference to the cash value of the policy. It should again be stated that the fundamental purpose of life insurance is protection to the family. When once acquired, therefore, it is essential that life insurance be conserved, and in this connection it is highly important to bear in mind that the great majority of such loans are never repaid and that the policy lapses upon failure to make such repay- ment. As previously stated, " Life insurance should be re- garded as a sacred possession to be mortgaged only in case of extreme necessity. Borrowing on the policy depreciates its value and defeats the original purpose it was intended to serve. If not actually necessary, borrowing on a policy is an act of flagrant injustice to the beneficiary/' . Much has been written of late to stem the tide against in- creasing policy loans, and many companies have attempted in recent years to check the abuse by raising the interest rate from 5 to 6 per cent, and by reserving the right to defer such loans for sixty or ninety days. The difficulty involved, how- ever, is a deeper one, namely, the failure on the part of the insuring public to understand the fundamental purpose of life insurance. It is therefore highly essential to impress upon the insured as well as the beneficiary the necessity of not allowing unnecessary loans to defeat the sacred purpose of life insurance in protecting the home or in providing for old age. If women the beneficiaries in the great majority of in- stances understood that a policy loan usually means a lapse, that replacement becomes possible only upon a satisfactory medical examination, and that in any case the loan for the time being impairs the amount of protection, and if they 8CHILDS, A. E., "The Ultimate Effect of an Unrestricted Right to Borrow on Life Insurance Policies," Proceedings of the Seventh Annual Meeting of Association of Life Insurance Presidents, 29. 244 THE PRINCIPLES OF LIFE INSURANCE were shown their right to keep themselves posted as to what the insured is doing with his policies, there is reason to believe that the number of policy loans would be greatly reduced and limited in the main to cases clearly justifiable. In this connection, also, the agent who originally negotiated the con- tract could, if again placed in touch with his client at the time a loan is contemplated, render a distinct service by forcibly emphasizing to him the reasons against needless pol- icy loans. Such efforts are apt to prevail, especially if the agent renders the further service of helping to suggest the use of some other assets which the insured may possibly have available to meet his pressing financial needs. ALEXANDER, WILLIAM, The Insurance Company, chap. 7, 208- 214, on " Large vs. Small Surrender Values," New York, 1905. CHILDS, ARTHUR E., address on "Ultimate Effect of an Unre- stricted Right to Borrow on Life Insurance Policies.'' Proceedings of the Seventh Annual Meeting of the As- sociation of Life Insurance Presidents. CLARK, J. R., "Policy Loans." Proceedings of the Fifth An- nual Meeting of the Association of Life Insurance Presi- dents. DAWSON, MILES M., Elements of Life Insurance, chaps, on " Surrender Values " and " Loans on Policies," New York. 1911. FACKLER, EDWARD B., Notes on Life Insurance, 96-99. New York, 1907. HUDNUT, JAMES M., Studies in Practical Life Insurance, 19-23. New York, 1911. Mom, HENRY, Life Assurance Primer, chap. 7, 130-134, on " Settlements and Surplus." Report of the Joint Committee of the Senate and Assembly of Wisconsin on the Affairs of Life Insurance Companies, 134-142. Madison, 1907. CHAPTER XIX SURPLUS Meaning of Surplus and Sources from Which Derived. Life-insurance policies may be classified either as " non- participating " or "participating." Xon-participating poli- cies are those which definitely guarantee the premium and the sum insured and do not entitle the insured to receive any other benefits than those expressly set forth in the contract. Participating policies, on the contrary, usually require the payment of a premium considerably larger than necessary to meet the company's liability under the contract, and as a con- sequence the insured is allowed from time to time to " partici- pate," i.e. to receive a portion of the surplus earnings of the company. This surplus may be defined as that sum which the company has on hand after deducting the reserve value of its policies and after paying its current expenses and annual death claims. To understand the sources from which a company derives its surplus, it is necessary to recall the nature of life-insur- ance premiums. Xet premiums, we saw, are calculated on the assumption that a certain rate of interest can be earned and that death claims will occur as indicated by a given mortality table. If, therefore, the rate of interest actually earned and the mor- tality actually experienced are just equal to the assumptions, and if all policies remain in force until maturity, net pre- miums will prove just sufficient to enable a company to meet the benefits guaranteed under its contracts. But to the net premiums the companies must add a loading to cover expenses and contingencies. It is thus clear that in the regular con- duct of its business a life-insurance company might derive a surplus from three principal sources: (1) a higher return on investments than the rate assumed for premium and reserve 245 246 THE PEINCIPLES OF LIFE INSUKANCE computations, (2) a lower death rate than that indicated by the mortality table employed, and (3) a saving in the loading because total expenses are less than the total loadings. Al- though the sums derived from all three sources are usually called surplus earnings, it should be noted that the last two are really in the nature of a salvage and that only the first interest earnings on investments in excess of the assumed rate may be truly characterized as a profit. A few minor sources of surplus, such as gains from the surrender or lapse of policies and from non-participating business, should also be mentioned, but these sources are usually of much less im- portance than the other three. Gain from Investment Earnings. Since life-insurance policies are written for a long term of years it is essential that the companies assume a rate of interest for their net premium and reserve computations so conservative as to preclude any likelihood of failure to realize the same at any time throughout the life of the contract. At present the as- sumed rate is usually 3 or 3% per cent., although many of the old policies still in force were issued on the assumption that a 4 per cent, rate would be realized on investments. If a com- pany has based its net premiums and reserves on the assump- tion that it will earn 3 per cent, but actually earns 4 or 41/2 per cent., as is now generally the case, that 1 or iy 2 pe cent, (minus the expenses connected with the making and main- tenance of investments) represents the excess of investment earnings over and above the return necessary to the solvency of .the company, and may, if considered advisable, be returned to the policyholders who contributed the same. Frequently a company may gain large profits from appreciation in the value of its investments, and this item is usually included under the general heading of interest earnings. Saving from Mortality. This saving arises from the fact that life-insurance companies in the United States do not experience on the average as heavy mortality as is indicated by the mortality table employed and which has therefore been provided for in the premiums. At the end of any given year SURPLUS 247 the saving in mortality represents the difference between the face value of the policies to be paid according to the mortality table used and the face value of the policies actually paid minus the reserve on the policies thus not paid. The reserve, it will be recalled, was defined as that sum which, together with future premiums, will enable the company to pay future death claims. In calling saving from mortality a surplus it is as- sumed, as Mr. Miles M. Dawson well explains, that " the lives which complete the year, no matter if there have been fewer losses than as per the table during the year, have as good vital- ity and as good chances of life as the persons at their attained ages, from whose lives the experience was taken which made up the mortality table. Therefore, their future premiums, with their present reserves, assure the payment of their claims ; and the premiums which have been received in excess of the needs of the past and of the reserve, may therefore be considered a true surplus." x Most writers in discussing this source of surplus emphasize the importance of not placing too much re- liance on the showing for any one year since mortality may fluctuate from year to year, and maintain that safety requires the finding of the company's experience in this respect for a number of years. It is therefore asserted that it is unwise for a company to distribute in dividends all of a large sav- ing from mortality in one year, and that, if it is not desired to decrease dividends in later years, prudence requires the re- tention of a portion of such saving to balance a possible smaller saving in a later year. Saving from Loading. Prudent management in life in- surance dictates that the gross premium should be more than sufficient to just meet normal requirements so that the com- pany may be protected against exceptional conditions. In fact, one of the avowed purposes in loading is the provision of a definite dividend to be returned to the policyholder at the end of the year together with the gains from other sources. Competitive conditions, however especially in the matter of agents' commissions, brought about a situation i DAWSON, MILES M., Elements of Life Insurance, ed. 3d, 102-103. 248 THE PRINCIPLES OF LIFE INSURANCE which until recently meant that the average company was just about able to keep its aggregate expenses within the ag- gregate loading on its premiums. Within recent years there has been a marked tendency towards economical management in life insurance and at present a large number of companies manage, by exercising rigid economy, to make their annual expenses much less than their allowance (the loading in the gross premium) for expenses and contingencies. Hence they are able to credit a very considerable saving to surplus, and this saving renders the twofold purpose of protecting the com- pany against financial disturbances and of furnishing a sub- stantial fund out of which to pay dividends. Gains from Forfeitures. The great majority of compa- nies, as previously explained, retain all or a portion of the reserves of those policies which are surrendered or lapsed. The sums thus retained have sometimes been regarded as con- stituting another source of surplus, although, as has been well said, " it seems to be an anomaly that any business should really be the gainer by losing custom." Owing to the large surrender values prevailing at present, however, and the high expense of securing new business, this factor can scarcely be regarded as yielding a profit ; furthermore, if any gain should be derived from this source, it is treated usually as an offset to expenses. Two reasons have been advanced to show that the so-called " gain from forfeitures " is only an apparent and not a real gain. In the first place it is believed that where illiberal sur- render values are allowed the apparent gain to the company is offset in part by an unfavorable mortality experience, which is attributed to the adverse selection which it is believed will result from the fact that healthy policyholders will show a greater disposition to discontinue illiberal contracts while those who are failing will remain in the company irrespective of the harshness of policy provisions. But of much greater importance, it is argued, is the expense of replacing the old risk with a new one. Not only did the company incur the heavy initial expense of securing the discontinued policy but SURPLUS 249 in replacing it with a new policy it incurred this initial ex- pense a second time, i.e. it is obliged to make two subtractions from its insurance fund in order to secure one policyholder. Moreover, certain investigations also show that companies with a reputation for liberal surrender values not only secure busi- ness at lower rates of commission than those paid by com- panies pursuing a different course, but also pay the highest dividends to policyholders. Methods of Apportioning the Surplus. Having out- lined the sources from which the surplus is derived we may next pass to its apportionment among policyholders. The plan now generally used in the United States is known as the " contribution plan," or some modified form of that system. As its name implies, this plan aims to credit to each policy that proportion of the company's total surplus which the pol- icy in question has " contributed." According to the plan " the surplus is rebated back to the insured precisely as it is considered that his policy has contributed it. Thus if the mortality has not been so high as was assumed, there is put into his dividend the proportionate saving on his own tabular cost of insurance. In like manner, if the expenses and con- tingencies have not absorbed all the aggregate loading on the premiums, there is given him in his dividend the proportion- ate part of his loading that has not been required for expenses and contingencies. If the average interest returns upon the mean assets have exceeded the rate assumed, he receives in his dividend interest at the additional rate upon the funds belong- ing to his- policy." 2 Stated in the form of a debit and credit account, the policy is credited under this plan with (1) the terminal reserve at the end of the previous year, (2) the pre- mium paid under the policy, and (3) the interest actually earned on these two items minus investment expenses; and is debited with (1) actual expense of conducting the business, (2) cost of insurance as shown from the actual experience of the company, and (3) the terminal reserve of the policy at the end of the year. The difference between the two sides of 2 DAWSOIT, MILES M., The Business of Life Insurance, 70. 250 THE PRINCIPLES OF LIFE INSURANCE the account is regarded as the surplus contributed by the pol- icy under consideration. Although regarded as theoretically sound in principle, nu- merous difficulties arise in the application of the plan and many modifications of the system are therefore found in actual practice. In applying the system some companies employ the " two-factor method/' some use three factors, and a few even four. Under the two-factor method the surplus is usually divided into the following two parts: (1) that derived from surplus interest and (2) that derived from all other sources combined, the gain from interest being distributed in propor- tion to the reserves and the balance of the surplus in propor- tion to the loadings. Where three factors are used, the ele- ments referred to are saving from loading, saving from mortality and gain from excess interest. In the case of deferred dividend policies (those which defer the distribution of surplus to the policyholder until the end of a stipulated number of years) the dividends are usually computed in the following way: (1) the actual dividends which the policy would have received had it been on the annual dividend plan are ascertained; (2) these annual dividends are accumulated at compound interest up to the end of the dividend period; and (3) the accumulated amount of these annual dividends is then increased by a percentage in order to recompense the policyholder for the risk which he assumes under the deferred dividend system, and which is not assumed under an annual dividend plan, of losing the accumulated surplus through death, surrender or lapse during the distribution period. The assessment of expenses probably presents the greatest difficulty connected with the distribution of surplus. By far the greatest part of the expenses of a life-insurance company is the initial expenditure incurred for the procurement of new business. With respect to this large initial expense some hold that it should be assessed against the new business, while oth- ers maintain that the new business is for the benefit of the company as a whole and that the initial expense should there- fore be assessed against the company's entire business. Fur- SUKPLUS 251 thermore, many expenses, such as rent, office supplies, salaries, office expense, advertising, postage, etc., are of a joint nature and it is difficult to identify the same for the purpose of as- sessing them upon the numerous individual policies and groups of policies carried by an insurance company. This difficulty of properly assigning expenses to individual policies has been the subject of much discussion in recent years. Mr. Daniel H. Wells, for example, has suggested the following plan as the best method of most nearly attaining the equity which it is the aim of the contribution method to give : " Assess upon the investment income all investment expenses, upon premi- ums such expenses as are determined by the premiums, and upon the death cost, or what is technically called the cost of insurance, all other expenses/' 3 Yet this rule, as is prob- ably also true of any other general rule that can be devised, still leaves the difficulty of identifying each of the numerous expenses of a company with reference to each individual pol- icy. In his discussion of this complex question Professor Gephart is forced to the conclusion that " absolute definiteness cannot be secured, for the best devised principles for assessing insurance expense will meet many difficulties when the at- tempt is made to apply them/' * Meaning of the Terms " Divisible Surplus " and ' ' Dividends. ' ' Having ascertained the amount of surplus for all policies, the company may next set aside out of this amount a so-called " contingent reserve." The balance of the surplus fund may be considered as " dividend " or " divisible " surplus, the terms having reference to that part of the surplus which the management of the company decides may be re- turned with safety to its policyholders. The sums thus re- turned are commonly designated as " dividends " or " profits," although these terms as used in life insurance should not, as is the case in business generally, convey the idea that the amounts returned represent the " chance element in produc- 3 WELLS, DANIEL H., " Distribution of Surplus," Yale Readings in Life Insurance, chap. 19, 264. * GEPHART, W. F., Principles of Insurance, 201. 252 THE PRINCIPLES OF LIFE INSURANCE tion." Instead, we have already seen that, with the possible exception of excess interest earnings, surplus in life insurance consists of salvages, and dividends to policyholders therefore represent essentially the return of that portion of their pre- mium payments which the experience of the company shows to be unnecessary for the payment of claims and the main- tenance of reserves. While the companies may, in the absence of legislation, use their discretion in determining the amount of surplus to be distributed there is a tendency to regulate this matter by statute. Thus, as a result of the New York insurance in- vestigation of 1906, that state limited the amount of surplus which a company may withhold from policyholders, the limit varying from 20 per cent, of the reserve liability in the case of smaller companies to 5 per cent, of the reserve where the same exceeds seventy-five millions of dollars. The purpose of this legislation was to prevent the company from retain- ing more surplus than is necessary to offset the factors, such as fluctuations in the mortality rate and in interest earnings, which are apt to interfere with the payment of uniform divi- dends. It was felt not only that life insurance is not subject to unusual losses such as are experienced in fire insurance, and that the aforementioned limits are therefore conservative, but that a large surplus furnishes a constant temptation for the misuse of funds and for extravagance in the conduct of business. Methods of Distributing the Surplus According to the Time of Distribution. Dividends may be paid either an- nually or on the deferred-dividend plan. The annual-divi- dend plan is now most generally used by companies issuing participating policies, and in certain states is required by statute. The dividends, as will be shown later, may be used to reduce premiums, to purchase paid-up additions, etc. In nearly all the well established companies these dividends grad- ually increase from year to year because the increasing reserve value of the policy results in an increasing surplus through the. operation, of the excess interest factor, SURPLUS 253 Deferred dividends, as distinguished from annual divi- dends, refer to those which, according to the terms of the pol- icy, are not payable until the close of a stipulated number of years, such as five, ten, fifteen or twenty years. Policies providing for payment of dividends in this manner are com- monly called " deferred-dividend," " accumulation," " dis- tribution," or " semi-tontine " policies. The underlying prin- ciple of the plan is that those policyholders who fail to con- tinue premium payments to the end of the designated period because of death, surrender or lapse, lose the dividends which they would have received under the annual-dividend plan, and that the dividends thus lost revert to those policyholders who continue their premium payments throughout the de- ferred-dividend period. The system as used at present must not be confused with the so-called " tontine " plan, which was at one time extensively used in the United States and which provided for a forfeiture of both dividends and policy value upon failure to pay a premium, the entire forfeiture accumu- lations being divided among the persisting policyholders at the close of the designated dividend period. As distinguished from this plan, the deferred-dividend system applies the for- feiture idea to dividends only, and thus reduces the chance of large gains being derived from the surrender or lapse of policies. But even in its present form the deferred-dividend plan seems to be losing favor with the public and is being super- seded by the annual distribution system. The latter plan, it is argued, is not only well adapted to the policyholder who wishes to keep his annual premiums to the lowest possible fig- ures, but also serves the purpose of making the company eco- nomical in the management of its business since extravagance will at once be revealed by a reduction in the annual-dividend distribution. The deferred-dividend system, on the other hand, has met with much opposition in recent years, although the plan has also many able supporters. Briefly outlined, the arguments advanced against and in favor of the plan are the following : 254 THE PRINCIPLES OF LIFE INSURANCE Against the plan it is argued : 1. That it is the reverse of insurance, the fortunate surviv- ors benefiting at the expense of those who die. 2. That the plan is frequently not understood hy the in- sured at the time the contract is issued, or, if understood, its significance is not properly appreciated. 3. That the plan furnishes a temptation towards extrava- gance in that it gives the company possession of large unas- signed surplus funds. This is especially true where an ac- counting to policyholders is deferred until the end of the divi- dend period, whereas under an annual distribution plan such extravagance would not be likely to occur since it would come to the immediate notice of policyholders. It is for this rea- son that some of the companies using the plan give an annual accounting to their policyholders of the amount of surplus standing to their credit, thus enabl'ing them to judge whether the company is properly managed. 4. That the plan has been responsible in the past for extrav- agant estimates on the part of agents as to the amount of dividends that would be realized by policyholders who would continue premium payments to the end of the dividend period. In fact much of the opposition to the system was occasioned by the fact that the estimates made far exceeded the results obtained, thus causing many policyholders to labor under the impression that they had been deceived by the companies. In favor of the plan it is argued : 1. That it represents an understanding between the insured and the company which is clearly set forth in the contract and which should be known to the insured at the time the con- tract is issued. It follows that the plan is not morally wrong and works no injustice to the policyholder since he has the right to have his dividend payments deferred and conditioned upon the payment of premiums during the whole of the stipu- lated dividend period. 2. That with reference to a company's solvency the plan is more advantageous than the annual distribution system in that it enables the company to retain control of a large fund SURPLUS 256 which is free from any definite liability and which will serve as a protection against the depreciation of the company's as- sets in time of financial panic or business depression. The shortcoming of the annual distribution system, it is argued, lies in the fact that the company, owing to the strenuous competition prevailing in the business, may possibly endanger its solvency by too liberal a distribution of its surplus funds. How Dividends May Be Used. Having explained the sources of the surplus, and the methods of ascertaining and apportioning it, we may next pass to a consideration of the va- rious forms in which the insured may receive his allotment. Briefly stated, it is customary for American companies to allow the insured, at his option, to take his dividends in any one of the following five ways: 1. The current dividend each year as determined by the company may be withdrawn in cash or applied to the payment of premiums. 2. Instead of taking dividends in cash, the insured may have the same applied to the purchase of non-forfeitable paid- up additions- to the policy. Such paid-up additions may be either participating or non-participating, depending upon the terms of the contract. Usually proof of good health is not required as a condition precedent to the exercising of the op- tion, and if required, such evidence of good health need be furnished only once, namely, at the time when this form of dividend distribution is first applied for. Unless the owner of the policy elects some other plan, the companies usually reserve the right in their contracts either to pay dividends in cash or to apply the same to the purchase of paid-up additions. 3. Dividends may be allowed to accumulate to the credit of the policy either at a definite rate of interest or at such a rate as may be determined by the company, and are withdrawable on any anniversary of the policy. 4. Dividends may be used to make the policy a paid-up con- tract. This means that whenever the reserve on the policy and existing dividend additions at the end of any policy year shall equal or exceed the net single premium for the attained 256 THE PKINCIPLES OF LIFE INSURANCE age of the insured according to a given mortality table and a stipulated rate of interest for an amount of insurance equal to the face amount of the policy, the company, at the request of the insured, will indorse the policy as paid-up insurance for such an amount as the reserve will purchase at the pre- mium named. 5. Dividends may be applied to convert the policy into an endowment, or in the case of endowment insurance to shorten the endowment term. Stated in another way, this plan provides that whenever the reserve on the policy and existing dividend additions at the end of any year shall equal the face amount of the policy, the company upon its surrender will pay the same as a matured endowment. The surplus is allowed to accumulate with the understanding that said ac- cumulation is not paid in the event of death. In case of sur- render or lapse, however, these accumulated dividends are not forfeited, since they are made to constitute a part of the policy's surrender value. Various other ways of using the surplus on behalf of the insured may be mentioned, but their employment is only oc- casional. Under the deferred-dividend plan the insured may be given the option of having the surplus used for the pur- chase of a life annuity or temporary life annuity, thus result- ing in a reduction of future premiums if the insured wishes to use the annuity in that way. At one time some companies also applied dividends for the purchase of an increased amount of insurance for a single year, but this plan is no longer used by companies. BIBLIOGEAPHY ALEXANDER, WM., The Life Insurance Company, Part I, chap. 16, and Part II, chaps. 4, 5. Annual and Deferred Dividends. Published annually by The Spectator Company. DAWSON, MILES M., The Business of Life Insurance, chaps. 8, 9, 13. , Elements of Life Insurance, ed. 3, 101-117. SUKPLUS 257 FACKLER, EDWARD B., Notes on Life Insurance, chap. 14, " Divi- dends." GEPHART, W. F., Principles of Insurance, pp. 186-204. Mom, HENRY, Life Assurance Primer, chap. 12, 134-139. Report of Joint Committee of Senate and Assembly of New YorTc, 378-388, 418-429. Yale Readings in Life Insurance, i, chap. 19, "Distribution of Surplus." PAET III SPECIAL FORMS OF LIFE INSURANCE CHAPTER XX FRATERNAL AND ASSESSMENT INSURANCE Extent of Fraternal Insurance. The preceding chapters are descriptive of " old-line " life insurance, i.e. life insurance based upon the maintenance of an adequate reserve. Yet a very considerable proportion of the total life insurance written in this country is carried by fraternal orders which for years have conducted their operations on the assessment plan. The 509 fraternal orders included in the statistics of the Insurance Year Boole show insurance in force at the end of 1913 of $9,622,000,000, or an amount nearly equal to 47 per cent, of the $20,564,000,000 of insurance carried by the old-line companies. The number of fraternal benefit certifi- cates in force exceeded 8,000,000, the amount of new business written during the year amounted to $1,065,000,000, the claims paid, $101,000,000, and the assessments, $129,000,- 000. As has been said, over one-fourth of the country's popu- lation is directly or indirectly interested in these societies. But while the regular life-insurance companies held reserves of $3,903,000,000 at the close of 1913 to guarantee the ful- fillment of their obligations, the assets of fraternal orders, although the face value of their certificates amounts to nearly 47 per cent, of the total insurance in force with the regular companies, amounted to only $183,000,000. Organization, Government, and Legal Status of Frater- nal Societies. The primary purpose of these societies is to enable their members, composed chiefly of persons with lim- ited means whose aim it is to secure the protective benefits of insurance at the smallest possible cost, to unite in a fraternal way for mutual protection. In fact the strength of the sys- tem and the survival of most of the large societies for so 261 262 THE PRINCIPLES OF LIFE INSURANCE many years, despite the inherently defective methods which have characterized their insurance business, are attributable chiefly to the fraternal tie which closely binds the members together. Generally speaking, the organization and government of a fraternal society assumes the following form: A parent so- ciety (or grand lodge), governed according to the terms of its constitution and by-laws, creates numerous local subordinate lodges. These local bodies, while usually allowed to regulate their affairs to some extent, especially as regards their purely benevolent features, are nevertheless subject in all important matters to supervision by the parent society and are governed by the rules which it adopts. As a rule some ritual is also observed. Another feature of such societies is the purely democratic form of government that prevails, all the members having the right to vote in their respective lodges on matters that affect the society as a whole, such as the selection of officers and the adoption of laws. The grand lodge usually consists of the representatives elected by the members of the local lodges, although in some instances there is a supreme lodge, composed of representatives selected by the various grand lodges, each of which in turn is made up of representa- tives chosen by the members of its subordinate local lodges. Some of the societies are incorporated bodies, while others are voluntary associations. From a legal point of view fraternal societies differ essen- tially from companies whose insurance operations are organ- ized on a strictly business basis. Most of the states have enacted legislation regulating the organization and conduct of such societies, but in all instances their benevolent character is insisted upon. Unless illegal, their rules are generally en- forced by the courts. The other important legal character- istics of fraternal orders have been concisely summarized by Mr. Walter S. Nichols as follows : x i NICHOLS, WALTER S., " Fraternal Insurance." A lecture deliv- ered at Yale University, published in Yale Readings in Life Insur- ance, i, 138-139. FRATERNAL AND ASSESSMENT INSURANCE 263 Nearly all of the societies have their own adjudicators for determining the standing and rights of their members, by whose decision the members must abide. These the courts will refuse to interfere with so long as they act honestly and fairly within their legitimate province. They are mutual societies, in which, like churches, the members are expected to abide by the form of government to which they have subscribed. A local lodge may be cut off from affiliation with a parent society or may cut itself loose just as a church may cut loose from its denominational connection. In neither case is the society itself dissolved. It simply loses the rights which belong to it as a member of the parent society and must surrender what- ever is in its possession and belonging to the parent. If it has a charter from the state, the state laws governing it as a cor- poration are superior to any rules of the association itself. On one point, however, whether incorporated or not, the courts are insistent, that is, no rule or action of the society can deprive a local lodge or a member of insurance or other property interests which are already vested, that is, in which an unconditional ownership has been established. Where they are incorporated, like other corporations they are regarded by the law as artificial persons acting through their officers as their agents and with no personal liability on the part of the members except those imposed by the rules of the society itself. Where they are not incorporated their legal character is not so easily confined. They are often regarded as a peculiar kind of partnership qualified by the special purposes for which they were organized. Distinctive Characteristics of Fraternal Insurance. As insurance associations, fraternal societies issue to their members so-called " benefit certificates/' according to which they promise, in return for " assessments " or " contribu- tions" from the certificate holder, to pay certain stipulated "benefits" in the event of death or whatever other con- tingency may be covered. Yet it is apparent that " any or- ganization which guarantees the payment of a definite sum of money, under certain circumstances, dependent upon the con- tingency of human life, in return for certain contributions, does an insurance business." The document containing the promise to pay may be called a " benefit certificate " instead of a policy, the term " contribution " or " assessment " may be used instead of premium, and the final payment in the event of death may be designated as a " benefit " instead of a claim, yet the whole transaction is essentially a form of insurance. The ordinary life-insurance policy is simply a definite promise to pay, in return for a fixed consideration, a stipu- lated sum on the occurrence of the specified contingency, and contains all the conditions which govern the parties to the contract. In this respect fraternal societies follow a radically different plan. Although the certificate is issued on the basis of an application 2 which is similar to that required by regular old-line companies, the benefit certificate 3 differs from an ordinary policy in three important particulars : 1. The certificate is comparatively brief, usually stating that the holder thereof is a member of the society, that he is entitled to all its privileges and to a certain portion of the beneficiary fund, and that the society's promise in this re- spect is conditioned on the member's compliance with the constitution and laws of the society, which are declared to be a part of the contract. In other words the benefit certificate, unlike an ordinary life-insurance policy, does not specify in detail the conditions which govern the indemnity agreement; instead, these are found in the society's rules. 2. The certificate' merely recognizes the holder's rights as a member in the society to share in the benefit for a specified amount. The certificate remains the property of the member, who is usually given the right under the rules to change the beneficiary at will, while the ordinary life-insurance policy is the property of the beneficiary designated therein unless the insured has expressly reserved the right in the contract to change such beneficiary at will. Usually the holder of a bene- fit certificate can only name as beneficiary some member of his family or other dependent. 3. The certificate, according to the laws of most states, 2 For a specimen of such application, see page 465 of this volume. 3 For a specimen copy of such benefit certificate, see page 464 of this volume. FEATEENAL AND ASSESSMENT INSUEANCE 265 cannot be an agreement promising the payment of d definite amount for a fixed premium as is the case with old-line contracts. From a practical point of view the most impor- tant difference between fraternal and old-line insurance has been the failure of the former to maintain a reserve suf- ficient to guarantee the payment of all obligations as they mature. In fact, until recently, the reserve idea was bitterly opposed by most fraternal orders as an unnecessary over- charge. Instead of accumulating adequate reserves, the so- cieties proceeded on the plan of charging low premiums (which experience soon demonstrated to be woefully inade- quate) and reserved to themselves the right, in case the funds on hand should prove insufficient to meet current claims, either to assess their members for an amount equal to the deficit or to scale down the amount of the benefit so as to make its payment possible with the funds on hand. In reality, therefore, the benefit certificate does not constitute a promise to pay a definite amount for a definite consid- eration. Since they have not promised to pay more than the funds on hand together with the assessments which they are able to collect from their members, enable them to pay, fraternal societies, considering the matter from a purely theoretical standpoint, cannot become insolvent. Yet a. very large number of such societies have passed out of existence as utter failures because they were unable to obtain sufficient funds through assessments upon their members to pay the benefits upon which members were relying for the protection of their families in case of death and for which they had been contributing for years. The unfortunate experience of so many fraternal orders is primarily due to the failure to recognize, until too late, that the only practicable plan of life insurance, as already ex- plained, is one involving the payment of a level premium and the accumulation of an overcharge in the early policy years with a view to meeting the deficit in the premium in the later policy years when it is insufficient to meet the cost of insur- ance. The societies operated on the plan of giving protec- 266 THE PRINCIPLES OF LIFE INSURANCE tion at tfie lowest possible cost. They went on the theory that, as benevolent organizations, they should not conduct an in- surance business for profit, and placed their reliance upon the collection of assessments to meet any unforeseen con- tingencies that might arise. Unusual deficits were not ex- pected because it was believed that the constant enrollment of young members would keep the average death rate about the same from year to year. But even assuming that de- ficiencies might occur, it was believed that the fraternal spirit would cause the membership to remain united and willing to pay the increased assessments which the society might see fit to levy. Various Assessment Plans that Have Been Used. One of the most interesting phases of fraternal insurance to study relates to the various assessment. plans that have been em- ployed. The first one to be generally adopted was the " flat assessment " plan, according to which the same assessments were charged regardless of age. Manifestly, this plan re- sults in assessing the younger members much more than the actual cost of their insurance and the older members much less. The assessments charged under this plan also proved in nearly all instances to be woefully inadequate. In the course of time the defective character of this crude method became apparent. As the age of the members increased the death losses grew heavier with the result that assessments had to be increased. Younger members soon realized that they were paying much more than their just share to meet current claims, which it was observed, were being paid to an increas- ing extent to the older members. The younger members would, therefore, escape paying heavy assessments by with- drawing from the society, usually to join some younger so- ciety where protection could be obtained at a lower cost, while the old and infirm members would remain. Because of this adverse selection the average age of the membership in the society, and consequently the assessments, would rapidly in- crease, thus further accelerating the rate of withdrawal on the part of young and healthy members. Under these conditions FRATERNAL AND ASSESSMENT INSURANCE 267 it would soon become impossible to secure any more new members. The proportion of the remaining members who were aged or infirm would now rapidly increase and death losses would also increase correspondingly. With the mem- bership decreasing and death losses rapidly increasing, as- sessments would, in the course of time, reach prohibitive figures with the result that the society would dissolve, thus depriving a large number of old or sickly certificate holders of the protection for which they had contributed for years and which, under the circumstances, could not be replaced with insurance in a regular company. The influence exerted by this adverse selection is indicated by the two following actual examples. 4 The first column in each case represents the membership of the society and the second column the num- ber of deaths per 1,000 during successive years. It will be noticed that in the case of the first society, for example, the membership decreased in eleven years from 62,457 to 16,894, or nearly 73 per cent., while the death rate increased from 12.5 per 1,000 to 33.9, or over 171 per cent. I II MEMBERS' DEATH RATE MEMBERS' DEATH RATE 62,457 12.5 126,128 13.7 62,574 13.0 131,031 13.2 61,355 15.4 135,368 14.8 60,554 16.4 132,674 16.1 60,076 16.5 127,073 16.1 56,060 16.1 123,380 16.4 53,21018.4 119,785 16.6 36,028 21.8 115,212 17.7 21,316 26.8 96,633 19.0 19,119 30.1 89,679 22.3 16,894 33.9 82,256 22.2 The next assessment plan to be generally adopted was the so-called " graded assessment." Here assessments were graded according to the age of entry, varying, for example, from $.60 at age 20 to $2.50 at age 60. It was, however, again the purpose of the society to collect just enough to pay current 4 These examples are cited in B. H. Meyer's " Fraternal Insurance in the United States," published in the Annals of the American Academy of Political and Social Science, March, 1901, 83. 268 THE PRINCIPLES OF LIFE INSURANCE losses, and the rates were intended to represent approximately the mortality at the several ages. Moreover, the rates were not changed and a member who entered the society at age 25 would continue to pay the rate for that age during subse- quent years. This plan, it is clear, although not as crude as the preceding one, nevertheless becomes increasingly ad- vantageous to the members as they grow older and therefore, like the preceding plan, also works a hardship upon the younger members. A third plan had in view increasing the rate as the member grows older, but this plan it is apparent will prove unat- tractive if extended to very advanced ages. Consequently the rates under this plan were not increased after the member attained a stipulated age like sixty Recent Tendency to Adopt the Protective Features of Old-Line Insurance. All the 'aforementioned assessment plans proved exceedingly unsatisfactory, despite the fact that fraternal societies have generally been exemplary in the mat- ter of selecting risks and in keeping expenses down to a very low figure. Accordingly the societies have attempted in recent years to devise ways and means of strengthening their financial position, and many have secured the services of ac- tuaries for the purpose. Many of the societies have accumu- lated some sort of reserve or emergency fund, but in the great majority of instances this fund falls far short of being an adequate reserve. It is encouraging to note, however, that those in charge of the leading societies now fully realize that there is only one correct plan of insurance, namely, that based on scientific principles, and that fraternal insurance, if it is to guarantee its benefits and be a permanent factor in the community, must be conducted on the same scientific basis that the old-line companies have wisely made the founda- tion of their enormous business. In fact, some of the so- cieties have already adopted either level rates computed scien- tifically on the basis of the National Fraternal Congress table of mortality, or the so-called " step-rate " plan. This latter plan consists of level rates increasing for successive terms of FRATERNAL AND ASSESSMENT INSURANCE 269 five 01? ten years. The increasing term rates, however, apply only to the working period of life and, at about age 60, merge into a level rate for the rest of life. In trying to reorganize their scale of rates the societies are encountering much opposition from their members and are experiencing much difficulty in educating them to an under- standing of the situation. The problem involved is a serious one since many of the societies have been in existence for many years and, owing to their inadequate rates during the whole of their existence, are now obliged to increase their rates enormously in order to meet current claims. In other words, their problem is to find some way of meeting the situation which has grown out of the accumulating deficits of past years. And in trying to solve this problem the societies must contend with the conflicting interests of different classes of members. The older members naturally favor the retention of the old methods, since the raising of rates at the older ages to an adequate basis would, in many instances, mean an unbearable burden. The younger members, on the other hand, feel that they should not be asked to contribute for the benefit of the older members, and are therefore not so inclined to oppose a more equitable rate adjustment. In their attempts to reform their rating systems the societies have in most in- stances tried to compromise between these two classes of members, i.e. when deficiencies made it necessary rates were increased but the increase was greater at the older ages than at the younger ones. Many feel that the only solution avail- able is, as Mr. Walter S. Nichols puts it, " to so regulate the inequality between the groups that additions to the young membership can be kept up until such time as the rates can step by step be finally raised to an adequate basis." 5 Recent Legislation Concerning Rate Adjustments. As indicating the present tendency to bring about a gradual adjustment of fraternal rates, mention should be made of the so-called respectively, to these two contingencies. In the first place, it has become a common habit to borrow on policies. The loan privilege is necessary and has its proper uses, but in ever so many instances the privilege is exercised because some unnecessary luxury is desired, or because the security market seems low, or because some other apparent opportunity to make money quickly seems to present itself. And even where these considerations are not the motive, the insured frequently uses this asset because it is so easily obtained, never considering at the time the relation of that asset to his beneficiary and often overlooking some other available asset which should have been used in preference to the cash value of his policy. The enormous increase in policy loans in recent years would war- rant this conclusion. Between 1903-1913 loans against poli- cies for the 260 companies referred to in the Insurance Year Book increased 313 per cent., as compared with an increase of only 106 per cent, in total admitted assets and 73 per cent, in total insurance in force. In other words, loans against policies increased relatively nearly three times as fast as as- sets and about four and one-third times as fast as the volume of insurance. In the last four years the increase in such loans aggregated approximately $212,000,000, or over 20 per cent, of the increase in admitted assets during the same four years. Much attention has been given of late to this alarming sit- uation, and an educational campaign may do much to coun- teract this undesirable tendency. But it seems to me that in this respect nothing can take the place of the agent who has negotiated the contract and who, if again placed in touch with his client at the time the loan is contemplated, can emphasize to him such facts as : " Life insurance should be regarded as a sacred possession to be mortgaged only in case of extreme 436 THE PRINCIPLES OF LIFE INSURANCE necessity"; "borrowing on the policy depreciates its value, in the great majority of instances results in a lapse and de- feats the original purpose the policy was intended to serve," and " borrowing on the policy if not actually necessary is an act of flagrant injustice to the beneficiary." Such arguments, if amplified and forcibly presented, are apt to prevail, espe- cially if the agent renders the further service of ascertaining and suggesting the use of some other asset which the insured may possibly have available for his pressing requirements. These remarks, of course, are based on the assumption that almost the last thing a man should mortgage is the life in- surance taken out by him for the protection of a dependent household. Secondly, the agent is afforded another opportunity for serv- ice by advising the beneficiaries under his client's policies in respect to the safeguarding of the proceeds. As already stated, about 60 per cent, of insurance funds are lost by the beneficiary within six years following the insured's death. If the client did not avail himself of an income policy, there is special need to keep the lump sum payment intact and to conserve its income-producing capacity. Here a knowledge of conservative investment is a desirable feature of an agent's equipment. Placing this knowledge at the beneficiary's dis- posal will be appreciated and warmly recommended to acquaint- ances. Lastly, let me refer briefly to the fourth concept underly- ing professional conduct, namely, that the life-insurance sales- man should be actuated by a spirit of loyalty to his fellow insurance men and of helpfulness to the institution of life insurance and enthusiasm for the greatest possible dissemina- tion of its benefits. General compliance with our several con- cepts of professional conduct will be the surest means of pro- tecting the entire group against distorted and unfair views of the public. But even more than professional conduct is required. You should ever be students and teachers of your subject. Never forget the close relationship between the the- ory of life insurance and its practice. " In the pursuance of your vocation," as I stated on a former occasion, " despite the fact that you are justified in viewing your efforts from the standpoint of commercial gain, you nevertheless are and al- ways will be as a class essentially teachers, persuaders of men and the missionaries of a noble propaganda. If this view is correct, it follows that the more you know about your com- LIFE-INSURANCE SALESMANSHIP 437 plex subject the better for the people whom it is your duty to serve. The agent should not only be a student as well as a teacher all his life, but he should grasp the truth of the saying that ' theory without practice to test it, to verify it, to correct, is idle speculation; but practice without theory to animate it is mere mechanism. In every art and business the- ory is the soul and practice the body.' " It has been said that " nine-tenths of the man exists above the shoulders." It is the part above the shoulders that needs to be developed and kept abreast of the times if the service idea is to be given the widest and most beneficent applica- tion. Constant study will better fit you to know the innumer- able uses of life insurance, and to know your contract, your client, and the technical phases of your subject in its rela- tion to your field work. It will give you power and cause you to love and respect your calling. It will set you to think- ing, and with the mind centered on the subject, suggestions will come from the most unexpected sources. And do not re- strict your studies to to narrow a groove. Rather acquaint yourselves also with a knowledge of investments and with the facts surrounding the organization and management of various business activities, especially in view of the growing importance of so-called " business life insurance." In closing let me make the further suggestion that each and all of you do your share as promoters and teachers of life- insurance education to help cover this nation with life insur- ance. Life-insurance education among the masses, I feel, has become firmly rooted and is a powerful movement. It is im- portant that you should assist in getting this subject on the program wherever and whenever possible, and in having it properly presented from the pulpit and lecture platform and in the schools, colleges and press. Note the great and disin- terested educational work that the medical profession is doing in preventing loss of life and misery through disease. That is the right spirit, and it should also be your aim to educate the public in protecting itself against the loss and misery occa- sioned by the premature death or improvidence of its productive members. You, however, may proceed with the certain knowl- edge that your efforts along this line will not only raise your calling in the estimation of the community, but will result ad- vantageously to yourselves. APPENDIX n SPECIMEN COPY OF AN ORDINARY WHOLE-LIFE POLICY TOGETHER WITH THE FORM OF APPLICATION FORM OF POLICY THE LIFE INSURANCE COMPANY No, Age 85 In Consideration of the payment of Twenty-six and 88/100 Dollars, the receipt whereof is here- by acknowledged, and of the annual payment of a like sum to the said Company, on or before the twenty-first day of April in every year during the lifetime of John Doe, of Philadel- phia, Pennsylvania, (hereinafter called the Insured), promises, upon receipt of. due proof of the death of the Insured, to pay at its Home Office unto his wife Jane Doe, Beneficiary, the sum of One Thousand Dollars, less any unpaid premium or premiums for the then current policy year and any other in- debtedness on account of this Policy; provided, however, that if there be no Beneficiary or Contingent Beneficiary surviv- ing the Insured, such payment unless otherwise directed by the Insured and endorsed by the Company on this Policy shall be made to the executors, administrators or assigns of the said Insured. Subject to the Rights of any Assignee and With or With- out Reserving the Right of Revocation, the Insured, (1) may designate a Beneficiary or Beneficiaries if none be named in this Policy, or in the event of the death of any person desig- nated; (2) and may designate a Contingent Beneficiary or Beneficiaries whose interest shall be as expressed in, or by en- dorsement of the Company on, this Policy ; (3) and may change any Beneficiary or Contingent Beneficiary not irrevocably designated. If there be more than one Beneficiary the inter- est of any deceased Beneficiary shall pass to the survivor or survivors unless otherwise directed by the Insured and en- dorsed by the Company on this Policy. No designation, di- 438 SPECIMEN LIFE POLICY 439 rection, revocation or change shall be effective unless duly made in writing, and filed at the Home Office of the Company (ac- companied by the Policy for suitable endorsement) prior to or at the time this Policy shall become payable. No Assignment of this Policy shall be binding upon the Company until it be filed with the Company at its Home Of- fice. The Company assumes no responsibility as to the valid- ity of any assignment, and satisfactory proof of assignee's interest must be produced on making claim. This Policy is issued and accepted by the parties in inter- est subject to the provisions stated on the second and third pages hereof which are a part of this contract. In Witness Whereof, THE INSURANCE COMPANY, of , , has by its President and Secretary executed this contract, this twenty-first day of April, one thousand nine hun- dred and fifteen, , President. , Secretary. PROVISIONS 1. Policy and Application Entire Contract. This Policy and the application therefor (a copy of which is attached to this Policy when issued) constitute the entire contract between the parties hereto. All statements made by the Insured shall, in the absence of fraud, be deemed representations and not warranties, and no statement of the Insured shall avoid this Policy or be used in defense to a claim thereunder unless it is material and is contained in the said application. 2. Agents. No agent of the Company has any authority to waive forfeitures or to make, alter or discharge contracts. 3. Reserve. The reserve on this Policy and any dividend additions thereto shall be in accordance with the American Experience Table of Mortality with interest at three per cent. 4. Suicide. If within one year from the date hereof the Insured shall, whether sane or insane, die by his own hand, the liability of the Company under this Policy shall be limited to the amount of the reserve hereon. 5. Incontestability. This Policy shall be incontestable after one year from its date except for non-payment of pre- mium, provided, however, that if the age of the Insured has been misstated, and the error shall not have been adjusted dur- ing his lifetime, the amount payable hereunder shall be such 440 THE PRINCIPLES OF LIFE INSURANCE as the premium paid would have purchased at the correct age. 6. Premium Payments. The insurance under this Policy is based upon annual premiums payable in advance, but pay- ments may be made semi-annually or quarterly, in advance, at the premium rates therefor now in use by the Company, and change from the mode selected to either of the other of such modes may be made on any anniversary of the Policy. No premium after the first shall be considered paid (except it be duly charged as a premium loan) unless a receipt, signed by the President or Secretary of the Company and counter- signed by an agent authorized to receive such premium, shall be given therefor. Should default be made in the payment of any premium this Policy shall cease and determine except as hereinafter otherwise provided. 7. Grace. A grace of thirty-one days, during which time the insurance shall remain in full force, will be allowed for the payment of every premium except the first. 8. Reinstatement. This Policy will be reinstated at any time within five years succeeding default in premium pay- ment, upon evidence satisfactory to the Company of the in- surability of the Insured and payment of all premium arrears with interest at the rate of five per cent, per annum, and the payment or reinstatement of any indebtedness which existed at the time of such default with interest from that date. 9. Dividend Options. This Policy while in force except as extended term insurance shall participate in the surplus of the Company and ftie Company will annually determine and account for the divisible surplus accruing hereon until all sur- plus found to have arisen from this Policy shall have been re- turned. The current dividend each year, at the option of the owner of the Policy, may be: (a) withdrawn in cash; or (b) applied to the payment of premiums; or (c) applied to the purchase of non-forfeitable participating paid-up additions to the Pol- icy; or (d) left to accumulate to the credit of the Policy and withdrawable on any anniversary thereof, at such rate of in- terest not less than three per cent,, credited annually, as may be determined by the Company. Unless the owner of the Pol- icy shall otherwise elect in writing, dividends will be paid in cash. 10. Paid-up and Endowment Options. Whenever the re- serve on this Policy and existing dividend additions at the end of any policy year shall equal or exceed the net single pre- SPECIMEN LIFE POLICY 441 mium for the attained age of the Insured by the American Ex- perience Table of Mortality with interest at three per cent, for an amount of insurance equal to the face amount of thi8 Policy, the Company, at the written request of the Insured, will endorse the Policy (subject to any existing indebtedness) as participating paid-up insurance for such an amount as the said reserve will purchase at the premium named; or, when- ever said reserve at the end of any policy year shall equal or exceed the face amount of this Policy, the Company upon a full and valid surrender of the Policy and all claims there- under will pay, as a matured endowment, the amount of said reserve less any existing indebtedness to the Company on ac- count of this Policy. 11. Non-Forfeiture and Loan Features. The following provisions relating to the Non-Forfeiture and Loan features of this Policy shall become operative only after payment of premiums for two full years, and no request, revocation or change in connection with such provisions shall become ef- fective unless duly made in writing and filed at the Home Of- fice of the Company: 11 o. Basis of Surrender Values. The cash surrender value of this Policy at any time prior to default in pre- mium payment or within the thirty-one days of grace, will be the then reserve on the Policy and any divi- dend additions then existing, less any indebtedness to the Company on account thereof, and less also a sur- render charge on the amount insured which during the fifth or any previous Policy year shall be at the rate of ten dollars per $1,000 of insurance and which thereafter shall diminish annually at the rate of one dollar per $1,000 of insurance. 11 &. Premium Loans. L T pon request of the Insured, to- gether with the Assigns if any, made prior to default in premium payment, the premium or premiums thereafter falling due, during the time any such re- quest shall remain unrevoked and not paid when or before due, will be charged as a premium loan with interest at the rate of five per cent, per annum, pro- vided the then cash surrender value (as stated in the preceding paragraph numbered 11 a) shall be sufficient to cover such loan. Any premium loan may be re- paid at any time. He. Extended and Paid-up Insurance Options. Upon de- 442 THE PKINCIPLES OF LIFE INSUKANCE fault in premium payment, unless the premium be paid within the thirty-one days of grace, the face amount of the Policy and any existing dividend addi- tions, less any indebtedness to the Company on ac- count thereof, will be extended automatically as non- participating term insurance for such length of time from the date of such default as he then cash sur- render value (as stated in the preceding paragraph numbered 11 a) will provide at the net single premium rate for the attained age of the Insured according to the American Experience Table of Mortality with in- terest at three per cent. 11 d. Upon request of the Insured, together with the Bene- ficiary and Assigns if any, made prior to default in premium payment or within the thirty-one days of grace and including a waiver of the automatic ex- tended term insurance feature, participating paid-up insurance will be secured upon default in premium payment, unless the premium be paid within the thirty-one days of grace, for such an amount as the then cash surrender value (as stated in the preceding paragraph numbered 11 a, but exclusive of any in- debtedness which shall remain as a lien against the pol- icy) will provide at the net single premium rate for the attained age of the Insured according to the American Experience Table of Mortality with interest at three per cent. lie. Change from automatic extended term insurance to paid-up insurance, or vice versa, may be made in ac- cordance with their respective provisions, if the Pol- icy be not then in premium default for more than thirty-one days. 11 f. Cash Surrender and Loan Options. Upon request ac- companied by a full and valid surrender of this Pol- icy and all claims thereunder, the Company will pay the then cash surrender value thereof, which while the Policy is in full force including the thirty-one days of grace, shall be as stated in the preceding para- graph numbered 11 a, and subsequent thereto shall be the full reserve on the form of insurance then in force less any indebtedness to the Company on account thereof. 110. Upon request and the sole security of this Policy SPECIMEN LIFE POLICY 443 properly assigned, the Company, unless extended term insurance be in force, will advance at a rate of in- terest not exceeding six per cent, per annum, an amount which with the interest, and any unpaid pre- mium or premiums, for the then current policy year shall equal, or at the option of the Insured be less than, the cash surrender value of the Policy and of any existing dividend additions at the end of such year. Failure to pay either loan or interest shall not avoid the Policy unless the total indebtedness to the Company on account thereof shall equal or exceed the cash surrender value of the Policy and any existing dividend additions, nor until thirty-one days after no- tice shall have been mailed to the last known address of the Insured and of any Assignee. 11 h. The Company shall have the right to defer payment of the cash value, or the making of the loan (unless for the purpose of paying renewal premiums on poli- cies in this Company), for a period not exceeding ninety days. TABLE OF LOAX AXD SURRENDER VALUES This Table is based upon a policy of $1,000 free from in- debtedness and without dividend additions. The Values stated will apply pro rata to the amount of this Policy and due al- lowance will be made for any dividend additions continued in force and also for any portion of a year's premium paid over and above the premiums for the full number of years indi- cated. Indebtedness will be adjusted as stated in the Policy. AT END OF POLICY YF.AB LOAN OB CASH VALUE PAID-UP INSURANCE EXTENDED TEBM IXSCBANCE YEABS DAYS 2 $ 16.13 $ 37 1 297 3 29.76 67 3 122 4 43.77 97 4 3i3 5 58.16 127 6 132 6 73.94 158 7 332 m 90.11 189 9 122 8 106.68 220 10 220 9 123.65 250 11 258 10 141.01 279 12 236 444 THE PRINCIPLES OF LIFE INSURANCE AT END OF POLICY YEAB LOAN OH CASH VALUE PAID-UP INSUBANCE EXTENDED TEBM INSURANCE YEARS DAYS 11 158.76 309 13 158 12 176.87 337 14 31 13 195.35 366 14 222 14 214.16 393 15 10 15 233.28 420 15 127 16 251.68 445 15 195 17 270.34 469 15 238 18 289.22 492 15 258 19 308.32 515 15 260 20 327.58 537 15 245 21 347.00 559 15 214 22 366.52 579 15 171 The Values in the above Table after the fourteenth policy year are equal to the full reserve according to the American Experience Table of Mortality with interest at three per cent. The basis upon which the Table is constructed will apply if this Policy be continued in force beyond the twenty-second year. PROVISIONS RELATING TO SETTLEMENT (in lieu of payment in one sum) WHEN THIS POLICY BECOMES PAYABLE The Insured shall have the right, with the privilege of revo- cation and change, to elect, in lieu of payment in one sum, either of Options "A", " B ", or " C ", or that the amount payable be distributed under two or more of said options; the Beneficiary or Beneficiaries when this policy becomes payable shall have the same right and privilege if no such election ef- fected by the Insured shall then be in force; the Beneficiary or Beneficiaries if of lawful age when this Policy becomes payable, shall also (subject to the rights of any assignee, and if there then be living no Contingent Beneficiary designated by the Insured) have the right, with the privilege of revocation and change, to designate a Contingent Beneficiary or Bene- ficiaries whose interest shall be as expressed in, or endorsed by the Company on, this Policy; provided, however SPECIMEN LIFE POLICY 445 1st. Amount "Payable. The amount payable must equal or exceed $1,000 for each option elected. 2nd. Endorsement. No election, direction, designation, revocation or change shall be effective unless duly made in writing and filed at the Home Office of the Company (ac- companied by the Policy for suitable endorsement) prior to or at the time this Policy shall become payable. 3rd. Deceased Beneficiary. If there be more than one Beneficiary, the interest of any deceased Beneficiary shall, upon satisfactory proof of such decease, pass to the survivor or survivors unless otherwise directed by the Insured and endorsed by the Company on this Policy; except that under Option " C " only so many of the stipulated installments, if any, as then remain unpaid, shall so pass. 4th. Rights of Contingent Beneficiary. Unless otherwise directed by the designator and so endorsed by the Company on this Policy, the Contingent Beneficiary or Beneficiaries, if any, shall, upon satisfactory proof of the death of the last surviving Beneficiary, succeed to all the interest, rights and privileges then possessed by such Beneficiary; except that under Option " C " the interest of any Contingent Beneficiary shall be limited to such of the stipulated install- ments, if any, as then remain unpaid. 5th. Last Surviving Beneficiary or Contingent Bene- ficiary. At the death of the last surviving Beneficiary if there be no Contingent Beneficiary then living, or at the death of the last surviving Contingent Beneficiary occurring subsequently thereto, the amount retained by the Company under Option " A " will be paid to the executors, adminis- trators or assigns of such last surviving Beneficiary or Con- tingent Beneficiary upon due surrender of this Policy; under the same conditions, any of the installments under Option " B ", or any of the stipulated installments under Option " C ", then remaining unpaid, will be commuted upon the basis of three per cent, compound interest and paid in one. sum in like manner. OPTION A Annuity Extension. To have the whole or any part not less than $1,000 of the proceeds of this Policy at the death of the Insured retained by the Company until the death of the last surviving Beneficiary or Contingent Beneficiary, the Company in the meantime to pay an annuity equal to three per cent, of 446 THE PRINCIPLES OF LIFE INSURANCE the amount so retained, the first annuity being payable one year after the death of the Insured. Commutation. At the time any annuity payment becomes due the Beneficiary, if of lawful age, provided the Company has not been specifically directed to the contrary by the In- sured, shall have the right, upon due surrender of this Policy, to withdraw the amount so retained by the Company, in addi- tion to such annuity payment, and if said amount be so with- drawn the annuity payments shall cease. OPTION B Limited Installments. To have the whole or any part not less than $1,000 of the proceeds of this Policy at the death of the Insured paid in a specified number of annual install- ments as per the first Table below, which shall apply pro rata per $1,000 of the amount to be so paid, the first installment being payable immediately. Change. The number of the installments may be changed by the insured at any time prior to the payment of the first in- stallment. Commutation. . The installments remaining unpaid will be commuted upon the basis of three per cent, compound inter- est, and paid in one sum, at any time when an installment is due, upon written request of the Beneficiary or Beneficiaries, if of lawful age, and due surrender of this Policy, provided the Company has not been specifically directed to the contrary by the Insured. LIMITED INSTALLMENT TABLE Number of Installments. 25 20 19 18 17 Amount of each $55.75 $65.25 $67.78 $70.59 $73.74 Number of Installments. 16 15* 14 13 12 Amount of each . $77 29 $81 32 $85.94 $91.29 $97.53 Number of Installments. 11 10 9 8 7 Amount of each $104.92 $113.81 $124.69 $138.30 $155.83 Number of Installments. 6 5 4 3 2 Amount of each $179.22 $211.99 $261.19 $343.23 $507.39 * ILLUSTRATION. If payment is to be made by 15 installments, the amount of each Installment will be $81.32 for 'each $1,000. SPECIMEN LIFE POLICY 447 OPTION C Continuous Installments. To have the whole or any part not less than $1,000 of the proceeds of this Policy at the death of the Insured converted into an immediate life annuity to the Beneficiary at the then published rate of the Company; or, paid in either 10, 15, 20 or 25 stipulated annual installments of an amount corresponding in the Table below to the num- ber of installments selected and to the age of the Beneficiary at the date of the death of the Insured, provided that if the Beneficiary shall survive to receive the number of installments selected, then similar installments shall be continued through- out the lifetime of the Beneficiary. The Table shall apply pro rata per $1,000 of the amount to be so paid, the first install- ment being payable immediately. Pro-rata Share. If there be more than one Beneficiary the amount to be so paid, unless otherwise directed by the Insured and endorsed by the Company on this Policy, shall be con- sidered as divided into equal parts and the amount of each Beneficiary's annual installment shall be determined in ac- cordance with the Table below for the age attained. COKTES'UOUS ES'STALLMEKT TABLE AGE OF BE.NE- FICIABT XCMBEB OF INSTALLMENTS STIPULATED 10 15 20 25 10 $42.06 $41.24 $40.36 $39.48 11 42.27 41.43 40.54 39.64 12 42.48 41.63 40.72 39.81 13 42.71 41.84 40.91 39.97 14 42.95 42.05 41.10 40.14 15 43.19 42.28 41.31 40.32 16 43.44 42.51 41.51 40.50 17 43.70 42.74 41.72 40.70 18 43.94 42.97 41.93 40.88 19 44.19 43.20 42.14 41.07 20 44.44 43.43 42.35 41.27 21 44.71 43.68 42.58 41.48 22 44.99 43.94 42.81 41.68 23 45.28 44.20 43.05 41.89 24 45.59 44.48 43.30 42.12 25 45.89 44.76 43.56 42.35 26 46.23 45.06 43.83 42.61 448 THE PRINCIPLES OF LIFE INSURANCE AGE OF BENE- FICIABT NUMBER OF INSTALLMENTS STIPULATED 10 15 20 25 2T 46.56 45.37 44.11 42.86 28 46.92 45.69 44.40 4.3.12 29 47.28 40.03 44.70 43.38 30 47.65 46.36 45.02 43.67 31 48.04 46.73 45.34 43.96 32 48.45 47.10 45.68 44.27 33 48.87 47.48 46.03 44.56 34 49.29 47.88 46.39 44.88 35 49.75 48.30 46.77 45.21 36 50.22 48.73 47.16 45.56 37 50.70 49.18 47.56 45.89 38 51.23 49.66 47.99 46.27 39 51.78 50.16 48.43 46.64 40 52.36 50.69 48.90 47.01 41 52.98 51.25 49.38 47.42 42 53.62 51.83 49.88 47.82 43 54.32 52.45 50.40 48.22 44 55.04 53.10 50.94 48.64 45 55.83 53.78 51.50 49.04 46 56.64 54.49 52.08 49.46 47 57.50 55.23 52.67 49.88 48 58.42 56.01 53.27 50.30 49 59.39 56.82 53.89 50.68 50 60.42 57.66 54.51 51.10 51 61.50 58.54 55.14 51.47 52 62.63 59.44 55.76 51.84 53 63.82 60.36 56.38 52.19 54 65.07 61.31 56.99 52.52 55 66.37 62.28 57.60 52.83 56 67.75 63.26 58.18 53.11 57 69.18 64.25 58.75 53.39 58 70.67 65.24 59.29 53.65 59 72.20 66.23 59.81 53.88 60 73.79 67.21 60.30 54.08 61 75.41 68.17 60.76 54.26 62 77.07 69.10 61.20 54.44 63 78.75 70.00 61.60 54.60 64 80.44 70.87 61.97 54.74 65 82.11 71.68 62.32 54.86 66 83.78 72.46 62.65 Age 66 67 85.39 73.19 62.97 and over SPECIMEN LIFE POLICY 449 AGE OF BENE- FICIARY XUMBEB OF INSTALLMENTS STIPULATED 10 15 20 25 68 86.99 73.88 63.28 same 69 88.50 74.52 63.58 as 65. 70 89.96 75.11 63.87 71 72 91.36 92.69 75.65 76.14 Age 71 and over 73 93.96 76.57 same 74 95.17 76.94 as 70. 75 96.30 77.24 76 77 97.35 98.32 Age 76 and over 78 99.22 same 79 100.05 as 75. 80 100.82 Age 81 and over same as 80. Participation. For ages of Beneficiaries under 10 years the installments will be the same as for age 10. All payments under Options " A " and " B ", and the stipu- lated payments under Option " C ", will be increased by such annual dividends as may be apportioned by the Company. FORM OF APPLICATION PART I. APPLICATION TO THE LIFE INSURANCE COMPANY. 1. Part 1 of application of (Name in full) for Life Insur- ance, Residence County of State of P. O. Address 2. Full name of the person, if any, to be designated as bene- ficiary. Relationship to yourself 3. Do you reserve the right to change such beneficiary ? 4. Your Occupation or Employment. (If more than one, state all) 450 THE PEINCIPLES OF LIFE INSURANCE 5. Place and date of your Birth? 6. Have you ever applied for insurance in this Company! If so, what is the number and amount of each policy issued? 7. Is your life now insured in any other company? If so, in what companies and for what amount? 8. Have you ever applied to any company or society for in- surance, without receiving a policy of the exact kind and amount applied for? 9. Is any negotiation for other insurance now pending or contemplated ? 10. Insurance Amount, $ Plan Premium payable (Annually, Semi-Annually or Quarterly) 11. Have you paid the Agent taking this application the amount of such premium? It is understood and agreed (1) that if the amount of the premium on the insurance herein applied for is not paid at the time of making this application 'there shall be no liability on the part of the said Company under this application unless nor until a policy shall be issued and delivered to me and the first premium thereon actually paid during my lifetime; and (2) that if the amount of such premium is paid to the said Company's agent at the time of making this application the insurance (subject to the provisions of the said Company's regular form, of policy for the plan applied for) shall be ef- fective from the date of my medical examination therefor and such a policy shall be issued and delivered to me or my legal representatives, provided the said Company in its judgment shall be satisfied as to my insurability, on the plan applied for, on the date of such medical examination; and (3) that if said Company shall not be so satisfied the amount of the premium paid shall be returned. Name in full of the Beneficiary (may be signed by applicant). Per Initials of Applicant. Signature in full of the person applying for insurance on his life. Dated at < this day of 19 Actual date of signature to application. SPECIMEN LIFE POLICY 451 PART IL DECLARATIONS MADE TO THE MEDICAL EXAMINER OF THE INSURANCE CO. N. B. Answers to the following questions must be elicited and recorded by a regularly appointed Examiner of the Com- pany, with no one present but the Applicant and Examiner. 1. A. Part I! of Application of for Life Insurance which forms part of the accompanying application signed by the undersigned applicant and marked Part I. Said application is to be hereto annexed. B. Race (white or black?) o. Age last birthday? D. Are you married, single or a widower? 2. A. Where do you reside winter and summer? B. Where have you resided during the past ten years? c. Have you ever changed your residence or tried a change of climate on account of your health, or been advised to do so by a physician? If so, give particulars. D. Do you contemplate, for any reason, either a temporary or permanent change of residence, or a trip beyond the limits of the temperate zone? If so, give particulars. 3. A. How much insurance are you applying for in this appli- cation ? B. Has any proposal or application to insure your life ever been made to any Company, Society, Association or Agent upon which a policy has not been issued as ap- plied for? C. Has any physician ever given an opinion that you were not safely insurable? D. When and for what Company were you last examined for life insurance? 4. A. What is your present occupation and how long have you been so engaged ? B. Have you any other occupation or business? c. What have been your occupations during the past ten years ? D. Do you contemplate a change in occupation? If so, what? E. Are you now, or have you ever been, engaged, either di- rectly or indirectly, in the sale or manufacture of malt or other spirituous beverages? 5. A, What is your weight in ordinary clothes? B. What is your height in shoes? 0. To what extent, if any, has your weight increased or di- minished during the past year, and from what cause! D. If heavy or light in weight, state whether this is a fam- ily or individual characteristic. B. Which parent do you most resemble physically? 6. A. If you use wine, spirits, malt liquors or other alcoholi* beverages, state kind used and how much in any on* day at the most. B. How frequently do you use the amount stated ? c. If you use any of them daily, weekly or monthly, stat kind and average for the past two years. D. Have you used any of them to the extent of intoxica- tion during the past ten years? // so give circum- stances and dates. E. Have you ever taken treatment for alcoholic or drug habit? F. If a total abstainer, how long have you been so ? o. In what form and to what extent do you use tobacco? H. Do you now use or have you ever used opium, chloral, cocaine or any other narcotic drug? 00 a g OS 7. QE 17 LIVING. a fc EH J el 1* w o-t. S^ 1 REVIOUS CHARACT HEALTH. < co < co 2? fc Father. Mother. No. living. . . . Brothers. No. dead. ... No. living .... Sisters. No. dead Father's Father. Father's Mother. Mother's Father. Mother's Mother. 8. Have either of your parents, or any of your uncles, aunts, brothers or sisters been afflicted with Consumption? or SPECIMEN LIFE POLICY 453 Cancer, Insanity, Epilepsy, Gout, Diabetes or Rheuma- tism? 9. Have you been closely associated within the past two years, either at home or in business life, with a consumptive? 10. A. When were you last confined to the house by illness? How long? What nature? B. When did you last consult a physician, and for what? c. Have you fully recovered, and are you now in good health? D. Give name and address of the physician who attended you. E. Give name and address of your usual medical attendant. F. Are you willing your physician be consulted respecting your health? 11. Have you had any illness, disease or accident during past ten years not mentioned above? Give details. Illness, disease or accident. Date. Duration. Severity. Re- sults. Name of medical attendant. 12. Have you had since childhood any of the following diseases or disorders? Malarial or other Fevers? Smallpox or Varioloid? Apoplexy or Paralysis? Mental Derangement or any Nervous Disease? Headaches, severe, protracted or frequent? Indigestion, Appendicitis or any Disease of Stomach or Bowels ? Persistent or frequent Cough or Hoarseness? Spitting or raising of blood? Asthma or shortness of breath? Pleurisy, Bronchitis, Pneumonia, or any Chest or Lung Disease? Vertigo, Dizziness or Unconsciousness? Fits, Epilepsy, Delirium Tremens or Convulsions of any kind? Impairment of Eyesight or Hearing? Discharge from Ear or any other Chronic Discharges? Piles, Fistula or any other Disease of the Rectum? Chronic or frequent Diarrhoea or Dysentery? Affection of the Liver or Spleen? Jaundice or Dropsy? Liver or Kidney Colic or Stone? Gravel, Bladder or Kidney Disease? 454 THE PRINCIPLES OF LIFE INSURANCE Painful, frequent or difficult Urination? Sunstroke or Fainting Spells? Palpitation or any Disease of the Heart? Enlarged Veins, Cancer, Tumors, or Ulcers, of any kind? Hydrocele or any disease of the Testicles or Prostate gland ? Neuralgia or Sciatica ? Skin Disease, Gout or Goiter? Syphilis, or Stricture? State how frequently, the date, character and duration of each, and its effect upon your health? 13. A. Are you ruptured? B. If so, do you wear a truss con- stantly except when in bed? 14. A. Have you ever had Inflammatory or Articular Rheuma- tism? B. If so, state the number of attacks, c. The duration of each attack. D. In what years, and parts affected? 15. Have you ever applied for a Pension? If so, what was the disability ? 16. Have you undergone any Surgical Operation, or ever had disease of bones of joints, spinal curvature, or any bodily malformation ? 17. Has a Physician at any time expressed an opinion that your urine contained either sugar, albumin or casts ? 18. Have you had since childhood any chronic or constitutional disease or severe injury not fully set forth above? I certify that my answers to the foregoing questions and statements are correctly recorded. Signature of the Applicant. (Signed in presence of Medical Ex- aminer.) Signed by applicant in my presence. ,M.D. Medical Examiner. APPENDIX III SPECIMEN COPY OF AN ADULT WHOLE-LIFE INDUSTRIAL POLICY INSURANCE COMPANY In Consideration of the representations and agreements in the application herefor, which is copied hereon and made a part hereof, and of the premium stipulated herein, to be paid on or before each Wednesday, grants this insurance with the priv- ileges and benefits and subject to the conditions and provisions on this and the three following pages, which are made a part of this contract. Policy number Date April 28 1915. Weekly Premium 25 Cents Age next birthday 85 Years Name of Insured John Doe Name of P>eneficiary Jane Doe Relationship to Insured Wife Full Policy Amount 340. Dollars During the first six MONTHS from the date hereof, the sum insured hereunder will be ONE-HALF only of the full policy amount in case of death from any cause other than ACCIDENT. In case of death from ACCIDENT during the first six MONTHS and THEREAFTER in case of death from any cause, the sum insured will be the FULL policy amount. On satisfactory proof of the death of the Insured, made in the manner and to the extent required herein and upon sur- render of the Policy and Premium Receipt Books, the Company will pay the amount due hereunder. The Company may make payment either to the beneficiary above named, if living, or to such other living beneficiary as may be duly and finally desig- nated, and recognized by endorsement hereon, or to the Exec- utor or Administrator of said Insured or to any relative by blood or connection by marriage, or to any person appearing to the Company to be equitably entitled thereto by reason of having incurred expense in any way on behalf of the Insured 455 456 THE PRINCIPLES OF LIFE INSURANCE for burial or for any other purpose; and the receipt of any such payee shall be conclusive evidence that payment has been made to the person or persons entitled thereto and that all claims under this Policy have been fully satisfied. This Policy shall not take effect unless upon its date the Insured shall be alive and in good health and the premium duly paid. In Witness Whereof, the said Insurance Company has, by its President and Secretary, executed and delivered this con- tract on the date herein above set forth. , President. , Secretary. Limitation of Premium Payments. If the premiums shall be duly paid until the anniversary of the date of this policy next following the Insured's seventy-fourth birthday, it will be continued in force thereafter without the payment of further premiums. Change of Beneficiary. With the consent of the Company, the Insured, if of lawful age, may from time to time change the beneficiary, by request to the Home Office upon the Com- pany's prescribed form accompanied by this policy, such change to take effect only upon endorsement hereon by the Company. Incontestability. After this policy shall have been in force for two full years, it shall be incontestable except for non-pay- ment of premiums, or for assignment or pledge, or for failure to have the policy endorsed in case of previously issued insur- ance as herein provided, but it shall nevertheless be subject to adjustment for error in age. In case of error in age, no greater sum will be paid hereunder than the premiums paid would have purchased for the true age according to the table of rates and benefits on which this policy is based. No suit shall be maintained under this policy unless commenced within six years from the time when cause of action accrues. Distribution of Surplus. Beginning not later than the end of the fifth year from its date, if all the premiums then due shall have been paid, this policy shall annually participate in such distribution of the surplus as the Company may appor- tion. Dividends will be applied in payment of premiums unless the holder elects to receive them in cash. Eeinstatement. At any time within one year from default in payment of premiums, if the cash surrender value has not SPECIMEN INDUSTRIAL POLICY 457 been paid or the extension term expired, this policy may be reinstated upon production of evidence of insurability satis- factory to the Company and approved at its Home Office, and upon payment of arrears of premiums and payment or rein- statement of any indebtedness hereon or secured hereby. Claim Concession. This policy will be paid subject to its conditions if the Insured die while premiums are in arrears not more than four weeks, but neither this concession nor the acceptance of any overdue premium shall create an obligation on the part of the Company to receive premiums which are in arrears, nor shall it be a waiver of their payment on Wednesday of each week in advance. NON-FORFEITURE BENEFITS. Automatic Extended Term Insurance After Three Years. After premiums shall have been paid on this policy for three full years, then, in case of failure to pay any subsequent premium, the policy, without any further stipulation or act, will be binding on the Company for its full amount as EXTENDED TERM INSURANCE, commencing from the date to which the premiums shall have been paid, the length of the term to be determined by the period of premium payments, according to Table A. The insurance will wholly cease and expire at the end of the term of extension to which the policy is entitled under its conditions. TABLE A. The periods of Extended Insurance in this table are the same for any amount of weekly premium paid. AGE AT ISSCE EXD or 3 TEAKS EXD OF 4 YEAES EXD or 5 YEABS EXD or 6 YEABS ESD o 7 YEABS ESD or 8 Xauuu Yre Wks Yrs Wks Yrs Wks Yrs Wks Yrs Wks Yrs Wks 26 27 28 29 30 31 32 33 34 35 : o 1 1 1 32 34 36 38 42 46 51 5 10 16 1 1 1 1 1 1 2 2 2 2 30 31 33 37 41 47 1 8 14 20 2 2 2 2 2 2 3 3 3 3 26 28 32 36 42 48 3 10 17 23 3 3 3 3 3 3 4 4 4 4 23 26 31 36 43 50 5 12 19 25 5 5 5 5 21 25 30 36 43 50 5 12 18 24 5 5 5 5 5 5 6 6 6 6 19 24 29 35 42 49 3 9 15 20 AGE AT Issre EXD OP 9 YEARS EXD OF 10 YZA:-: = EXD or 11 YEABS EXD OT 12 YEABS ESD or 13 YEABS END or 14 YSAZS Yrs Wks Yrs Wks Yre Wks Yra Wks Yrs Wfa Yrs Wks 26 27 28 29 6 6 6 6 17 22 27 33 7 7 7 7 13 18 23 28 8 8 8 8 8 12 17 21 9 9 9 9 1 4 8 11 9 9 9 9 43 45 47 49 10 10 10 10 30 31 31 32 458 THE PKINCIPLES OF LIFE INSUKANCE AGE AT ISSUE END OF 9 YEABS END OF 10 YEARS END OF 11 YEARS END OF 12 YEARS END OF 13 YEARS END OF 14 YEARS Yrs Wks Yrs Wks Yrs Wks Yrs Wks Yrs Wks Yrs Wks 30 31 32 83 34 35 6 6 6 7 7 7 39 45 51 4 9 12 7 7 7 7 7 8 34 39 44 48 51 1 8 8 8 8 8 8 25 29 33 35 37 37 9 9 9 9 9 9 14 16 18 19 19 18 9 10 10 9 9 9 51 51 50 47 10 10 10 10 10 10 32 31 30 27 24 20 Aon AT ISSUE END OF 15 YEARS END OF 16 YEARS END OF 17 YEARS END OF 18 YEARS END OF 19 YEARS END OF 20 YEARS Yrs Wks Yrs Wks Yrs Wks Yrs Wks Yrs Wks Yr* 13 13 13 13 12 12 12 12 12 11 Wk 26 27 28 29 30 81 32 33 84 35 11 11 11 11 11 11 11 11 10 10 14 13 12 11 9 7 4 47 41 11 11 11 11 11 11 11 11 11 11 46 43 41 38 35 31 26 21 14 7 12 12 12 12 12 11 11 11 11 11 22 18 14 10 5 51 45 38 30, 22 12 12 12 12 12 12 12 12 11 11 47 42 36 30 23 16 9 43 34 13 13 13 12 12 12 12 12 12 11 16 10 2 47 39 31 22 12 2 43 34 26 18 9 51 42 32 21 10 50 Alternative Options of Paid-up Policy or Cash Surrender Value After Five Years. After premiums shall have been paid on this policy for five full years, then, in case of failure to pay any subsequent premium, if the holder hereof, instead of having the policy continued as extended insurance as above provided, shall elect in place thereof to avail himself of either one of the following options, and shall signify his preference by writing filed with the Company at its Home Office while the extended insurance is in force and not later than thirteen weeks from the date to which the premiums shall have been paid, the Company will, upon surrender of the policy, OPTION 1 Issue in exchange therefor a PAID-UP POLICY according to Table B, payable at the same time and on the same conditions as this policy. TABLE B. The amounts in this table are based on a weekly premium of five cents. If the weekly premium on this policy is ten cents, the Paid-up Value will be twice the amount stated in this table; if fifteen cents, three times, and so on. AGE AT ISSUE END OF 5 YEARS END OF 6 YEARS END OF 7 YEARS END OF 8 YEARS END OF 9 YEARS END OF 10 YEARS END OF 11 YEARS END OF 12 YEARS 26 27 28 29 30 31 $6 6 6 6 6 6 $9 9 8 9 9 9 $11 11 11 11 11 11 $13 13 13 13 13 13 $15 15 15 15 15 15 $18 17 17 17 17 17 $20 20 19 19 19 19 $22 22 22 22 22 21 SPECIMEN IXDUSTKIAL POLICY 459 AGE AT ISSUE END or 5 YEARS EXD or 6 YEABS EXD or 7 YEABS END or 8 YEABS END or 9 YEAKS END or 10 YEABS EXD or 11 YEABS EXDOT 12 YEABS 32 33 34 35 7 7 7 7 9 9 9 9 11 11 11 11 13 13 13 13 15 15 15 15 17 17 17 17 19 19 19 19 21 21 21 21 AGE AT ISSUE END OF 13 YEABS EXD or 14 YEABS EXD or 15 YEABS EXD or 16 YEABS EXD or 17 YEABS END OF 18 YEABS END or 19 YEABS END or 20 YEABS 26 27 28 29 30 31 32 33 34 35 $24 24 24 24 24 23 23 23 23 23 $26 26 26 26 26 25 25 25 25 25 $28 28 28 28 27 27 27 27 27 $30 30 30 30 30 29 29 29 29 28 $33 32 32 32 32 31 31 31 31 30 $35 34 34 34 33 33 33 32 32 32 $37 36 36 36 35 35 34 34 34 34 . $39 38 38 37 37 36 36 36 36 35 OPTION 2 Or, with the written assent of the person to whom the policy is payable, pay the CASH SURRENDER VALUE according to Table C, within sixty days after written demand therefor. TABLE C. The amounts in this table are based on a weekly premium of five cents. If the weekly premium on this policy is ten cents, the Cash Surrender Value will be twice the amount stated in this table: if fifteen cents, three times, and so on. AGE END OF EXD OF END or END or END or END or END or END o AT 5 6 7 8 9 10 11 12 ISSUE YEABS YEABS YEABS YEABS YEABS YEABS YFABS YEABS 26 $2.49 $3.46 $4.46 $5.48 $6.53 $7.61 $8.73 $9.87 27 2.53 3.51 4.52 5.56 6.63 7.73 8.87 10.03 28 2.55 3.54 4.55 5.59 6.67 7.78 8.91 10.08 29 2.62 3.62 4.65 5.72 6.81 7.93 9.08 10.26 30 2.71 3.73 4.78 5.85 6.96 8.10 9.26 10.45 31 2.78 3.80 4.85 5.93 7.03 8.16 9.33 10.52 32 2.89 3.93 4.99 6.08 7.20 8.34 9.51 10.71 33 3.01 4.06 5.13 6.23 7.36 8.52 9.70 10.90 34 3.13 4.19 5.27 6.38 7.52 8.68 9.87 11.09 35 3.24 4.31 5.40 6.52 7.67 8.84 10.04 11.26 AGE EXD OF EXD OF END or END or END or END or END or EXD or AT 13 14 15 16 17 18 19 20 ISSUE YEABS YEARS YEABS YEABS YEABS YEAKS YEABS YEARS 26 $11.05 $12.26 $13.50 $14.77 $16.07 $17.40 $18.76 $20.14 27 11.22 12.45 13.70 14.99 16.30 17.64 19.01 20.41 28 11.27 12.50 13.75 15.03 16.34 17.68 19.04 20.43 29 11.47 12.71 13.97 15.27 16.58 17.93 19.30 20.70 30 11.67 12.92 14.20 15.50 16.83 18.19 19.56 20.97 31 11.73 12.97 14.24 15.54 16.85 18.20 19.56 20.95 32 11.94 13.19 14.46 15.76 17.09 18.43 19.80 21.19 33 12.14 13.39 14.67 15.98 17.30 18.65 20.02 21.41 34 12.32 13.59 14.87 16. 1 17.51 18.86 20.22 21.61 35 12.50 13.77 15 05 16 3R 17.69 19.04 20.40 21.79 460 THE PRINCIPLES OF LIFE INSURANCE The figures in Tables A, B and C are for the end of the full paid policy year, on the assumption that there is no indebted- ness then existing hereon. The figures for additional years will be furnished on request. If neither the option of paid-up policy nor of cash surrender value be chosen as above provided, then the policy will be con- tinued as extended insurance, subject to its terms. This policy is based on reserves calculated upon the Stand- ard Industrial Mortality Table with interest assumed at three and one-half per cent. The values and extension terms stated herein are the equivalents of the reserve at the end of each full paid policy year, less an amount not exceeding two and one- half per cent, of the full policy amount. They will be in- creased by a proportionate part of the difference between such reserve and that of the succeeding year for each thirteen weeks premiums paid beyond the full paid policy year, and will be lessened by deduction from such reserve of any indebtedness to the Company on or secured by ihe policy. A paid-up policy issued under the terms hereof will have a surrender value which will be its net value at the date of the demand therefor, less any indebtedness on or secured by the policy ; and if this policy shall become extended insurance after payment of premiums for five full years, it will have a sur- render value, similarly determined, but decreasing and expir- ing with the extension term. The Company will pay such value within sixty days after written demand therefor, upon sur- render of the policy, with the written assent of the person to whom it is payable. Alterations, Erasures and Waivers. No modification, change or alteration hereof or endorsement hereon will be valid unless signed by the President, a Vice-President, the Secretary or an Assistant Secretary, and no other person is authorized on behalf of the Company to make, alter or discharge this contract or to waive forfeiture. Agents are not authorized to waive any of the terms or conditions of this policy or to extend the time for payment of premiums or other moneys due to the Company, or to bind the Company by making any promise or by accepting any representation or information not contained in the application for this policy. Payment of Premiums. Premiums hereon are payable at the Home Office of the Company in , but may be paid to any of its authorized Agents, subject to the conditions of the pol- icy. Should such Agent fail to call for any premium when SPECIMEN INDUSTRIAL POLICY 461 due, it will be the duty of the Insured to make immediate payment of the premiums either to the District Office or to the Home Office. Failure of the Agent to collect premiums will not relieve the Insured from the obligation to pay the premiums when due, nor will the Company assume any liability for such failure. No payment of premium shall be valid unless entered in the Premium Receipt Book at the time of payment, by the Agent, or other representative of the Company, authorized to receive it, nor if made when more than four weeks in arrears, except as herein provided under " Reinstatement." Policy When Void. This policy shall be void, if in the ap- plication therefor, there is any misrepresentation, willfully made or relating to a matter increasing the risk of loss; or if any premium shall not be paid when due, except as herein pro- vided ; or if the policy be assigned or pledged ; or if any erasure or alteration be made otherwise than as herein provided; or if an Industrial or Weekly Premium, policy previously issued by this Company on the life of the Insured shall be in force on the date hereof or running as extended insurance, unless this policy bears an endorsement signed by the President, a Vice- President, the Secretary or an Assistant Secretary, authoriz- ing its continuance in addition to such previously issued in- surance. The Company shall not be presumed or held to know of the issue of any prior policy or the existence of any previous application upon which a policy may not have been issued, and the issue of this policy shall not be deemed a waiver of this condition. Proof of Claim. In case of death of the Insured, proofs of claim shall be made on blanks to be provided by the Company and shall contain full answers of the claimant, physician and other persons to all the questions asked therein and shall con- form to all the requirements thereof. APPENDIX IV SPECIMEN COPY OF A WHOLE-LIFE ANNUITY CONTKACT THE LIFE INSUEANCE COMPANY Single Premium $10,000 Age 60 Number Annuity : $888.70^100 Every Year In consideration of the payment of Ten Thousand Dollars agrees to pay at its Home Office in the City of - , , to RICHARD ROE an Annual Annuity of Eight Hundred and Sixty-three and 70/100 Dollars during the lifetime of the said RICHARD ROE (herein called the Annuitant). The first Annuity shall be payable on the First day of July, Nineteen hundred and twelve, if the Annuitant is then living, and subsequent payments Annually thereafter, said Annuity terminating with the last Annual payment preceding the death of the Annuitant. Each Annuity will be paid by check to the order of the per- son entitled to receive the same, which check will require the personal endorsement of the payee as proof of survival. Age. If the age of the Annuitant has been misstated, the amount payable hereunder shall be such as the actual money paid would have purchased at the Society's annuity rates in use at the register date of this contract at the correct age; any overpayment or overpayments by the Society, with interest thereon, shall be charged against the payments to be mad after adjustment. The Contract. The entire agreement between the parties hereto is comprised in this contract. No person except an Ex- ecutive Officer of the Society President, a Vice-President, Secretary, Assistant Secretary, Comptroller, Deputy Comp- 462 ANNUITY CONTRACT 463 troller, Treasurer, an Assistant Treasurer has the power to modify this contract. This contract does not participate in Surplus. Executed, this First day of July, 1911, at the Home Office of the Society in . EXAMINED BY , President. , Secretary. ., Registrar. APPENDIX V SPECIMEN COPY OF A FRATERNAL BENEFIT CER- TIFICATE, TOGETHER WITH FORM OF APPLICATION COPY OF BENEFIT CERTIFICATE /SUPREME COUNCIL! /SUBORDINATE COUXCIL\ I SEAL. / \ SEAL. / This certificate is issued to , a member of - - Coun- cil, No. , located at , upon evidence received from said Council that he is a contributor to the Widows and Or- phans' Benefit Fund of this Order; and upon condition that this certificate, the Charter of the Drder and the statements made by him in his application for membership in said Coun- cil, and the statements certified by him to the Medical Exam- iner, both of which are filed in the Supreme Secretary's office, be made a part of this contract, and upon condition that the said member complies in the future with the laws, rules and regulations now governing the said Council and Fund, or that may hereafter be enacted by the Supreme Council to govern said Council and Fund, and upon condition that any changes, additions or amendments to the Charter, Constitutions or Laws, duly made or enacted subsequent to the issuance of this Benefit Certificate, shall bind the said member and his bene- ficiaries and shall govern and control the agreement in all re- spects in the same manner as if such changes, additions or amendments had been made prior to and were in force at the time of the application for membership, and upon condition that the said member, for himself and for any person or per- sons accepting or acquiring any interest in this Benefit Certifi- cate, agrees that no action at law or in equity shall be brought or maintained on any cause or claim arising out of any mem- bership in the > or on any Benefit Certificate, unless such action is brought within three years from the time when the right of action accrues. These conditions being complied with, the Supreme Council of the hereby promises and binds it- self to pay out of its Widows and Orphans' Benefit Fund to 464 FRATERNAL BENEFIT CERTIFICATE 465 the sum, of Dollars, in accordance with, and under the provisions of the laws governing said Fund, upon satisfac- tory evidence of the death of said member, and upon the sur- render of this Certificate ; provided that said member is in good standing in this Order at the time of his death, and provided also that this Certificate shall not have been surrendered by aaid member and another Certificate issued at his request, in accordance with the laws of this Order. In witness whereof the Supreme Council of the has hereunto affixed its Seal and caused this Certificate to be signed by its Supreme Regent and attested and recorded by its Su- preme Secretary at , , this day of , A. D. 19. Attest: , SUPREME SECRETARY. , SUPREME REGENT. I accept this certificate on the conditions named herein. (Signature of Member.) Witnessed and delivered in the presence of either , REGENT, "1 Of ETARY, J -, SECRETARY, J Council, No. FORM OF APPLICATION FOR MEMBERSHIP IN A FRATERNAL ORDER State of , 19. To the Officers and Members of Council, No. , , Located at , State of . Having become acquainted with the objects of your Order, I hereby make application for amount membership Write whether " Option A " or " Option D." in your Council, and do declare, upon my honor as a man, that the statements by me subscribed herein are each and every one of them true. I am not now a member of this Order; I have not, within six months, been rejected; am not now under suspension, and have never been expelled from any Council of this Order; and am a believer in a Supreme Being. I reside at No. St., City or Town of , State of . I was born at , State of , on the day of , 18 , and am between and years of age. My occupa- tion is that of . Place of business, No. St., City or Town of , State of . I direct that, in case of my de- cease, all benefit to which I may be entitled from the be paid to Names of Beneficiaries. (Write name or names in full.) 466 THE PRINCIPLES OF LIFE INSURANCE Residence of Beneficiaries. (Give complete address.) Related to me as Ages of Beneficiaries. Subject to such future disposal of the benefit, as I may here- after direct, in compliance with the Laws of the Order. I am temperate in my habits, and have no injury or disease which will tend to shorten my life; am now in good health and am able to gain a livelihood. I do hereby warrant the truthful- ness of the statements in this application, and consent and agree that any untrue or fraudulent statements, or any con- cealment of facts, therein, or to or from the Medical Examiner, or my suspension or expulsion from, or voluntarily severing my connection with the Order, shall forfeit the rights of my- self and iny beneficiaries, heirs, and all other persons claim- ing under my Benefit Certificate issued hereon, or from my membership in the Order, to all benefits and privileges therein. I agree for myself, my beneficiaries, heirs, and all such other persons, that in any and all questiqns, controversies, actions and trials in court, or otherwise, which shall arise between my- self and between them, or any of them, and the Supreme Coun- cil of the , and any Grand or Subordinate Council there- of, it shall be presumed and taken prima facie., that every offi- cer of said Supreme, of every Grand and of every Subordinate Council, in the sending of notices and otherwise has in all respects fully performed his duty, and fully complied with all the laws of said Councils, and that the burden of proving any failure of such performance or compliance shall rest upon me and said beneficiaries, heirs or said other persons; that any Subordinate Council of which I may become a member or its officers or any one or more thereof, shall not have the power to waive the performance of or compliance with any law or re- quirement of the Supreme Council, and any such attempted waiver shall be inoperative to bind or create any liability upon the Supreme Council; that any knowledge or information which may be acquired by any Subordinate Council of which I may be a member, or by any officer or member thereof, and not im- parted or disclosed to the Supreme Council, shall not be deemed to be notice to the Supreme Council, and the said Supreme Council shall not be bound thereby; that I will and they shall conform to and abide by the Constitutions, Laws, Rules and Usages of the said Council and Order now in force, or which may hereafter be adopted by the same. If I refuse or neglect to undergo an examination within six weeks from the date of FEATEEXAL BENEFIT CEETIFICATE 467 notice from the Secretary of said Council to present myself to the Medical Examiner, or if I fail to present myself for initia- tion within sixty days from the date of the approval of my medical examination, I hereby agree that my medical exami- nation and my initiation thereafter, without further medical examination, unless authorized by the Supreme Regent, shall be void, and I hereby accept notice of the fact that no Sub- ordinate Council has power or authority to waive the same; and I agree that my proposition fee shall be forfeited, that my first election may be declared void, and a new ballot be taken by said Council at any time before I receive the De- gree. And for myself, and for any person accepting or acquir- ing any interest in any Benefit Certificate issued on this appli- cation, I hereby expressly waive any and all provisions of law now existing, or that may hereafter exist, preventing any physi- cian from disclosing any information acquired in attending me in a professional capacity or otherwise, or rendering him incompetent as a witness in any way whatever; and I hereby consent and request that any such physician testify concern- ing my health and physical condition, past, present or future. And for myself, and for any person or persons accepting or acquiring any interest in any Benefit Certificate issued on this application, or arising out of any membership therein, I agree that no action at law or in equity shall be brought or main- tained on any cause or claim arising out of any membership, or on said Benefit Certificate unless such action is brought within three years from the time when the right of action ac- crues; or if the action arises upon my death, or alleged death, within three years from the date of such death, and that in case I shall, within five years from and including the date of my initiation, enter upon or become engaged in a proscribed occupation, or take my own life, whether sane or insane, or, in case, after having been suspended for one year or more I shall, within five years from the date of my reinstatement, take my own life, whether sane or insane, or if my death shall be caused, at any time, by the excessive use of intoxicating liquor, er be the result of my violation of, or occur while I am violating any law, the punishment for which is death or imprisonment in a State or Provincial prison or penitentiary, my Benefit Cer- tificate shall become and be null and void, and no person or persons be entitled to a benefit thereunder or under my mem- bership in the Order. 468 THE PKINCIPLES OF LIFE INSURANCE [Recommended by . Applicant will write his name IN FULL. (Eecommenders must sign personally.) I hereby certify that the above Application of Write applicant's name IN FULL. was received by me on the day of , 19 , and was read at a stated meeting of the above-named Council, on the day of , 19 ; that he was notified by me on the day of , 19 , to present himself to Dr. , Medical Examiner. , Secretary. Address, . I hereby certify that he was duly elected by ballot on the day of , 19 ; and that he was admitted to member- ship by the conferring of the Degree according to the prescribed Ritual of the , on the day of , 19 . Number on Roll Book . , Secretary. QUESTIONS TO BE ASKED BY THE COLLECTOR ON THE NIGHT OF INITIATION. Ques. Is the date of your birth correctly stated above? If not, please correct it. Ques. Have you changed your occupation since date of your application? If so, what is now your occupation? Ques. Has your physical condition changed since your ex- amination for admission? I hereby certify that Write applicant's name IN FULL. on the day of , 19 , paid to me $ as his assess- ment for the W. & O. B. Fund for age (Attained age nearest birthday.) and that the same has been entered in the W. & O. B. Fund Ac- count Book accordingly. This Application must be sent to the Supreme Secretary, with blanks properly filled by Secretary and Collector of Subor- dinate Council, immediately after the admission of applicant, , Collector. and Benefit Certificate will be returned. INDEX INDEX Actuaries, or Seventeen Offices, table, 136-137 Admission of companies, 359, 365 Advantages of life insurance. See Life insurance Adverse mortality selection, 235, 236, 266-267 Age of applicant, policy provi- sion relating to, 375 statements relating to, 374375 Agents, in branch-office system, 338 brokers distinguished from, 418-419 commissions paid to, 334-335 in direct-agency system, 335 effect of opinions of, on the meaning of policy provi- sions, 424 in general-agency system, 335, 336-338 home office in its relation to, 333-334 industrial policies limit pow- tion and management of, 279-280 industrial policies, limit pow- ers of, 282 law pertaining to, 416-424 liability of, to principal for injury occasioned by mis- conduct, 424 misrepresentations by, with reference to disability in- surance, 289-290 necessity for, 429-430 oral waiver by, effectiveness of, 422-423 organization and management by, 332-340 policy provisions pertaining to, in industrial policies, 421- 423 471 Agents Confd. in ordinary life policies, 421- 423 powers of, 423-424 professional view to be taken by, 427-437 state statutes in relation to: appointment and licensing, 419-420 definition of term " agent," 417-419 prohibition of misconduct, 420 Aggregate mortality tables, 136 American Experience table. See Mortality tables. Annual level premium, definition of, 48 nature of, 143 Annuities, classification of, 58-59 cost of, illustrated, 113 deferred, 59, 114-115 definition of, 24, 58, 111 guaranteeing a minimum num- ber of payments, 114 immediate, and their advan- tages, 112-114 last-survivor, 115 manner of paying for, 48 net single premium computa- tions in, 164-173 purpose of, 23-25 whole-life and term, 58 Annuity contract, specimen copy of, 462 Annuity payments, disability clause providing for, 301 Anderson, Stewart, citations from, relative to, use of life insurance as a means of protecting credit, 34 volume of business life insur- ance, 29 472 INDEX Application, age of applicant as stated in, statements re- lating to, 374-375 definition of, 372 legal interpretation of, general rules underlying, 369-372 part of contract, 372-373 specimen copy of, 449 statements in, as to family re- lationships and family his- tory, 374 as to health, habits and medi- cal attendance, 373-374 relating to other, insurance and rejected applications, 375 Assessment associations, assess- ment plans used by, 272- 274 business, 271-272 reorganizations of, 271 Assessment plans, flat, 266-267 fraternal insurance in, 266-268 graded, 267-268 See also Assessment associa- tions Assignee, insurable interest of, 389-391 Assignments of policies, by as- signee, 414-415 by beneficiary, 413-414 law pertaining to, 409-415 policy restrictions relating to, and interpretation of, 410- 413 reasons justifying, 410 Beneficiary, assignments by, regu- lated by state statutes, 413-414 cessation of interest of, effect of, 407-408 claims of creditors in relation to, 397-104 clauses relating to, 397-398 designation of, 406-407 industrial policy requirement relating to, 282-283, 402 law pertaining to, 394-^408 methods of revoking, 397-398 reserving right to change, 397- 402 Beneficiary Cont'd. transmissibility of interest of, 404-406 vested rights of, 394-396 Benefit certificate, nature of, 263 266 specimen copy of, 464 Bond issues, life insurance as se- curity for, 38-39 Borrowing without collateral made possible through life insurance, 42-45 Branch-office system, 338 Brokerage, 335, 418-419 Business failures, 30-31 Capitalization of the value of a human life, 13, 14-15 Cash and loan values: limited- payment policy, 83-85 paid-up extension values, 237 usefulness during times of financial stringency, 40-42 whole-life policies, 75-76 See Surrender values Childs, A. E., citation from, rela- tive to policy loans, 242, 290 Child endowment policies, 52, 88 Collateral loan investments, 352 Commissioners of insurance, duties and powers of, 357- 358, 360 Commissions, methods of pay- ing, to agents, 334-335 Committees. See Home office or- ganization Companies. See Stock com- panies, Mutual companies and Mixed companies ; also Home office organiza- tion and Agency organiza- tion Conservation of health and life promoted by life insurance, 27-28 Contingent or survivorship insur- ance, 57 Contingent interests made mar- ketable through life insur- ance, 45-46 INDEX 473 Continuous-installment policies, advantages of, 54, 102-103, 103-106 nature of, 102-103 premiums compared of, with those on a whole-life pol- icy, 104-106 Contribution plan of apportion- ing surplus, 249-250 Conversion privilege, advantages of, in term policies, 70 Corporation bond investment, 26, 345, 348-349 Craig, James M., citation from, relative to stock com- panies, 317 Credit, life insurance as a means of strengthening, 36, 38- 39 Creditors, insurable interest of, in life of debtor, 386-388 rights of, to life-insurance pol- icies, 402-404 Dawson, Miles M., citations from, relative to, assessment as- sociations, 273-274 contribution plan, 249 endowment policies as invest- ments, 90-91 law of average in life insur- ance, 6 necessity of accumulating in- surance funds, 7 saving from mortality, 247 Debenture bonds, 55 Deferred annuities, advantages of, 168-169 definition of, 114-115 net annual level premium com- putation in, 183-185 net single premium computa- tions in, 168-173 return premium feature applied to, 59, 173 Deferred dividend plan, 253-258 Deferred dividend policies, 250 Dexter, George T., citations from, relative to, mutual com- panies, 318 stock companies, 317 Direct-agency system, 335 Disability insurance, age and time limits to the application of, 297-299 benefits granted in, 299-301 causes of disability in, 295 297 definition of disability in, 290, 294-297 development of, in Europe, 284 in the United States, 286 disability statistics in, 290 dividend payment in, after dis- ability, 301-302 nature of protection in, 58 nature of risk in, 287-288 objections urged against, 288 291 reasons for, 58, 286 risks not covered in, 292-294 Discrimination between insur- ants, 360 Dividends, forms in which re- ceived, 255-256 mixed companies, in relation to, 322 pavment of, after disability, 301-302 under annual dividend plan, 252 under deferred dividend plan, 253-255 stock and mutual plans com- pared in connection with, 315-316 Tontine plan and, 253 Double endowments, 51-52 Employees, group insurance of, 304-310 insurance of, for the benefit of their families, 36-38 life insurance indemnifies against loss of, through death, 31-34 Endowment insurance, a means of providing for old age, 92-94 an incentive to save, 91-92 business uses of, 97 child endowment policies and, 474 INDEX Endowment insurance Cont'd. definition of, 50-51, 87 family uses of, 98 funds for specific purposes ac- cumulated by means of, 97-98 investment feature of, 88-89, 95-97 long-term, advantage of, 92- 94 nature of, 88-97 nature of the premium in, 51, 159-160 net single premium computa- tion in, 159-160 policy analyzed, 88-89 types of, 51-52, 87-88 premium charged for, 89-90 saving period hedged by, 94-97 sinking funds accumulated by means of, 3940 term insurance feature of, 88- 89, 95-97 thrift encouraged by, 21-22 Expenses of life-insurance com- panies, classification of, 219-221 distribution of, 212-213 group insurance in, 306-307 incidence of, 219-221 methods of loading and, 214- 219 state regulation of, 361-362, 365 Extension participating values, limited-payment policy and, 84, 85 whole-life policy and, 75-76, 77 Fackler, Edward B., citation from, relative to surrender charges, 235-236 Family relationships and family history, statements relat- ing to, 374 Federal regulation, 356, 364-366 Fitting the policy to the client, 60-61 Flat assessment plan, 266-267 Forfeitures, gains from, 248-249 Fraternal insurance, adoption of protective features of old Fraternal insurance Cont'd. line insurance in, 268-269 application for benefit certifi- cate in, specimen copy of, 465 assessment plans used by, 266- 268 benefit certificate in, copy of, 464 distinctive characteristics of, 263-264 extent of, 5, 261 legal status of, 261-262 legislation concerning rate ad- justments in, 269-271 Mobile bill, 269-271 National Fraternal Congress table, 137 organization and government in, 261-262 purpose of, 261-262 step-rate plan in, used by many societies, 49-50 General-agency system, 335, 336- 338 Gephart, W. F., citation from, rel- ative to apportionment of surplus, 251 Government bond investments, 345, 348-349 Graded assessments, 267-268 Group insurance, benefits of, 308- 309 development of, 304 functions of, 309-310 nature of group insured in, 304-306 policy in, 306 purpose of, 304-306 rates in, nature of, 306-308 Gross premium, definition of, 149, 209 See also Loading Guaranteed interest bonds, 106- 107 Habits, statements as to, 373-374' Health, statements as to, 373- 374 INDEX 475 Hoffman, F. L., citation from, relative to industrial in- surance, 279 Holcombe, John M., citations from, relative to, advan- tages of life insurance to society, 25 origin of life insurance, 4 Home-office organization, adminis- trative officials in, 324, 329-330 advisory officials in, 324, 330- 331 board of directors and commit- tees in, chosen from its membership, 326-328 deliberative bodies in, 324 executive committee in, 328 executive officials in, 324, 328- 329 field force, in relation to, 333- 334 finance committee in, 328 office departments in, 325-327 Hudnut, James M., citation from, relative to non-forfeiture laws, 232-233 Income policies, a guarantee against loss of principal, 20 See also Installment policies Incontestable clause, advantages of, 379-381 industrial policies contain an, 281 policy provision relating to, 379 Industrial insurance, amount of insurance in, adjusted to unit of premium, 277 beneficiary clauses contained in, 402 comparison of, with other forms of life insurance, 277-278 distinctive features of the policy in, 280-283 extent of, 275-277 organization and management of agents in, 279-280 Industrial insurance Cont'd. premiums in, paid weekly, 277 purpose of, 275 specimen copy of whole-life policy in, 455 Installment policies, continuous, 54, 102-106 debenture bonds and, 55, 106- 107 definition of, 52 disability, 300-301 guaranteed interest bonds in, 55, 106-107 methods of charging premiums in, 53 nature of, 99, 161 net single premium computa- tion in, 161-164 ordinary, 100-101 premiums in, compared . with those charged under other policies, 104-106 purpose of, 99-100 reversionary annuities and, 55 survivorship, 101-102 various types of, 52-55 Insurable interest, assignee's, 389-391 creditor's, in life of debtor, 386-388 definition of, 384 growing out of other business relations, 388-389 growing out of ties of affection, blood or marriage, 391- 392 indemnity principle and, in re- lation to life insurance, 369-370 insured's, in his own life, 385 386 time and continuity of, 392- 393 Interest factor in life insurance, 143-145 Interest rate learned, method of arriving at, 353-354 Interest rates earned by life-in- surance companies, 19, 20, 343, 352, 353 Investment, life insurance a prof- itable and safe, 19-20 476 INDEX Investment earnings, in relation to surplus, 246 Investment feature of life insur- ance, 68-89, 140 Investments, life-insurance, 342- 354 cash in offices and banks, 352 collateral loans, 352 corporation bonds, 345, 348- 349 classes of, 348-352 considerations that should gov- ern, 342-344 corporation stocks, 345, 351- 352 extent of, 26-27, 346-348 finance committee, in relation to, 328 government bonds, 345, 348- 349 influence of, 26-27 manner of arriving at the rate earned in, 353-354 net deferred and unpaid pre- miums, 352 premium notes and policy loans, 350 " rate of interest earned in, 352- 353 real-estate, 345, 350-351 real-estate mortgages, 345, 349- 350 reasons why important, 342 safety of, 19-20 state regulation of, 344-346 Johnson, Alba B., citation from, relative to the usefulness of policy loans, 41-42 Joint-life insurance, business uses of, 34-35 definition and nature of, 56-108 disability insurance in relation to, 293 premiums in, compared with those charged under other policies, 108-110 types of, 56-57 uses of, 56, 110 Lapses, extent of, 230 Law of average, combination of many risks necessary for, 5 relation of, to life insurance, 129 See also Mortality tables Laws of probability, application of, to the mortality table, 137-138 compound probabilities, the law of, 120, 122-123 law of average and, 124-129 law of certainty and, 120, 121, 122 law of mortality and, 124, 129 principles of, stated, 120-123 simple probabilities under, method of determining, 120, 121, 122 use of, to forecast future events, 123-124 Last-survivor annuities, 115 Last-survivor insurance, 57 Legal reserve. See Reserve Legislation. See State regulation Life annuity due, nature of, 176- 177 Life insurance, accumulation of a fund necessary for the pay- ment of claims in, 7 advantages of, to society at large, 25-28 bond issues secured through, 38-39 borrowing without collateral made possible through, 42- 45 business uses of, 29-46 capitalizes the values of a hu- man life and indemnifies that value, 13, 14-15 conservation of health and life promoted by, 27-28 contingent interests made mar- ketable through, 45-46 credit strengthened by, 38-39 definition of, from the com- munity standpoint, 3 from the standpoint of the individual, 3 a duty, 15-16 employees should take out, for INDEX 477 Life insurance Cont'd. the benefit of their fam- ilies, 36-38 extent of, in the United States, 5 facilitates the purchase of a home, 22-23 family uses of, 13-16 features peculiar to: fixed and unchangeable pre- mium, 141-142 hazard of death, 140-141 principle of indemnity not applicable, 142 protection and investment, 140 incomes assured through the use of, annuities, 23-25 indemnifies against loss through death of officials and employees, 3 1-34 mortgage payments may be hedged by, 22-23 opposite of gambling, 10-12, 16 origin of, in Great Britain, 3 in the United States, 4 partnership insurance, 34-36 personal uses of, 16-25 rules suggesting the amount of, to be taken, 14-15 a safe investment, 19-20 saving made possible bv, 18- 19, 21-22 sinking funds accumulated through, 39-40 thrift encouraged by, 20-22 uncertainty changed into cer- tainty by, 10-12, 16, 119 uniform annual premiums in, desirability of, 8-9 woman's rights in relation to, 16 worry eliminated and initiative increased by, 17 Life Extension Institute, Inc., 27 Limited-payment policies, advan- tages of, 82-85 continuous and, compared, 177- 178 definition and nature of, 49, 79 disadvantages of, 81-82 Limited-payment policies Cont'd. guaranteed values of, 83-85 larger premiums necessary un- der, 79-81 manner of paying premiums in, 48 net annual level premium com- putation for, 182-183 Linton, M. Albert, citation from, relative to the endowment policy, 95-97 Loading, equitable distribution of expenses in, 212-213 expenses classified, 210-211 incidence of expense, 219-221 methods used in, 214-219 modified preliminary term plan and, 222, 224-225 preliminary term plan and, 222-223 purpose of, 209-210 saving from explained, 247-248 select and ultimate plan, 222, 225-226 Loans. See Policy loans Loan values, usefulness of, dur- ing times of financial stringency, 40-42 Lunger, John B., citations from, relative to, branch-office system, 339, 340 finance committee of a life-in- surance company, 328 office organization in life insur- ance, 324-327 Medical attendance, statements as to, 373-374 Misrepresentation, 360-361, 420 Mixed companies, control of, 321- 322 dividends of, 322 nature of, 314 retirement of stock of, provi- sions for, 322 Mobile bill, 269-271 Modified preliminary-term plan, 222, 224-225 Moir, Henry, citations from, rela- tive to, last-survivor and 478 INDEX Moir, Henry Cont'd. contingent or survivorship insurance, 57 method of arriving at rate of earnings, 353-354 Mortality, saving from explained, 246-247 Mortality tables: Actuaries, or Seventeen Offices, table, 136-137 American Experience table: construction of, 134-135 copy of, 132-133 origin of, 137 description of, 131-136 kinds of: aggregate tables, 136 select tables, 136 ultimate tables, 136 industrial insurance, special tables used in, 278 National Fraternal Congress table, 137 population data, objections to basing, on, 124, 130-131 sources of, 130 theory of probabilities applied to, 137-138 ultimate table of mortality, 225 Mutual companies, advantages urged in favor of, 317-318, 320-321 control of, compared with that of stock companies, 317- 318 loading of premiums, in rela- tion to, 314-317 nature of, 313-314 National Fraternal Congress ta- ble, 137, 268-269, 270 Natural premium, definition and nature of, 9, 48, 62 Net annual level premium, analo- gous to annuities, 175-177 in deferred annuity, computa- tion for, 183-185 due in life annuity, 176-177 in limited-payment life policy, computation for, 182-183 nature of, 174 in ordinary life insurance, computation for, 179-182 Net annual level premium Cont'd. reason for choosing, in prefer- ence to single payments, 174-175 in return premium policies, 187-190 in term insurance, computation for, 178-179 Net level premium, 174-190 Net single premium, in annui- ties, computation for, 164 173 in deferred annuities, computa- tion for, 168-173 in endowment insurance, com- putation for, 159-160 in installment insurance, com- putation for, 161-164 in pure endowments, computa- tion for, 158-159 in term insurance, computation for, 149-154 in whole-life insurance, com- putation for, 154-157 New business expenses, method of meeting, 221-223 preliminary-term plan, 222- 223 Nichols, Walter S., citations from, relative to, fraternal societies, 263 rate adjustments in fraternal insurance, 269 Non-forfeiture laws, 231-233 Non-participating policies, 245 Officials. See Home-Office or- ganization Old age provision, endowment insurance as a means of, 92-94 Oral waiver of policy conditions by agents, 422-423 Ordinary installment policies, methods of charging pre- miums in, 101 nature and purpose of, 52-53, 100-101 Ordinary life policies. See Whole-life policies INDEX 479 Other insurance, statements re- lating to, 375 Partnership insurance, uses of, and necessity for, 34-36 Participating paid-up values, in limited-payment policy, 84-85 in whole-life policy, 75-76, 77 Participating policies, 245 Policies, classifications of, ac- cording to inclusion or ex- clusion of a pure endow- ment, 50-52 according to the method by which the proceeds are paid, 52-55 according to the inclusion of disability features, 57-58 according to method of pay- ing premiums, 47-50 according to the term, 47 special types of contracts, 55-57 combination of various types of, 59-60 group, 304-310 industrial, distinctive features of, 280-283 legal interpretation of, 369- 383 prohibitions or restrictions in, 382-383 restrictions in, relating to as- signments, 410-413 some better adapted than oth- ers to meet special needs of the insured, 60-61 various types of, equivalent in net cost, 60 See also various types of poli- cies, as, Term policies, Whole-life policies, etc. Policy loans, advantages result- ing from, 240-241 desirability of restricting, 243 development of, 238-239 extent of, 241-242 lapses and surrenders in rela- tion to, 242-244 nature of, 239-240 restrictions upon, 239-240, 241 Preliminary-term plan, 222-223 Premium notes and policy loan investments, 350 Premiums, assumptions underly- ing rate computations and, 142-147 classification of, as net and gross, 148-149 as single and periodic, 148 according to the method of paying, 47-50 continuous-payment, disad- vantage of, 76-77 in endowment insurance, com- parison of rates of, 89-90 fundamental principles under- lying the computation of, 139-147 in industrial insurance, man- ner of paying, 277 interest factor in computing, 143-145 in joint-life policies compared with those charged on other policies, 108-110 level annual, desirability of, 8-9 payments of, at intervals of less than one year, compu- tation for, 185-187 waiver of, in disability poli- cies, 302 See also Level premium, Natu- ral premium, Single pre- mium, Limited-payment plan, Step-rate plan Probabilities. See Laws of probability Prohibitions or restrictions in policies, 382-383 Publicity through statements and examinations, 360-365 Pure endowment, definition of, 50, 88 in relation to the payment of dividends, 52 net single premium computa- tions, 158-159 Rate-making. See Premiums Real-estate investments, 345, 350-351 430 INDEX Real-estate mortgage investments, 26, 27, 345, 349-350 Rebating, 360-361, 420 Reinsurance reserve. See Re- serve Representations, 361, 375-376 Reserve, basis of valuation for, 193-194 comparison of, on different in- terest bases and on differ- ent policies, 201-208 definition of, 192-193 financial importance of, 191 in fraternal insurance, absence of adequate, 265, 268 industrial insurance based upon, 278 meaning of, 9 method of calculating, annual level premium, whole-life policy, 198-201 single premium whole life policy, 194-198 origin of, 192 prospective, 193 purpose of, 192-193 reinsurance, 193 retrospective, 193 unearned premium, 193 Reserve value of policies in the United States, 9-10 Return-premium policies, in child endowment, 52 deferred annuities containing, 59, 173 definition and nature of, 56 in premium computations, 187- 190 Reversionary annuities, 55 Richards, George, citations from, relative to, assignment of policies, 409-410 construction of contract ac- cording to the laws and usages of the place where made, '372 creditors' insurable interest, 386, 387 incontestable clause, 381 insured's interest in his own life, 385 Richards, George Cont'd. policy prohibitions or restric- tions, 383 statements in application as to health, habits, and med- ical attendance, 374 warranties, 377 Risk in life insurance, measure- ment of, 119-138 Rules suggesting the amount of life insurance to be taken, 14-15 Saving, endowment insurance an incentive to, 91-92 endowment policy hedges pe- riod of, 94-97 limited-payment policies in re- lation to, 83-85 made possible by life insurance, 21-22 relation of, to life insurance, *8-19 period of, hedged through life insurance, 94-97 Saving from mortality, 246-247 Select and ultimate plans, 222, 225-226 Select mortality table, 136 Semi-endowments, 52 Sinking funds for institutions accumulated through life insurance, 3940 Single premium, definition of, 48 nature of, 143 Standard of solvency, 359 State regulation, in regard to, agents, 363 beneficiary, 396 duties and powers of supervis- ing officials, 356-357 investments, 344-346, 363 officials intrusted with super- visory control, 356-357 organization and admission of companies, 359-360 publicity, 360 reasons for, 355 shortcomings in practice of, 363-364 subject matter covered by, standard of solvency, 359 INDEX 481 State regulation Cont'd. taxes and fees, 362-363 treatment of policyholders, 360-362 versus federal, 356, 364 Step-rate plan of paying premi- ums, 49-50, 268-269 Stock companies, arguments in favor of stock control, 317-318, 320-321 control of, compared with that of mutual companies, 317- 318 loading of premiums, in rela- tion to, 314-317 nature of, 313 Stock investments, 345, 351-352 Suicide clause, 381-382 Surplus, definition of, 245 disability clause provisions in relation to, 302 dividends, meaning of, 251-252 divisible, meaning of, 251-252 gain from forfeitures, 248-249 gain from investment earnings, 246 methods of apportioning, 249- 251 methods of distributing, 252- 255 saving from loading, 247-248 saving from mortality, 246-247 sources of, 245-249 ways of using dividends, 255- 256 Surrender charge, gains from for- feitures, 248-249 meaning of, 230 reasons justifying, 234-237 Surrender values, liberality of companies in matter of, 233-234 meaning of, 229-230 non-forfeiture laws and, 231- 233 options granted, 237-238 Surrenders, extent of, 230 Survivorship annuity policies, 101-102 Taxation of life insurance, 26, 362-363 Term policies, advantages of, 63- 67 advantages of the conversion privilege in, 70 as a means of protecting busi- ness risks, 33 classification of, 47 convertible feature of, 69-70 definition of, 62 disability insurance in relation to, 292-293 disadvantages of, 67-68 endowment policies contain a term insurance feature, 88-89 nature of, 62-63 net annual level premium on, computation of, 178-179 net single premium on, compu- tations of, 149-154 premiums on, compared with those charged on other types of policies, 64 renewable and non-renewable, 69 restrictions in issuing, 62, 69 types of, 62 uses of, 62, 63-67 Termination of policies analyzed, 230-231 Thrift encouraged by life insur- ance, 20-22 Tontine plan, 52, 253 Transmissibility of beneficiary's interest, 404-406 Ultimate mortality table, 136, 225 Unearned premium. See Re- serve Warranties, classification of, 377-378 definition of, 376 importance of,. 376 incontestable clause in rela- tion to, 379-381 purpose of, 376-377 state statutes relating to, 378 379 Wells, Daniel H., citation from, relative to apportionment of surplus, 251 482 INDEX Whole-life policies, cash and loan values, 75-76, 77 continuous premium payments, disadvantage of, 76-77 definition of, 72 guaranteed values in, 75-76 net annual level premium com- putation in, 179-182 net single premium computa- tions in, 154-157 permanent protection furnished by, 72-73 premiums in, compared with those charged on other types of policies, 73 saving combined with insur- ance, 74-76 at smallest initial outlay, 73- 74 specimen copy of, 438 Willett, Allen H., citation from, relative to saving result- ing from combination of risks, 11 Woods, Edward A., citations from, relative to, gene- ral agency system, 337- 338 necessity of having agents, 333 specialization in large agencies, 338 use of life insurance for busi- ness purposes, 33-34 Woman's rights in relation to life insurance, 16 Zartman, Lester M., citation from, relative to life-in- eurance taxation, 366 (2) This book is DUE on the last date stamped below A 000190292 3 UH1VEKS1T UBKARY