I MB,*! ;! IvH LIFE INSURANCE LIFE INSURANCE A TEXTBOOK BY SOLOMON S. HUEBNER, Pn.D. ^ROFESSOR OF INSURANCE AND COMMERCE, WHARTON SCHOOL OF FINANCE AND COMMERCE. UNIVERSITY OF PENNSYLVANIA ENDORSED BY THE EDUCATION AND CONSERVATION BUREAU THE NATIONAL ASSOCIATION OF LIFE UNDERWRITERS NEW YORK AND LONDON D. APPLETON AND COMPANY 1919 COPYRIGHT, 1915, BY D. APPLETON AND COMPANY Printed in the United States of America WtBfACE 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 fulfil 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. Not 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. HUEBNER. University of Pennsylvania CONTENTS PART I THE NATURE AND USES OF LIFE INSURANCE CHAPTER PAGE 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 of 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 .... 29 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- x CONTENTS CHAPTER PACK 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- l av > 73- Combines saving with insurance, 74. Disadvantage of continuous premium payments, 7 6. 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 CHAPTER 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, 1 06. 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 sam~ lines, no. Annuities, in. Immediate an- nui f -es and their advantages, 112. Other types of annuities, 114. PART II THE SCIENCE OF LIFE INSURANCE XI. 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 CHAPTER 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 SAPTER PAGE 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 CHAPTER PAGE 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 extent 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 n$- control, 364, xvi CONTENTS PART V IMPORTANT LEGAL PHASES OF LIFE INSURANCE CHAPTER PAGE 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, 38 1 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 debtor, 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 PART I THE NATURE AND USES OF LIFE INSURANCE 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 forms 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/' x 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 H., The Economic Theory of Risk and Insur- ance, 106. 3 4 THE PRINCIPLES OF LIFE INSURANCE Assurance ' lor : 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/ 1 Yale Insurance Lectures, i, 18. 3 Ibid., p. 19. * Ibid., p. 24. 6 Ibid., p. 25. NATURE AND PRINCIPLES 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 poHcyholders $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 INSURANCE 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. 6 e 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. s 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 "PRINCIPLES 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 PEINCIPLES OF LIFE INSUKANCE 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 Book, 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 NATUKE AND PKINCIPLES 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." 9 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 WILLETT, ALLAN H., The Economic Theory of Risk and Insur- ance, 168, 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. Eecognizing 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. AGE EXPECTANCY INSURANCE VALUE 4 PER CENT. INSURANCE VALUE 5 PER CENT. 25 30 35 40 45 50 55 60 38 35 31 28 24 20 17 14 $9684 9332 8794 8331 7623 6795 6083 5281 $8434 8187 7796 7449 6899 6231 5637 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. Tke 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 PEKSONAL 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 cent, 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 PERSONAL 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. Nearly 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 PKINCIPLES 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% 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 or 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 volume 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 PRINCIPLES 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 AND PEKSONAL 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 they constitute a distinct and tangible benefit to the state. Life insurance promotes a sense of responsibility, strengthens family ties, and thus ele- vates the 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 the benefits of right living. . . . There can be no doubt, furthermore, that life insurance curtails the expense to the 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 with the prevention and punishment of crime, and the relief of the 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 the 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 expense in supporting members of destitute families, has been recognized for years by the gov- 1 Yale Insurance Lectures i, 39, 41. 26 THE PRINCIPLES OF LIFE INSURANCE 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 have 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 ejiormous 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 lin'e 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/' CHAPTEE 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 PRINCIPLES 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 in- sured'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. Numerous 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 ene 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." 3 ANDERSON, STEWART, " Commercial Life Insurance," in H. P. Dunham'? 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 arid 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 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 SO 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 Qy 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 PKINCIPLES 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^ 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 5 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-insuance 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 life work,, 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- Now, .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, but 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 his 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 giver 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 vance, or may be paid for by annual premiums continuing during the joint duration of the two lives. BIBLIOGRAPHY A very large number of papers and addresses on Business Life Insurance have 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," chap. 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 ; che 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 divided 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 rinding 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- tnce 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- i Chapter xvi. CLASSIFICATION OF POLICIES 49 icy/ 7 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 PRINCIPLES 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 policy holder 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 PRINCIPLES OF LIFE INSURANCE 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 the 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 } 7 ears. Policies Classified According to the Method by Which the Proceeds Are Paid. Reference 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 Viay be combined with the endowment principle. Thus if the bolder 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 PKINCIPLES OF LIFE INSUEAKCE 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 the 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 2 MOIR, HENRY, 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 payment 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 '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 ths 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." 4 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 4 MoiB, HENRY, 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 Gl 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. CHAPTER V 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," according 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. Whilf 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 faet, 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, 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 ID 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 pror 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 INSUKANCE 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 $34.54 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 TERM INSURANCE 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 thp mortgage can be paid out of the insurance proceeds, the bal- ance of the insurance money, if any, being payable to the insured^ 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 PRINCIPLES 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 luring the period when conversion is permitted, and may be 70 THE PRINCIPLES OF LIFE INSURANCE 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 differ- ence 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 1 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." TERM 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. CHAPTER 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^ 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 PRINCIPLES 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 ORDINARY 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- GUAEANTEED VALUES Age: 35. Amount: $10,000. Annual Premium: $270. Plan: Ordinary Life. NUMBER OF YEARS AFTER POLICY HAS BEEN IN FORCE CASH OR LOAN VALUE PARTICIPATING PAID-UP INSURANCE EXTENSION PARTICIPATING YEARS 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 be increased by any surplus or addi- tions standing to the credit of the Policy. 76 THE PRINCIPLES 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 to 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 PRINCIPLES 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 chpsen, 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 the 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 THE PKINCIPLES OF LIFE INSUKANCE 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 in 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 PAYABLE AT DEATH AGE WHOLE OF LITE 10 YEARS 15 YEARS 20 YEARS 20 16.60 38.30 28.96 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 PRINCIPLES OF LIFE INSURANCE 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 e.ffort 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 policyhplder 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 1 Nw England Mutual Life Insuraiicu 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 : GUARANTEED VALUES Age: 35. Amount: $10,000. Annual Premium: $367. Plan: Life, 20 Payments. NUMBER OF YEARS AFTER POLICY HAS BEEN IN FORCE CASH OR LOAN VALUE PARTICIPATING PAID-UP INSURANCE PARTICIPATING 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. CHAPTEE 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 PRINCIPLES 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 the 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 FOB $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 LIFE 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 37.0 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 55 106.45 111 58 71.75 78 26 56.55 64 65 49.30 6005 7.65 .... 45.10 56 50 60 12020 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 parried 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." x 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 *DAWSON, MILES M., The Business of Life Insurance, 231-234. 92 THE PKINCIPLES 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 Linton, 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. 2 LINTON, M. ALBERT, " 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 PKINCIPLES 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 3 1 / 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 3 1/2 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 3 x / per cent., we find that the uniform annual premium for this policy at age 25 is $6.97. Therefore, if we weld this insurance contract to the com- pound interest contract we obtain the policy which we have taken as our illustration the policy which pays the full $1,000 if the young man of 25 lives to the age of 65, or at his death, if it occurs before age 65. Adding the two premi- ums $11.43 and $6.97, we obtain $18.40, the exact American 3 l /2 per cent, net premium at age 25 for a forty-year endow- ment. We have thus, by employing the simple conception of a savings fund and of an insurance policy which pays certain stipulated amounts should death occur within a given period of years, constructed the ordinary endowment policy and com- puted the premium therefor. We have learned that in paying ENDOWMENT INSURANCE 97 an endowment premium, a part of that premium builds up a fund which will mature the policy at the expiration of the endowment period, and another portion of the premium pro- vides for insurance sufficient to make up the amount by which the accumulated fund falls short of the full face of the policy, if death occurs before the fund is complete. 4. As a means of accumulating a fund for specific purposes. The special purposes which endowment insurance may be made to serve are exceedingly numerous, as a few illustrations will indicate. Thus, the credit and successful operation of many business firms desiring to negotiate a bond issue may be dependent chiefly upon the life of one man whose unexpected death may so endanger the success of the business as to preclude the redemption of the bonds upon maturity. But this contingency we have seen 3 may be averted if the head of the business insures his life for an amount equal to the bond issue under an endowment policy which will become payable at the same time that the bonds mature. In the event of death the firm receives the face of the policy and may either redeem the bonds if that is possible and desirable, or may set aside such an amount of the policy pro- ceeds as will, with interest, amount to the face of the bond issue at the time of maturity and use the balance for the development of the business. In case of survival the endow- ment policy will have resulted in the accumulation of a sink- ing fund year by year which will be just sufficient to redeem the bonds. The same principle might also be applied to the liquidation of a mortgage on a home. Furthermore, endow- ment insurance may be used in various ways by an employer as a means of binding his employees to himself and thus in- creasing the efficiency and loyalty of his working force. 4 We have also seen that endowment insurance lends itself admir- ably to the accumulation of a fund for the benefit of such institutions as colleges, churches, hospitals, etc. 5 3- Pages 38 to 39 of this volume. * Pages 39 to 40 of this volume, s Pages 36 to 39 of this volume. 98 THE PRINCIPLES OF LIFE INSURANCE But in addition to such business uses, endowment policies may often serve some special family purpose, especially as regards the making of proper and certain provision for starting children in life. It is to accomplish this purpose in the most convenient manner for parents or guardians that companies issue the various forms of " children's endow- ments " already enumerated. By means of such policies small savings, which would otherwise probably be wasted, may be accumulated into a fund to be used for educational purposes, or to start a son in business, or to provide a daugh- ter with a dowry in case of marriage. BIBLIOGRAPHY DAWSON, MILES M., "The Business of Life Insurance." Life Insurance as an Investment, chap. 23, New York, 1906. LINTON, M. ALBERT, "The Endowment Policy." An address delivered at the Fourth Annual Convention of General Agents of the Provident Life and Trust Company, Janu- ary, 1915. CHAPTER IX INSTALLMENT POLICIES Any of the usual plans of insurance may assume the form of a so-called installment policy, the installment feature merely providing that the proceeds of the policy at death or on maturity as an endowment shall be paid in a series of in- stallments, annually, semi-annually, quarterly or monthly, in- stead of in one lump sum. To illustrate, a whole-life policy may stipulate that in the event of the insured's death its face value of $10,000 shall be payable in ten annual install- ments of $1,000 each, or the arrangement may be for fifteen payments of $666.67, twenty payments of $500, twenty-five payments of $400, etc. Or there may be a further stipulation to the effect that after the company has paid $1,000 at the beginning of each year for ten years if the beneficiary be still alive, the same annual payments shall be continued for that amount throughout the beneficiary's lifetime. Numerous special arrangements, however, can be made to suit almost any set of conditions which the insured may have in mind when considering the purchase of such a policy. The Fundamental Purpose of Installment Insurance. The primary object of making an insurance policy payable in installments is to safeguard the beneficiary against the loss of the proceeds. As has been said, the installment plan serves the purpose of " insuring one's insurance." Few bene- ficiaries under life-insurance policies, and this is especially true of women, possess the necessary business experience so to invest and manage a large sum of money as to yield a constant and adequate income. Very frequently, too, the sud- den receipt of a large lump sum payment means little more to the beneficiary than abundance of money for unnecessary 99 100 THE PRINCIPLES OF LIFE INSURANCE expenditures with the result that the present is thoughtlessly made the period of luxurious living at the risk of experienc- ing actual want in the future. For these reasons the payment of a policy in a single sum is apt to defeat the very purpose for which the insurance was originally taken, namely, the absolute protection of the beneficiary. Payment in install- ments, on the contrary, safeguards the beneficiary against the loss of insurance protection by extravagance, bad advice or poor investment. The underlying purpose of life insurance is the protection of the family, and where a wife, children, or other dependents are named as beneficiaries, it is fundamentally important that the real purpose of the policy, namely, their protection, should be absolutely secured by properly safeguarding the proceeds of the policy upon its maturity. It is stated on good authority that about sixty per cent, of the insurance funds left to beneficiaries is lost by them through bad invest- ment or needless expediture within six years following the death of the insured. This experience is also true of other funds left to the beneficiary. On every hand we can point to examples illustrating how easily and frequently the compe- tence which a husband or father has provided through sav- ing or insurance is lost or foolishly spent by the heir or bene- ficiary. Modern "income policies," especially where the cir- cumstances justify the use of the continuous income feature, are a guarantee, as we shall see, against such a calamitous con- tingency. Ordinary Installment Policies. Having stated the gen- eral purpose of installment insurance, we may next examine the several methods of applying the principle in actual practice. One plan, as already noted, consists in paying the proceeds of a $1,000 policy in a definite number of installments, such as ten installments of $100 each, fifteen of $66.67, twenty of $50, etc. The advantage of this plan, as compared with an ordinary life policy payable in one sum, is twofold. Not only does the policy spread the payments over a number of years and thus protect the beneficiary against the loss of the INSTALLMENT pL*QIES 101 principal, but its premium, in '.prcptaftip&J to,' tj\o f uy of the policy, is also smaller. To understand the nature of this policy it is only necessary to ascertain the discounted value of the installments at an assumed rate of interest. If the rate of interest used by the company in its rate computations be 3^ per cent., it must have on hand at the death of the insured $860.77 in order to pay $1,000 in ten annual installments of $100 each, the first installment being paid at death. If the sum is to be paid in twenty installments of $50 each, the discounted value of the installments at S 1 /^ per cent, is $735.49. It is only on this commuted value of the installments (the real amount of the insurance), and not on $1,000, that the company needs to charge premiums. In other words, the lower premium on this policy is accounted for by the fact that the interest accumulation at the assumed rate which the company makes on the proceeds of the policy which it holds following the death of the insured is made available during the insured's lifetime in the form of a reduced annual premium. The policy, however, may be written at the regular ordinary life rates, i. e. for insurance amounting to $1,000 at maturity. In that case the interest earned on the funds held by the com- pany will be used to increase the size of the installments, which, in the case of the ten-installment plan (assuming 3% per cent, interest) will now amount to $116.18 instead of $100, and in case twenty installments are paid, to $67.98 in- stead of $50. But whatever the plan used, ordinary install- ment policies still have the objection that the beneficiary may outlive the installment period by many years and be without the steady income to which she has become accustomed. This situation is particularly serious when the age and physical condition of the beneficiary, at the time the installments cease, is such as to preclude the earning of a livelihood. Survivorship-Annuity Policies. 1 Such policies provide that if the beneficiary should outlive the insured she will receive an annuity during her lifetime, the policy, however, expiring and the premiums being forfeited in case the insured 102 THE PRINCIPLES OF LIFE INSURANCE should Qi:t> jye tKe] jberje^oiary. As compared with the ordi- nary installment pc-frcy', this contract does not promise the payment of a definite number of installments. Instead, it agrees to pay an annuity to the beneficiary only during the years that she may survive the insured. Yet in doing this the policy overcomes the objection, noted in connection with the ordinary installment plan, that the beneficiary may sur- vive the installment period and thus be without an income. Although popular among persons familiar with the mathe- matics of life insurance, this policy has never appealed to the public, partly because nothing is realized in case the bene- ficiary should die before the insured, and partly because the amount paid to the beneficiary in case she should outlive the insured is indefinite and may be very small. The first ob- jection, however, may be eliminated by having the policy provide for the return of all premiums paid in case the in- sured shall survive the beneficiary. Continuous-Installment Policies. The shortcomings of both of the preceding plans are remedied by the continuous- installment policy, which promises a fixed number of install- ments certain, to be followed by the same installment for as many more years as the beneficiary may outlive the fixed in- stallment period. To illustrate, the policy may provide for the payment of annual installments for twenty years, and if the beneficiary be still alive at the end of the twenty years, for the continuation of the payments during the whole of her subsequent lifetime. It is thus impossible for the beneficiary to be left without an income as may be the case under an ordinary installment policy. Furthermore, the policy over- comes the principal objection to the survivorship annuity be- cause, should the beneficiary not survive the insured many years, the installments will nevertheless be paid after her death until twenty annual payments have been completed. Unless the insured has expressly extended the privilege to the beneficiary, the installments (and this is also true of the ordinary installment policy) cannot be commuted for a lump sum payment, since to do so would defeat the chief object of INSTALLMENT POLICIES 103 the policy, viz., the securing of a definite income to the bene- ficiary. Should the beneficiary die before the insured and while the policy is in force, future premiums will be reduced to the corresponding rate for an ordinary installment policy. Various special applications of the continuous-installment principle are possible. Thus two or more persons may be named as beneficiaries under the same policy. Should one of them die after receiving the full number of installments certain, the installments relating to such beneficiary will then cease. But in case of death before the fixed number of installments have been paid, the remaining unpaid in- stallments will pass as they come due to the surviving bene- ficiary or beneficiaries. Again, the insured may feel that it would be financially imprudent to have his beneficiary receive at one time as much as is involved in a full annual installment. If desired, therefore, the companies will make the payments in proportionate semi-annual, quarterly or monthly install- ments. The continuous-installment feature may also be ap- plied to an endowment policy. In the event of death during the endowment period, the insurance is payable in equal an- nual installments for a stipulated period like twenty years and as long thereafter as the beneficiary may survive. Like- wise, in the event of the insured' s survival of the endowment period, the amount of the policy will be payable in twenty an- nual installments certain to himself or a designated beneficiary, to be followed by similar installments throughout the subse- quent lifetime of either the insured or the beneficiary nom- inated at the time the endowment matures. Under this plan the amount of the installment will depend upon the ages 'of the insured and beneficiary at the maturity of the endowment. Advantages of the Continuous-Installment Plan. Care- ful consideration of the continuous-installment feature in life insurance will convince one of its advantages as com- pared with other forms of settlement and with other methods of investment as regards reliability, economy and convenience. In view of the financial stability of our well-established com- panies, the plan furnishes an absolutely certain income 104 THE PK1NCIPLES OF LIFE INSURANCE for dependents. Not only does it guarantee an income to the beneficiary throughout life, but, owing to the installments certain, the income continues sufficiently long to secure the proper education and maintenance of the children. It also eliminates all details of administration on the part of the insured or beneficiary and secures them against the hazards and expense connected with the investment and management of an estate. To quote an excellent statement of its func- tions : This policy may be made to provide support for the widow during the remainder of her days; to educate the children; to give independence and protection to the unmarried daughters. In a word it may be made to provide unfailing support for any or every dependent. This policy appeals to men in every rank of life; to the man of limited means who is unable to pur- chase a home, because a minimum policy may pay the widow's rent for life; to the man of moderate means whose family is accustomed to use a larger income and to the man of affluence whose family is trained to spend a munificent allowance be- cause by means of an adequate policy each may solve the prob- lem of how to guarantee the continuance of the accustomed family income after his death. The foregoing advantages become especially apparent when we reflect that the premium on a continuous-installment, policy is considerably below that charged on a policy of a like amount when payable in one sum. An examination of the rates furnished on the opposite page (being those charged by the company used for illustrative purposes in preceding chapters) will show, for example, that when the ages of the insured and beneficiary are respectively 25 and 20 the annual premium on a whole-life policy payable in installments of $50 for twenty years certain and thereafter during the lifetime of the bene- ficiary is only $17.64 as compared with a premium of $19.00 for a $1,000 ordinary life .policy at age 25 payable in one sum. As the age of the beneficiary increases, as compared with that of the insured, it will be observed that the premium on the continuous-installment policy decreases, the rate, for INSTALLMENT POLICIES 105 w g H- i g M Q (M M H ' W fa PH <\ no H H P E o P CD ^ O ojoooicoaoici i i>- ^ 05 I-H !>; CD Tf CO Ol iO CD * lO >^ OS O CD 10 i ii ti i(M(MCOCO>OCD IOCO(MOOCD(MCDCO OOOiOiOOOOO iOOO (MlOr-H 106 THE PRINCIPLES OF LIFE INSURANCE example, being only $15.44, when the ages of the insured and beneficiary are respectively 25 and 45, as compared with the $19.00 rate on an ordinary life policy. The reason for this difference in the rates has already been explained as far as the installments certain are concerned. The continuous-in- stallment feature is an addition to the ordinary installment part of the contract and must, of course, be charged for in order to enable the company to meet its liability for those installments which it may have to pay to the beneficiary in case she should outlive the insured by more than twenty years. But this extra cost is slight because it is apparent that where the ages of the insured and beneficiary are about the same, and especially where the beneficiary is much older than the insured, there will not be on the average many instances where the beneficiary will outlive the insured by more than twenty years; furthermore, as regards the limited number of cases where the continuous feature goes into opera- tion, the number of installments payable will not average high. Guaranteed Interest Bonds. Another method of provid- ing a permanent and certain income to the beneficiary or the insured consists in the issue of " income " or "guaranteed interest bonds " upon the death of the insured or the comple- tion of the endowment period. If the rate of interest as- sumed for the mathematical computation of rates is 3 per cent., the cpmpany can, if it is willing to guarantee this rate, allow the proceeds of the policy to be left with it during the lifetime of one or more beneficiaries, and in the mean- time pay annually the agreed rate of interest. The plan sim- ply amounts to allowing the proceeds of the policy to stand out at interest, the principal to be paid by the company upon the death of the beneficiary or beneficiaries. Sometimes the policies provide that the annual return will be increased by the annual dividends apportioned by the company, and that, in the absence of restrictions by the insured, the beneficiary, at any time an interest payment is due, may withdraw the amount so left with the company. Another variation of the plan consists in making the rate of interest on the bond INSTALLMENT POLICIES 107 considerably higher than the company assumes it can earn. To pay the higher rate, however, the company charges a premium for an additional amount of insurance sufficiently large to furnish the extra return. CHAPTEE X OTHER LEADING TYPES OF CONTRACTS JOINT-LIFE POLICIES Under an ordinary joint-life policy two or more persons are insured in favor of each other, the policy terminating and being payable when the first death amongst them occurs. Such a policy may be issued in connection with any of the forms of insurance previously discussed, viz, term insurance, whole-life insurance, endowment insurance, etc., and the premium may be paid on either the continuous-payment or limited-payment plan. If -issued on the endowment plan, the company agrees not only to pay the policy in the event of the death of one of the parties to the contract during the endowment period, but also at the end of the period if all the parties to the contract are then alive. Premiums on Joint-Life Policies. The principles under- lying the computation of rates on joint-life policies are the same as those used in computing the rates on policies cover- ing single lives, with the exception that the theory of prob- ability of death must be applied with reference to two or more lives, instead of one, in order to determine the lia- bility of the company. Manifestly, since the company agrees to pay the policy as soon as one of two (or more) persons dies, the premium on a joint-life policy is higher per $1,000 of insurance than the rate on a policy on either life alone. On the other hand, it is apparent, that the premium on a joint-life policy covering two persons is less than the sum of the premiums on the policies insuring the two lives separately. On the two separate policies the company's liability is greater because each will involve the payment of its face value upon the death of the insured, while under the joint-life policy only one claim will be paid i.e. upon the happening of 108 OTHER LEADING TYPES OF CONTRACTS 108 02 W * M 3 r 1 (M * 1 1 I i 7 i J_ I I O GO co CD OB T. cc OQ cS 7^ Cj S rS a p-5 rt o> c 5 C D c 5 < r> ^ O a c< 3 li Q c ? < w 4 c o i M ^ MEASUREMENT OF RISK 127 The table shows that in thirty trials of ten throws each ithe actual experience coincided with the probable in eleven cases, that in two instances heads appeared eight times out of ten, and in one case only once. These results in groups of | ten may be combined into groups of twenty, thirty, fifty, one hundred, or in a single group of three hundred, and compari- sons may then be made of the fluctuations in those respective groups. By this arrangement the original data assumes the form shown on page 126: In the above table the data are arranged in fifteen groups of twenty throws each, ten groups of thirty, six of fifty, three of one hundred, and a single group of the three hundred throws and the number of times the coin fell heads or tails is shown for each group. The important fact to be considered is the relation between the probable and the actual experience in each grouping of the data. For instance, in twenty throws the probability is that heads will appear ten times, but the figures show that in one case this result occurred thirteen times and once only six; in thirty throws heads appeared as many as eighteen times in two instances and as few as eleven the same number of times. The following brief table shows the maximum and the minimum number of times the coin turned heads up in any single trial of the specified number of throws: FLUCTUATIONS IN NUMBER OF TIMES HEADS IN GBOUPS OF NUMBER OF TIMES TRIED MAXIMUM NUMBER TIMES HEADS APPEARED MINIMUM NUMBER TIMES HEADS APPEARED 10 throws 20 30 " 50 100 300 30 15 10 6 3 1 8 13 18 29 53 150 1 6 11 22 45 150 If this data are now reduced to the form of percentage the results can be more readily compared^ for the amount of the 128 THE PRINCIPLES OF LIFE INSURANCE fluctuations will then have a common basis. It is understood that the probability of the coin falling heads up is \ and this will be represented by fifty per cent. The variation of the actual percentage from fifty per cent, will therefore be the measure of the variation. The table presented herewith gives the results obtained: PERCENTAGE OF TIMES HEADS UP IN GROUPS OF MAXIMUM PER CENT. MINIMUM PER CENT. 10 20 30 50 100 300 80 65 60 58 53 50 10 30 36.7 44 45 50 This table furnishes the basis for an important generaliza- tion with reference to the accuracy of the theory of proba- bility. It shows that where the coin was thrown ten times the results varied from a minimum of ten per cent, to a maxi- mum of eighty per cent.; where twenty throws were made the variation was less, viz, from thirty to sixty-five per cent.; and that as the number of throws increased the vari- ation became smaller and smaller and the percentage of times heads appeared approached fifty, the true probable percentage. That the three hundred throws resulted in exactly one hundred and fifty heads must be regarded as an accident; but it can be said with equal certainty that it would be impossible out of any three hundred purely chance throws to get as many as eighty per cent, or as few as ten per cent, to fall heads up. The generalization referred to above is as follows: Actual experience may show a variation from the true " probable " experience but as the number of trials is increased this vari- ation decreases; and if a very great number of trials were taken the actual and the probable experience would coincide. Concretely, if the coin were flipped ten million times and it were a pure chance which way it would fall, the MEASUREMENT OF RISK 129 actual results would be so near five million times heads that he difference would be negligible. This generalization is called the law of average. This law is fundamental to all nsurance. Premium rates are based on probable losses and srill not accurately measure the risk unless the actual experi- ence approximates the probable. That this approximation shall be realized it is at all times necessary to deal with a sufficiently large number of cases to guarantee that great luctuations in results will be eliminated, i.e. to insure the operation of the law of average. In other words prediction of the future in life insurance based on what has happened tn the past can be made for a large group of persons ; it can- not be made for a single individual. When a mortality table shows that persons of a certain age die at the rate of seven Der thousand per year that does not mean that out of a group one thousand exactly seven will die within a year,, but that out of a large group, maybe containing many thousands, ;he deaths will occur at the rate of seven per thousand. With reference to the prediction of future mortality rates ;he law of average has a double application. Future mor- tality will be measured on the basis of past mortality data. These data of the past will supposedly be an approximate measure of the law of mortality heretofore referred to. But the statistics used for this purpose must be of sufficiently general application and must include a sufficiently large group >of individuals to insure the operation of the law of average. Only in case this is so will the data in question be a fair jineasure of the true law of mortality. Granted then that the collected data are approximately correct, they become a meas- ure of future mortality, only in case the group among whom {the probable deaths are to be estimated is large enough to guarantee an average death rate or the operation of the law of average within the group. THE MEASUREMENT OF MORTALITY MORTALITY TABLES The establishment of any plan of insuring against prema- ture death requires some means of giving mathematical values 130 THE PRINCIPLES OF LIFE INSURANCE to the chances of death, and the considerations advanced in the first division of this chapter show that the laws of proba- bility can be used for this purpose as soon as trustworthy data are secured showing the course of past mortality. Mor- tality tables, as such data are called, are records of past mortality put into such form as can be used in estimating the course of future deaths. Sources of Mortality Tables. There are two sources from which the best-known mortality tables in existence to-day have been obtained: (1) population statistics obtained from census enumerations, and the returns of deaths from registran tion offices, and (2) the mortality statistics of insured lives. Well-known examples of the former are the English life tables of Drs. Farr, Ogle, and Tatham, successively in charge of the General Eegistry Office of England and Wales. Dr. Farr's life table, for instance, was based on the registered deaths in England and Wales during the years 1838-54, and on the two census enumerations of population for 1841 and 1851. Objection to Tables Based 'on Population Data. For the purposes of measuring the mortality of insured lives, however, it is questionable whether statistics of a general population can be used. Such data, to be sure, would repre- sent the average mortality of a population group and to that extent would approximate the true law of mortality. But for purposes of insurance this may or may not be the mortality rate desired. An insurance company wants a measure of the mortality occurring among insured lives and it is probable that this may differ from that of a specific population group. Insured lives are subject to special influences affecting mor- tality and these factors must be taken into consideration. The statement has been made that if an insurance company could insure every person who passed a certain corner in a large city until it had a large enough group to guarantee the operation of the law of average, the company could dispense with its medical examination. This is probably true, but the i trouble is, when the matter of insurance is left to the choice \ MEASUREMENT OF RISK 131 of the individual, not every one who passed the corner in question would insure; and if this group could be divided into two parts, those who insure and those who do not, the former would show a much higher rate of mortality than the latter. Statistics of insurance companies bear out this state- ment. Mortality tables based on population statistics formed the first scientific basis for insurance rates, but their approxi- mation to true insurance mortality was not close and they were supplanted by tables based on insured lives as soon as the experience was forthcoming on which to base the latter. The present tables in use by American life-insurance com- panies and required by most state insurance departments as a basis for the valuation of policy liabilities have been con- structed from data of insured lives. Description of a Mortality Table. A mortality table has been described as the picture of " a generation of individuals passing through time." 2 It shows a group of individuals entering upon a certain age and traces the history of the en- tire group year by year until all have died. Since any de- scription will best be understood by reference to an actual table, the American Experience table, used almost exclusively for the computation of premium rates by old line companies in the United States, is presented on pages 132-133. The essential features of the table are the two columns of the number living and the number dying at designated ages. It is assumed that a group of 100,000 persons comes under observation at exactly the same moment as they enter upon the tenth year of life. Of this group 749 die during the year, leaving 99,251 to begin the eleventh year. The table proceeds in this manner to record the number of the original 100,000 dying during each year of life and the number living at the beginning of each succeeding year until but three persons of the original group are found to enter upon the ninety-fifth year of life, these three dying during that year. "NEWSHOLME, Vital Statistics, ed. 3, 255. 132 THE PRINCIPLES OF LIFE INSURANCE AMERICAN EXPERIENCE TABLE OF MORTALITY AGE NUMBER LIVING AT BEGINNING OF DESIGNATED YEAR NUMBER DYING DURING DESIGNATED YEAR YEARLY PROBABILITY OF DYING YEARLY PROBABILITY OF SURVIVING 10 100,000 749 .007490 .992510 11 99,251 746 .007516 .992484 12 98,505 743 .007543, .992457 13 97,762 740 .007569 .992421 14 97,022 737 .007596 .992404 15 96,285 735 .007634 .992366 16 95,550 732 .007661 .992339 17 94,818 729 .007688 .992312 18 94,089 727 .007727 .992273 19 93,362 725 .007765 .992235 20 92,637 723 .007805 .992195 21 91,914 722 .007855 .992145 22 91,192 721 .007906 .992094 23 90,471 720 .007958 .992042 24 89,751 719 .008011 .991989 25 89,032 718 .008065 .991935 26 88,314 718 .008130 .991870 27 87,596 718 .008197 .991803 28 86,878 718 .008264 .991736 29 86,160 719 .008345 .991655 30 85,441 720 .008427 .991573 31 84,721 721 .008510 .991490 32 84,000 723 .008607 .991393 ' 33 83,277 726 .008718 .991282 34 82,551 729 .008831 .991169 35 81,822 732 .008946 .991054 36 81,090 737 .009089 .990911 37 80,353 742 .009234 .990766 38 79,611 749 .009408 .990592 39 78,862 756 .009586 .990414 40 78,106 765 .009794 .990206 41 77,341 774 .010008 .989992 42 76,567 785 .010252 .989748 43 75,782 797 .010517 .989483 44 74,985 812 .010829 .989171 45 74,173 828 .011163 .988837 46 73,345 848 .011562 .988438 47 72,497 870 .012000 .988000 48 71,627 896 .012509 .987491 49 70,731 927 .013106 .986894 50 69,804 962 .013781 .986219 51 68,842 1,001 .014541 .985459 52 67,841 1,044 .015389 .984611 MEASUREMENT OF KISK 133 AMERICAN EXPERIENCE TABLE OP MORTALITY (Continued) AGE NUMBER LIVING AT BEGINNING OF DESIGNATED YEAR NUMBER DYING DURING DESIGNATED YEAR YEARLY PROBABILITY OF DYING YEARLY PROBABILITY OF SURVIVING 53 66,797 1,091 .016333 .983667 54 65,706 1,143 .017396 .982604 55 64,563 1,109 .018571 .981429 56 63,364 1,260 .019885 .980115 57 62,104 1,325 .021335 .978665 58 60,779 1,394 .022936 .977064 59 59,385 1,468 .024720 .975280 CO 57,917 1,546 .026693 .973307 61 56,371 1,628 .028880 .971120 62 54,743 1,713 .031292 .968708 63 53,030 1,800 .033943 .966057 64 51,230 1,889 .036873 .963127 65 49,341 1,980 .040129 .959871 66 47,361 2,070 .043707 .956293 67 45,291 2,158 .047647 .952353 68 43,133 2,243 .052002 .947998 69 40,890 2,321 .056762 .943238 70 38,569 2,391 .061993 .938007 71 36,178 2,448 .067665 .932335 72 33,730 2,487 .073733 .926267 73 31,243 2,505 .080178 .919822 74 28,738 2,501 .087028 .912972 75 26,237 2,476 .094371 .905629 76 23,<61 2,431 .102311 .897689 77 21,330 2,369 .111064 .888936 78 18,961 2,291 .120827 .879173 79 16,670 2,196 .131734 .868266 80 14,474 2,091 .144466 .855o34 81 12,383 1,964 .158605 .841395 82 10,419 1,816 .174297 .825703 83 8,603 1,648 .191561 .808439 84 6,955 1,470 .211359 .788641 85 5.485 1,292 .235552 .764448 86 4,193 1.114 .265681 .734319 87 3,079 933 .303020 .696980 88 2,146 744 .346692 .653308 89 1,402 555 .395863 .604137 90 847 385 .454545 .545455 91 462 246 .532466 .467534 92 216 137 .634259 .365741 93 79 58 .734177 .265823 94 21 18 .857143 .142857 9r- 3 3 1.000000 .000000 134 THE PRINCIPLES OF LIFE INSURANCE Construction of the Mortality Table. The table as given above represents the mortality data in its final form for use in expressing probabilities of death and of survival. It is mani- festly impossible for any insurance company to insure a group of 100,000 persons of exactly the same age and at exactly the same time, and it is equally impossible to keep any such group under observation until all have died. Insurance poli- cies are written at all times of the year and on lives at various ages. It is entirely practicable that a record be kept of all insured lives, showing at each age the number of persons under observation, and of those observed for one year at least the number who have died. If data are collected, therefore, showing (1) the age at which persons come under observa- tion, (2) the duration of the period of observation, and (3) the number dying during one year, for each age, the materials will be furnished, out of which a mortality table may be con- structed. Suppose, for illustration, that statistics have been collected as follows : AGE NUMBER UNDER NUMBER DYING BEFORE OBSERVATION END OF YEAR 10 30,000 210 11 150,000 1200 12, etc. 80,000 720 From these figures death rates may be computed for the respective ages in the following manner : KATE OF DEATH KATE OF DEATH AGE EXPRESSED AS A EXPRESSED AS FRACTION A DECIMAL 10 -sSif = ' 007 11 WL = .008 12 Death rates may be so computed for each separate age to MEASUREMENT OF RISK 135 the maximum limit of life, if only the data are collected as required above. If these figures can be considered as repre- senting the yearly probabilities of dying 3 for persons of each given age, a mortality table may be constructed from them by assuming a group of say 100,000 persons at the youngest age for which it is desirable to compute the table and then reducing the group by reducing the number yearly according to the given figures of the probabilities of death. The follow- ing simple table will illustrate this method: 123 4 5 ASSTTMFH SUBTRACT (4) AbsuMfcu MULTIPLY BY RESULT: NUM- FROM (2) FOR jNUAi PROBABILITY BER OF DEATHS NEW RADIX DIVING OF DYING AT GIVEN AGE AT NEXT AGE, EQUALS: 10 100,000 X .007 = 700 99,300 11 99,300 X .008 = 794 98,506 12 98,506 X .009 = 887 97,619 13 97,619, etc. Since the probability of dying at age 10 is .007, there will occur 700 deaths during the year among the 100,000 starting at age 10, this leaves 99,300 of the group to begin age 11 and this latter number dies at the rate of eight per thousand (.008), making 794 deaths during the year. In this way the original 100,000 are reduced by deaths year after year until all have died. Thus is the statement true that the mortality table represents " a generation of individuals pass- ing through time." In the mortality table shown on page 132 the two columns denoting yearly probabilities of death and of survival represent the final form of the actual statistics of dying among insured lives. These probabilities were then 3 The distinction between " central death rates," as the above rates are called by actuaries, and " probabilities of death," and the method of obtaining the latter from the former cannot be explained in the space available here. For purposes of simplification, death- rates and probabilities of death are therefore assumed to be identi- cal. For the construction of a mortality table, probabilities of death are necessary and they have reference to rates of dying among a group of persons beginning a certain age of life. 136 THE PRINCIPLES OF LIFE INSURANCE applied to the assumed population of 100,000 at age 10, in the manner herewith explained, and the result was the Ameri- can Experience table of mortality. Kinds of Tables and Important Tables Used in the United States. There is an important classification of tables of three kinds dependent on the data used in their calculation. They are known as select, ultimate, and aggregate tables. These terms have reference to the question whether the data used have been affected by medical selection. It is a well- known fact that lives which have been newly examined by an insurance company and have passed the medical tests required before becoming policyholders show a much lower rate of mortality than lives not so examined. The number of deaths occurring, for example, among 10,000 policyholders aged 40 who have just passed the medical examination will be fewer than among 10,000 aged 40 who were insured at age 30, and have been policyholders for ten years. So it is im- portant for a company in estimating the probable mortality to know whether it has a large number of newly selected lives. An unusually low mortality is to be expected among the risks of a new company, but such a record in the first few years furnishes no basis for assuming that the low mortality will continue. Since newly selected lives, therefore, furnish a lower mor- tality it is generally considered the safer plan for a company to compute premium rates on the basis of the mortality among risks with whom the benefits of fresh medical selection have passed. A select mortality table is based on data of freshly selected lives only; an ultimate table excludes this early data, usually the first five years following entry, and is based on the ultimate mortality of insured lives. Aggregate tables in- clude all the mortality data, the early years following entry as well as the later. The tables most used in the United States to-day by insur- ance companies are three. The Actuaries', or Seventeen Offices table, was calculated from the experience of seventeen British life-insurance companies and was introduced into the MEASUREMENT OF RISK 137 United States by Elizur Wright as the standard for the valu- ation of policies in Massachusetts. This table has at the present time been largely supplanted by the American Experi- ence table, the one found on page 132. The latter table was published in 1868 by Sheppard Homans and was calculated from the mortality experience of the Mutual Life Insurance Company of New York. Most premium rates for Ameri- can companies are to-day computed with this table as the basis. It is what was described heretofore as an ultimate table. The National Fraternal Congress table was derived from the experience of two American fraternal orders and was first published in 1898. It has been adopted by the National Fraternal .Congress and by a number of states as a standard for the computation of premiums and the valuation of policies among the fraternal societies. Application of the Theory of Probabilities to the Mor- tality Table. The statement was made earlier in this chap- ter that risk in life insurance is measured by the application of the laws of probability to the mortality table. Now that these laws are understood and the mortality table has been explained, a few simple illustrations may be used to show this application. Suppose it is desired to insure a man aged 35 against death within one year, within two years, or within five years. It is necessary to know the probability of death within one, two, or five years from age 35. This probability, according to the laws heretofore explained, will be determined according to the mortality table and will be a fraction of which the denominator equals the number living at age 35 and the numerator will be the number who have died during the one, two, or five years, respectively, following that age. According to the table, 81,822 persons are living at age 35, and 732 die before the end of the year. Hence the proba- bility of death in one year is viffl- During the two years following the stated age there are 732 -{- 737 deaths, or a total of 1,469. The probability of dying within two years is there- fore ss* Likewise the total number of deaths within five 138 THE PRINCIPLES OF LIFE INSURANCE years is 732 + 737 + 742 + 749 + 756 or 3,716, and the probability of dying within five years is thus gV^V Probabilities of survival can also be expressed by the table. The chance of living one year following age 35 will be a fraction of which the denominator is 81,822 and the numerator will be the number who have lived one year following the specified age. This is the number who are living beginning age 36, or 81,090, and the probability of survival for one year is therefore %[%%% These illustrations furnish an opportunity for a proof of the law of certainty. The chance of living one year following age 35 is ^"^2 an( ^ the chance of dying within the same period is 8 \ 2 -. The sum of these two fractions equals %i%22 or 1, which is cer- tainty, and certainty represents the sum of all separate proba- bilities, in this case two, the probability of death and the probability of survival. In like manner many more instruc- tive examples of the application of these laws to the mortality table could be made, but they need not be carried further at this point, for the subject will be fully covered in the chapters on " Net Premiums." BIBLIOGRAPHY DAWSON, MILES M., Elements of Life Insurance, ed. 3, 24-37. FACKLER, EDWARD B., Notes on Life Insurance, chaps. 2, 5. GEPHART, W. F., Principles of Insurance, chaps. 2, 3. Mom, HENRY, Life Assurance Primer, chaps. 3, 6. WICKENS, C. H., " On the methods of ascertaining the rates of mortality amongst the general population of a country, district or town, or amongst different classes of such popu- lation, by means of returns of population, births, deaths and migration." Journal of the Institute of Actuaries, xliii, 23-84. (Probably the best complete statement of the .subject in the English language.) CHAPTER XII FUNDAMENTAL PRINCIPLES UNDERLYING RATE-MAKING By BBUCE D. MUDGETT To compute premium rates in life insurance the following facts must be known: (1) the age of the insured; (2) the kind of policy to be issued and its face value; (3) the mor- tality table to be used in measuring the incurred risk; and (4) the maximum rate of interest which the company is willing to guarantee on funds in its possession. For exam- ple, if a contract is issued promising to pay the holder $1,000 should death occur within the following twelve months, and if the chance of death within one year is measured by the Ameri- can Experience table of mortality and it is further known that the person to be insured is forty years of age, all the facts are at hand for determining the amount of money to be contributed by him in order to cover the risk. At age 40 the table shows that his chances of dying are 9,794 in 1,000,- 000, or, expressed as a decimal, .009794. This decimal multi- plied by 1,000 represents the amount of money the insured must pay to receive the protection promised, if it is assumed that the money is put away and no use made of it until needed to pay losses. While the illustration is exceedingly simple and makes no attempt to bring out many of the complicated factors found in a more complete analysis of rate-making, it contains the essential features of any rate computation, viz, the determination of the risk covered and the amount payable in case the risk occurs. But before a fuller analysis can be under- taken it is necessary to explain certain peculiarities of life in- surance which differentiate it from insurance of other hazards and which are fundamental to any .discussion of rate-making. 139 140 THE PKINCIPLES OF LIFE INSURANCE Certain arbitrary rules used in rate computations must also be stated. To this twofold task the present chapter is de- voted. Features Peculiar to Life Insurance. Protection and in- vestment. While most kinds of insurance contracts have a single purpose, namely, the assumption of a particular risk, the great majority of life-insurance policies embody a two- fold purpose by combining insurance with investment. Every policy which contains an endowment feature, i.e. which cre- ates a fund available upon survival for a stated period, is to that extent an investment, and the increase of this investment fund constantly minimizes the insurance element. For in- stance, a policy issued ten years ago and having an endow- ment fund to its credit at the time of the insured's death equal to $500 will pay this $500 and in addition $500 more out of the " insurance fund." In other words, by the growth of the " investment fund " the insurance element of the policy is constantly decreased, While this fact is clearly apparent in the case of an endowment policy, it is not so evident in the so-called " ordinary life " policy. But there is no difference in principle, for the ordinary life policy accumulates a re- serve which eventually wipes out the insurance. As is often, stated, an ordinary life policy based on the American Experi- ence table of mortality matures as an endowment at age 96. This difference between life insurance and fire insurance, for instance, is fundamental, for the loss in fire insurance is measured by the total risk of burning, whereas in life insur- ance it is always equal to the total risk involved less the reserve fund. The hazard of death. Closely associated with this reserve factor in the life-insurance contract is the nature of the hazard or risk insured against. Fire insurance may again be called upon for a contrast. In fire insurance, the risk is loss by fire ; and fire may or may not occur. The pre- mium therefore need only provide against the possibility that fire occur within the term of the policy, and there is always the chance that the property may never burn. But not so PRINCIPLES UNDERLYING RATE-MAKING 141 with life insurance. While property may never burn, death is sure to occur eventually and death, therefore, as such, can- not be insured against. It can be provided for. That is, the risk insured against is the possibility of death at some par- ticular time. A company can insure against the chance of dying within One year, for instance, but if it agrees to pay $1,000 at death whenever it may occur, it really must pro- vide two funds, one against premature death and one to pro- vide for the certainty of death at an advanced age. Since the American Experience table assumes that all lives have failed by age 96, the company basing premiums on this table must have a reserve fund equal to the face of the policy by the time the insured has reached that age. This furnishes another reason why the ordinary life policy is sometimes called an endowment at age 96. A long-term unilateral contract with a fixed and unchangeable premium. A third peculiarity of life-insur- ance policies lies in the fact that they are usually issued for long terms at a premium fixed in advance and that the com- pany does not retain the right of cancellation. It has been variously estimated that from eighty per cent, to eighty-five per cent, of all insurance in force in the United States is composed of whole-life policies and twenty-year endowments and the most recent statistics show that about two-thirds of the insurance in force is insurance for the whole of life; hence it follows that a company in computing premiums must estimate its experience for at least twenty years and in the vast majority of cases for much longer, since the company must continue the contract in force for so long as the insured pays premiums. Furthermore, the company cannot change the premium on any policies in force, and if policies have been issued at inadequate premiums, these contracts must be carried at a loss. If the deficit cannot be made up out of surplus, of course, the company will become bankrupt. This necessity of issuing a long-term contract, without the right of cancellation, and at a premium that cannot be changed, compels the company to exercise great care in de- 142 THE PRINCIPLES OF LIFE INSURANCE termining the premium to be charged for the risk. The mor- tality tables used to measure life risks represent one of the highest developments in the application of past experience to the determination of future events. In -fire, marine, casualty, and in fact in most other kinds of insurance the contract is usually for one year or for a short term at most, and the company withholds the right in most cases to cancel the policy at will. In a contract covering one of the last-named risks the company needs only to collect a premium adequate to cover the risk for one year or for a few years at the most. If this should turn out to be insufficient, the company can can- cel the policy and thus prevent insolvency, or it can avail itself of the opportunity on renewing the contract to increase the premium. Application of the principle of indemnity in life insurance. Life insurance differs again from other forms of insurance with respect to the part played by the principle of indemnity in determining the amount of insurance which can be carried. In fire underwriting it is a fundamental prin- ciple, admitting of no exceptions, unless state statutes stipu- late to the contrary, that the insured shall not collect more than the actual cash value of the property destroyed. But who will determine what is the financial worth of a human life? To be sure a rough estimate may be arrived at, based on a man's income-producing power, but so long as the amount of insurance applied for is such as could be reasonably needed by a man in any occupation or profession the right of the insured to decide for himself how much insurance he will carry is not questioned. Assumptions Underlying Rate Computations. When the problem of rate computation is approached it will be found that several questions at once present themselves, the answers to which will exercise much influence upon the re- sults to be obtained. For instance, how is the premium to be paid? Is it to be paid in a single sum which will cover the risk for the entire period, as is the case with most kinds of insurance contracts, or will periodic payments be made an- PRINCIPLES UNDERLYING RATE-MAKING 143 nually, semi-annually, or otherwise ? Again, when is it to be paid? In case of annual premiums, will they be paid at the inception of the risk and annually thereafter, or will some other time be found ? Further questions are : What will be done with the money between the time it is received and the time it is paid out? How will mortality rates be determined for periods of less than one year duration in case, for instance, monthly premiums are decided upon, since the standard mor- tality tables give nothing less than yearly rates of mortality ? And, finally, when will death claims be paid? Clearly these questions must be answered before beginning the computation of rates ; and their answer will furnish a method of procedure in rate-making. Premiums may be paid in a single cash sum, called the "single premium," which pays for the entire risk incurred during the life of the policy, or they may be paid in periods ranging from one week to one year. Most policies are pur- chased by an annual premium. When actuaries first set them- selves to the task of computing premium rates they laid down the following working rules : ( 1 ) premiums will be paid in ad- vance; and (2) matured claims will be paid at the end of the policy year in which the policy matures. Accordingly, if a policy is purchased by a single premium this sum is to be paid at the inception of the risk; in the case of annual premiums the first payment is to be made on the date of issue of the policy and equal amounts annually thereafter on the anniver- sary of this date. This assumption squares with the actual practice of insurance companies for it is an invariable rule to require the payment of the first premium at the time the policy is issued. In fact the law of contracts makes the payment of a consideration a prerequisite to the beginning of the risk. It is clearly evident in the case of single premiums, and it is true only in lesser degree with annual premiums, that the company will have the money on hand for some time before being called upon to pay it out again in satisfaction of ma- tured claims. The question of the use of the money in the meantime therefore arises. This money is invested and made 144 THE PRINCIPLES OF LIFE INSURANCE to earn interest while in the company's possession, and it is proper that regard be had to these interest earnings as one source of the fund available to pay claims. But since the company does not know in advance what rate of interest will be earned it is necessary to assume a rate which is reasonably certain of being earned each year throughout the long life of the policy. And since much of the premium money received by the company is held for a number of years before being paid out in the form of matured claims it will be possible to earn interest on interest. The importance of compound in- terest accumulations to an insurance company is evident from the following figures showing first the amount of money ob- tained from investing $1,000 at different rates of interest for fifty years; and second, the amount of money which must be invested in the beginning to equal $1,000 in fifty years, at different rates of interest : fa t 2% =$ 2,692 3% = 4,384 Amount of $1,OOOJ 3i/ 2 % = 5,585 in 50 years 1 4% = 7,107 5% = 11,467 6% = 18,420 fa t 2% =$371.50 Present worth of $1,000 due 50 4 years hence 3% = 328.10 3y 2 % = 179.10 4% = 140.70 5% = 87.20 I 6% = 54.30 In other words, if six-per-cent. interest can be guaranteed on an investment, $1,000 may be put away now and at the end of fifty years it will have accumulated to $18,420; or in order to pay a debt of $1,000 fifty years hence it is necessary to put away only $54.30 and earn compound interest on it at the rate of six per cent. These facts are highly important to the insurance company, which is often called upon to keep policies in force for fifty years. In determining the interest rate to be assumed in comput- ing premiums it is necessary to select a rate which the com- PRINCIPLES UNDERLYING RATE-MAKING 145 pany is sure of earning every year over a long period of years. The assumption that 6 per cent, could be earned would most surely be disastrous, for while the company might earn that rate in a prosperous year, this period might be succeeded by a business depression and through decreases in earnings and in the market value of securities or real estate the com- pany would fail to earn the assumed 6-per-cent. rate and it would be called upon to replenish its inadequate earnings from surplus or, in the absence of the latter, might be forced into bankruptcy. This makes it necessary for the company to assume a rate of interest which can be earned even in times of business depression. The first premium rates used in the United States were based on a 4-per-cent. interest assumption and this rate has been very generally employed in cases where the Actuaries' table of mortality was used to compute pre- miums. With the American Experience table a rate of 3^ per cent, has generally been used until recent years. Since about the year 1900 a number of companies have been using a 3-per-cent. interest assumption. Where policies are made participating it makes little difference what rate is used so long as it is not too large, since all money earned above the rate assumed is returned to the policyholder in the form of dividends ; and the lower the rate used the better will a com- pany be able to weather a period of financial depression. The second rule referred to above stated that matured claims would be paid at the end of the policy year. Some time must clearly be determined upon in order to know how long the money will draw interest before being paid. If it can be assumed that there will be a fairly even distribution of deaths throughout the year then on the average deaths will occur at the middle of the year. The payment of claims, then, based on this assumption, would occur six months after death. In the early experience of life-insurance companies this was not far from the truth, for it took about three months to make proof of death, and old policies allowed the company three months after proof before the claim was pay- able. At the present time, however, due largely to the factor 146 THE PRINCIPLES OF LIFE INSURANCE of competition, claims are paid promptly, one prominent com- pany, for instance, advertising that over ninety-five per cent, of its claims are paid within one day of receipt of proofs of death. The importance of this consideration lies in the fact that the company loses nearly six months' interest on the sum paid. For, if deaths occur on the average at the middle of the year and proof of death requires one week, as is likely to be the case nowadays, the claim is paid on the average at nearly the middle of the year. But by the assumption used in computing the premium the money is supposedly held until the end of the policy year. Computing premium rates at 4 per cent., this would mean a loss of $20 on a $1,000 policy. The assumption that claims are paid at the end of the year, however, is maintained in the face of this fact for two reasons: (1) because of the great amount of labor and expense involved in computing new tables based on the more correct assumption; and (2) because the mortality table, as explained in the preceding chapter, allows sufficient margin to cover this deficiency and make the position of the company perfectly safe. , Another assumption made by the companies in their rate computations is that the death rate is uniform throughout the year. Thus, if out of 100,000 persons of a certain age 600 die within one year, the assumption is that fifty die the first month, fifty the second month, and so on during the year. The fact is that the death rate is constantly decreasing up to about age 10 when it begins gradually to increase, and this increase continues at a constantly accelerating rate to the end of life. This assumption is of financial impor- tance to the company only in case of policies paid for by premiums at intervals more frequent than one year. In the case of annual premiums, since all premiums are paid in ad- vance, the money is on hand at any time during the year to, pay insurance costs. In the case of monthly premiums, how- ever, if only one-twelfth of the annual premium is collected in advance, but one-sixth of the total year's mortality should occur during the first month, the company will not have the PRINCIPLES UNDERLYING RATE-MAKING 147 funds on hand to pay losses. This situation can occur only during the first ten years of life when the mortality rate is constantly decreasing and it necessitates special treatment in case of insurance of children under age 10. But after age 10 the mortality rate is increasing and the discrepancy be- tween the assumption of uniform deaths and the actual situ- ation is favorable to the company and therefore presents no dangers, for the company will now collect one-twelfth of the premium, but will experience less than one-twelfth of the year's losses during the first month. BIBLIOGRAPHY DAWSON, MILES M., Elements of Life Insurance, ed. 3, 19-23, 38-39. FACKLER, EDWARD B., Notes on Life Insurance, 12-13, 51-52. MOIR, HENRY, Life Assurance Primer, chaps. 4, 5. CHAPTEE XIII THE NET SINGLE PREMIUM By BBUCE D. MUDGETT Classification of Premiums as Single and Periodic. Life-insurance policies may be purchased by a single premium, an annual premium, or a premium paid weekly, monthly, quarterly, or semi-annually. Of these the annual premium is by far the most important and may continue until the death of the policyholder or the maturity of the policy or may be limited to a definite number of years as in a twenty-pay- ment life policy and a twenty-payment thirty-year endow- ment. In the twenty-payment life policy, for instance, the premiums continue for twenty years provided death does not intervene before this period has elapsed and after the twenty payments have been made the policy requires no further payments and matures whenever death occurs. Few insur- ance contracts, with the exception of annuities, are purchased by single premiums, although they may be so purchased and the companies will quote single premium rates for any kind of policy. Nevertheless, in taking up the subject of rate computation in life insurance it is necessary to begin with a thorough study of the single premium, inasmuch as it fur- nishes the method of approach in determining annual pre- miums. Classification of Premiums as Net and Gross. The pre- mium charged for a life-insurance contract is supposed to cover all contingencies the company is likely to meet, and these may be conveniently grouped into two classes, viz, mor- tality and expenses. Mortality has reference to that part of the premium which provides for the occurrence of the event 148 THE NET SINGLE PREMIUM 149 or risk insured against, while the second element covers the costs incident to the management of a company, such as salaries, rents, commissions, etc., which may be fairly charged against a particular policy. In computing premiums mor- tality costs are always determined first and to this mortality element is added an amount, determined by a more or less scientific method, called loading, which provides for expenses, and from these calculations is determined the premium charged the policyholder. According, therefore, as to whether the "premium" in question is "loaded" or not, it may be classed as net or gross. The net premium makes provision for mortality losses only, while the gross or " office " premium contains this element plus an addition, or a "loading," for expenses. The gross premium is the only one known to the policyholder, but before it is obtained an actuary must have ascertained the net premium. If, therefore, the gross annual premium is the ultimate object of the study of rate compu- tation this study must begin by first determining the net single premium. From the latter, as will be shown later, the net annual premium can be found. Following this it will be possible to study the various methods of loading in order to ascertain the gross annual premium. In the preceding chapter it was shown that the computation of premium rates on any kind of policy required information as to (1) the amount of the policy, (2) the age of the insured, (3) the mortality table to be used in measuring the risk in- curred, and (4) the rate of interest assumed on funds pos- sessed by the insurance company. In the computations that follow, risks will always be measured according to the Ameri- can Experience table of mortality; the rate of interest as- sumed will be 3 per cent, and the face value of the policy will be $1,000 unless otherwise stated. The age of the in- sured will be stated in each instance. Term Insurance. Term insurance is the simplest type of contract issued insuring against premature death. Term policies usually run for five, ten, fifteen, or twenty years, and promise to pay the sum insured if the policyholder should die 150 THE PRINCIPLES OF LIFE INSURANCE within this period, nothing being paid if death does not occur during the designated term. Term policies are' therefore a distinct type of temporary insurance. Attempts have been made to popularize a one-year term policy which is renewable from year to year at the option of the insured, thereby grant- ing current cost insurance which is paid for at the beginning of each year, the premium furnishing protection for that year only, and a different rate being chargeable for the following year's insurance. This type of policy offers an excellent op- portunity to explain the simple elements of rate-making. Sup- pose, therefore, that the net single premium is to be ascer- tained on a renewable one-year term insurance of $1,000 on a life aged 45. Immediate use will now be found for two of the assumptions used in rate-making which were mentioned in the preceding chapter, viz, that premiums are paid in advance and that matured claims are paid at the close of the policy year. Accordingly, it is required to find the amount of money which must be paid in at the beginning of the year by a policyholder in order to enable the company to return $1,000 at the close of the year in case the policy has matured. The question must now be asked: What is the risk insured against? It follows from the definition of term insurance that it is the chance of dying during the year. This will be determined by means of the mortal- ity table. This shows that, of 74,173 persons living at age 45, 828 die during the year. Suppose now that an insur- ance company should issue 74,173 one-year term policies to persons aged 45. If the mortality experienced among this group coincides with the experience indicated in the mor- tality table there will be 828 deaths during the year. Since each of these deaths represents a liability of $1,000 to the company, and since the claims are payable at the close of the year, the company must have on hand at that time $828,000 to pay claims. But this entire amount need not have been collected from the policyholders since they were required to pay their premiums at the beginning of the year and the company was able to invest the money at interest for THE NET SINGLE PREMIUM 151 one year and earn 3 per cent, thereon. For every $1 col- lected, therefore, the company will have on hand $1.03 when the claims mature. Eight hundred and twenty-eight thou- sand dollars, therefore, bears the same ratio to the amount of money which must be collected from the group of 74,173 persons as $1.03 bears to $1. Put in the form of a proportion this may be stated as follows: 8 28 OOP _ 1 -08 x ~ T.OO 1.03 x 1.00 X 828000 = 803883.50 X may here be defined as the present value of $828,000 dis- counted for one year at 3 per cent. This amount of money ($803,883.50) therefore must be paid at the beginning of the year by the group of 74,173 persons in order that there may be on hand at the end of the year sufficient funds to pay $1,000 for each of the 828 deaths. To obtain the premium which each individual should pay, it is only necessary to di- vide the total fund by the number contributing, viz : 803,883.50 -f- 74,173 = $10.84 The " net single premium " for a one-year term insurance at age 45, or the amount of money that must be paid at the beginning of the year to supply each individual's contribu- tions to the death losses of the group for the year is, therefore, $10.84. This same problem may be approached in a different way and a formula stated for determining costs. The original assumption required the insurance of a group of 74,173 per- sons of identical age. But this is impossible to obtain in practice. Suppose now that it is desired to insure a single individual aged 45 against death during the year and that the net single premium for this insurance is to be ascertained. Clearly, if the event occurs against which protection is de- sired, it will cost the insurance company $1,000. But what is the probability of death occurring during the year? It has been shown that 828 persons aged 45 die out of a group of 74,173. Reference to the discussion of the theory of proba- bilities in Chapter XI will show that this is equivalent to 152 THE PRINCIPLES OF LIFE INSURANCE saying that the probability of death during the forty-fifth year is 7 %^ 3 . The cost to a single person, therefore, will be 7 4i73 of $1,000. But since this value needs to be on hand at the end of the year and money earns 3 per cent, interest, the amount to be paid in by the insured will be the value of the above amount discounted for one year at 3 per cent. This result is found as follows: YftkX 1000 1.03 = $10.84 It must not be assumed from this that an insurance com- pany can insure a single person; instead, it must always deal with a group sufficiently large to guarantee a close approxima- tion of its actual mortality experience with the table mor- tality. It must, as was explained earlier, be sure of the operation of the law of average. But it does not need to insure this entire group with the same kind of policy or at the same age. The law will operate if only the entire group of policyholders including all ages and all kinds of policies be sufficiently large. If the method here used in determining the cost of this insurance is carefully studied it will be found to embody the following process : Multiply the probability insured against by the amount of the policy and divide by the amount of $1 at the assumed rate of interest for one year; and from this formula it is possible to construct a general formula to apply in computing all net single premiums, viz, the probability insured against multiplied by the amount of the policy multi- plied by the value of $1 discounted for the period the money is held. One dollar discounted for one year at 3 per cent, equals |$f ==.970874. Multiplying by this factor gives the same result as dividing by 1.03. This formula will be used hereafter in computing net single premiums. It would be possible now to compute the net single premium paid at the beginning of the second year for the second year's insurance under our renewable one-year term policy issued at age 45. The probability of death during this year is the yearly proba- bility of death at age 46, or yf f-J-g and the cost of the year's insurance would be : THE NET SINGLE PREMIUM 153 X 1000 X .970874 In like manner, the yearly cost of insurance can be com- puted for any age from 10 to 95, inclusive, the years covered by the American Experience table. While much emphasis has here been placed upon the one- year term policy because of its appropriateness in developing the elementary principles of rate computation, the fact must not be lost sight of that one-year term policies are rarely sold. The usual term policies extend for five years or longer, and this fact brings complications into the matter of rate- making. Suppose it is desired to compute the net single premium for a five-year-term insurance issued at age 45, i.e. the amount of money which, paid in a single sum at age 45, will purchase insurance against death at any time within the next five years. Two facts are apparent upon a mo- ment's reflection: (1) the premium is paid only once, in a single sum at the inception of the risk; (2) death claims will be paid at the end of the year in which they occur, and not at the end of the five-year period. This latter fact has an important bearing on the interest which will be earned and therefore on the method of computing the five years' cost. Manifestly, the cost cannot be correctly de- termined by multiplying the total probability of dying dur- ing the five years by the face value of the policy and discount- ing this amount in one operation since some of the money collected will draw interest for only one year while another part will be earning interest for five years. It is necessary to compute the cost of each year's mortality separately. The probabilities insured against in this case are the chances that a person aged 45 will die during the first year following, during the second year, the third year, etc. These prob- abilities are respectively ^fffj, yff^, ? |ffy, -^ffj and Each of these figures must be multiplied by the amount insured and by the present value of $1.00 discounted in each instance by the length of time the money is held. The money available for the first year's death claims will be held one year; for the second year's claims, two years, etc., the 154 THE PRINCIPLES OF LIFE INSURANCE funds for the last year's claims being held five years. The discounted values of one dollar for one, two, three, four and five years at 3 per cent, interest are respectively $.970874, $.942596, $.915142, $.888487 and $.862609. The cost of the five years' insurance, therefore, can be shown as follows : 828 of 1st. year's insurance. 74,173 ;.888487 $10.733 " " 4th. j L i o l " " 5th. 74,173' Net single premiumr=$53.861 cost of 5 years' insurance. This computation shows that $53.86 deposited with the com- pany and placed at 3 per cent, interest will furnish enough money to pay all the death claims on this five-year term policy. Whole-Life Insurance. A whole-life policy continues for the whole of life and promises to pay its face value upon the death of the insured to his estate or his beneficiary. There is a possibility that the insured may live to an advanced age and this must be taken into consideration in computing the premium. This policy is like the term contracts just con- sidered with the exception that, instead of being limited to a definite number of years, it continues for the largest possible length of life and will certainly be paid at some time. Since the American Experience table of mortality assumes that all persons die by the end of the 95th year, the maximum possible age for which insurance against death needs to pro- vide in this case will be 95. The net single premium on a whole-life policy issued at age 45 must, therefore, provide against the possibility that the insured will die during his 45th year, his 46th year and so during every year up to and including his 95th. The separate probabilities insured against THE NET SINGLE PREMIUM 155 will be fifty-one in number, i.e. for the years 45 to 95 inclu- sive. The chance of dying in each separate year will be multi- plied by the face value of the policy ($1,000) and this amount discounted for the number of years between the issue of the policy (i.e. the payment of the single premium) and the payment of death losses, thus: 828 xl,000x.970874=10.837955=:cost of mortality during age 45 " " " " 46 " " " " 47 " " " " 48 " " 49 " " " " " 50 " " " " 51 =1 1.1 11092= " " ^- 4,173 74,1 / 3 Q97 ~-li- QR9 _-^^ 74,173 i^L 1 04.4 1^- i5?i 74,173 74,173 1,260 74J73 1,394 74,173 1,468 74,173 1,546 74,173 1,628 74,173 Xl 3 OOOx.701380=zll.914562r=r " Xl J OOOX-641862=12.703456z= Xl,000x.605016z=13.279307= 52 53 54 55 56 57 58 59 60 61 156 THE PRINCIPLES OF LIFE INSURANCE 1 713 ^-^Xl,000x.587395=13.565686=rcost of mortality during age 62 1,800 74,173 Xl ' 0(> x ' 57028e y^^X 1,000 X .553676=14.100737= '7 2> r3 X 1,000 X .521893=14.5648*9= " " Q ] KQ -X 1,000 X. 506692=14.741770= " " 74,17o o 24S * . \/ I 000 v 4-01014. I4.<37fil4.n " " " " 64 " 65 " 66 " 67 " " 68 " 69 " 70 71 72 " 73 " 74 " " 75 " 76 " 77 (( ( >TO " 79 " 80 " 81 82 '74 173 1 > uuu X.4yllM4: 14.0/t)14U Z,o2i d77fififi 1404^108 " " " 74,17j 74,173" 1)0 y^X 1,000 X .450189=14.858003= " " " 2 487 ^jT^X 1,000 X. 437077= 14.655070= " " 2 505 ^,wv/tf _ r\/-v/\ yx jiO/lO^fi 14491101 (t ft te 74,173 Al ' 00 A ^ -I^-X 1,000 X. 411987=13.89 1571= " " 74,173 v 1 flfin v TQOOR7 lT r ? c 91 r l4. " " " /4,173 2 431 vl OnfVv IRfin? 19797R40 " <( ff 2 369 74,173 Al ' 9 9Q1 ^^-Xl,OOOX.366045=11.306123= " " 74, 17 o 2,196 105216^3 " " " 74,173" ' / *' ' 9 091 ."'" M v i r>Afi vx oj.E:nT9 Q 79fi74fi " " " IA i-7o A -l,OOOA.o4oUJ^ y./^o/4b / 4,1/0 74,173 A ^-^X 1,000 X. 325226- 7.962607= THE NET SINGLE PKEMIUM 157 1)648 Xl,OOOx. 315754= 7.015526=cost of mortality during age 83 1)47 : X 1,000 X. 306557= 6.075510= " " " " " 84 74,173 1 9Q9 X 1,000 X. 297628= 5.184304= " " " " " 85 74,173' ^TT^X 1,000 X. 288959= 4.339859= " " " " 86 /4,173 qqq X 1,000 X. 280543= 3.528867= " " " " " 87 74,173 74, 17 o 555 74,173 385 74,173 246 74,173 137 74,173 58 74,173 18 74,173 3 74,173 X 1,000 X. 272372= 2.732056= " " " " 88 X 1,000 X. 264439= 1.978667= " " " " 89 X 1,000 X. 256737= 1.332611= " " " " " 90 X 1,000 X. 249259= .826685= " " " " " 91 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= " " " " 95 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 fiifl ^ the amount of the contract at the end of the period. Or it may be stated in this way: the probability insured against is -fJIff 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: f fifl 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 PREMIUM 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 'Xl,OOOX.970874 10.837955, cost of 1st. year's insurance. 10.776447 " " 2d. " " xl,000v.915142 10.734007 " " 3d. " " /4,173 oo Xl 5 OOOX-888487 10.732805 " " 4th. " Xl,OOOX-862609 10.780723 " " 5th. " 74,173 927 747173 JL5 X 1 > 00 X-862609 811.798884 " of 5 -year pure endowment. 74,173 Net single premium=$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: ffffA 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. CHAPTEE XIV THE NET SINGLE PREMIUM (CONTINUED) By BRUCE 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 pne 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 i monthly installments extending over a period of years, or in iten, 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- iments, 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 PRINCIPLES 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. 1 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 d-raw 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 in ten installments $878.6120 If the company therefore has $878.61 on hand at the time* the policy matures and continues to earn 3 per cent, interest PRESENT 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 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 : : x : 100 or i o o o _ 878- 6 f ~~ 100 x _ looooo 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 anc 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, thai 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 SINGLE PKEMIUM 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, 33569- 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 : ffllfXlOOX 970874 = $ 91 - 07= = net cost of first an ' nuity payment. In 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 : 0/1 1 7Q g^XlOOX-970874=$91.068681=net cost of 1st. annuity payment. 33 730 ._1_X100X .942596= 82.433465= " " " 2d. " " oo,oby 01 040 = 74.131508= ' ' ' 3d. OQ 7QQ . X 10 X'888487= 66.201715= " " " 4th. 38,569 = 58.679956= " " " 5th. -837484= 51.594434= " " " 6th. = 44.966819= " " " 7th. 1 fi Qfil ' X 10 OX-789409= 38.808328= " " " 8th. 16,670 Xlo0x766417 _ 33 125 493_ 9t h. -744094= 27.924023= " " " 10th. 38,569 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 PREMIUM 167 o/ 1 7Q xlOOx.970874==$91.068681=net cost of 1st. year's annuity. X 100 X. 942596= 82.433465= " " " 2d. " X 100 X. 915142= 74.131508= " " " 3d. " 38,o69 X 100 X. 888487= 66.201715= " " " 4th. " 26 237 ^-J-X 100 X. 862609= 58.679956= " " " 5th. " 00,00" 90 7fil '' X 100 X. 837484= 51.594434= " " " 6th. " X 100 X. 8 13092= 44.966819= " ". " 7th. " 77: X 100 X. 789409= 38.808328= " " " 8th. oo,oo9 16,670 Xlo0x j 66417== 33.125493= " " " 9th. 38,o09 14 474 X 100 X. 744094= 27.924023= " " " 10th. 12 383 ~ X 100 X. 722421= 23.194118= " " " llth. 38,569 o'tlX 100 X. 701380= 18.947025= " " " 12th. . 680951= 15.188938= " " " 13th. 6>9 ^-XlOOx.661118= 11.921688= " " " 14th. 38,569 51714 .58725552 74*173 XlX>680951== -55798634 74173' N ~' N '~~" .52930975 |^|||x IX. 641862= .50118940 .47360288 74,173 &A. 74S .44652894 .41995816 51,230 ^ *. ^ . w . v-w, .39388661 7 4, 1 7 o THE NET LEVEL PREMIUM 181 AQ QJ.1 ^-^ X 1 X .553676= .36831364 74,173 X l X .537549= .34323619 X. 521893= .31867466 ,17o X l X -506692= .29465097 X 1 X .491934= .271 19277 74, 17o If^fl X 1 X .477606= .24834894 74,1 to X 1 X .463695= .22616798 X 1 X .450189= .20472240 xlX. 437077= .18410468 X 1 X .424346= .16441098 XlX.411987= .14573097 X IX. 399987= .12813411 X IX. 388337= .11167444 XlX. 377026= .09637995 X 1 X .366045= .08226673 X 1 X .355383= .06934887 X 1 X .345032= .05760224 X 1 X .334983= .04705469 X 1 X .325226= .03772153 74,173 ^^ X 1 X .315754= .02960739 I * 5 I/O 5,485 74,173 >0 2266950 182 THE PKINCIPLES OF LIFE INSUKANCE 4,193 74,173 3,079 74,173 2,146 74,173 462 X IX. 297628= .01682491 XlX. 288959= .01199499 XlX. 280543= .00811677 XlX. 272372= .00514831 XlX. 264439= .00301969 XlX. 256737= .00159913 X 1 X .249259= .00072587 XlX. 241999= .00025775 74,173 -T^r X 1 X .234950= .00006652 /4,17o i. A ?- XlX. 228107= .00000923 /4,173 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 : 7 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 life annuity due computed on page 180 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 ^.-o^V or $37.3"5. 4. Deferred annuity. Deferred annuities a.re 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 x 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 ==$1.000000 H4S- X 1 X .970874= .96136489 78,106 X l X -942596= .92402309 7o,10o f7K 7<2O -'(* X I X .915142= .88791246 7o,luo iThe 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 78,106 X1 X. 888487= .85298438 78 ' 1Q6 XlX. 862609= .81917263 73,345 78 106 xlx - 837484 = .78643464 72,497 78>106 'XlX. 789409= .72392644 70,731 yg-^r X 1 X .766417= .69404963 69,804 78)106 XlX. 744094= .66500317 68,842 7^-j^r X 1 X .722421= .63673606 67,841 78>106 XlX. 701380= .60920186 . 680951= .58235582 H 2 ^! X 1 X .661 1 18= .55615982 64,563 T^g-XlX. 641862= .53056788 63 364 ^g-^rXlX. 623167= .50554828 62,104 T^YQ-g-XlX. 605016= .48106309 . 587395= .45708756 78 ; 10 gXlX. 570286= .43359581 78^06 X l X - 553676:== -41056068 56,371 rrrXlX. 537549= .38796219 i 0,1 uo . 521893= .36578481 53,030 yg-^Q-g- X 1 X .506692= .34401809 51,230 7g - I Y^-XlX.491934= .32266124 49 341 ~ X 1 X .477606= .30171251 THE NET LEVEL PREMIUM 185 f 7) ? 6 !x IX. 463695= .28116993 78,106 X IX. 450189= .26104922 .437077= .24136996 78,106 x 1 X .424346= .22215333 78,106 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 -)-, as follows: 155.947 Qiyq I 17.0003 *-*f V 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 1 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 onlv say that the chance that he will die within one 186 THE PEINCIPLES OF LIFE INSUKANCE year equals g-J-Jfj. 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 2~y 2 per 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 PREMIUM 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 INSUKANCE 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 $8.33492701. If, therefore, the following computation is made, neglecting un- important decimals, 647.69 77 71 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 74,173 Q A C\ 74173 X 2x70x.942596= 1.5087026 870 74173 X 3X70X.915142= 2.2541416 QQ/ 74173 X 4 X 70 X. 888487= 3.0051854 927 ?4173 X 5 X 70 X. 862609= 3.7732529 962 74173 X 6 X 70 X. 837484= 4.5619974 X 7 X 7 X- 813092= 5.3768015 1 944 74 173 X 8 X 70 X. 789409= 6.2222113 vYm X 9 X 70 X. 766417= 7.1020640 1 143 X 10 X70X. 744094= 8.0265003 $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: 2 =$5.1097 8.8349 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 PAWSON, MILES M., Elements of Life Insurance, ed. 3, 38-75, 84r-92. FACKLER, EDWARD B., Notes on Life Insurance, chaps. 3, 6, 7, 9, 10, 11. (An excellent elementary discussion of formulae and commutation columns.) Mom, HEXRY, 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 PRINCIPLES OF LIFE INSURANCE 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 RESEEVE 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 mortality that can safely 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 3y 2 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 year 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 RESEKVE 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 policy holders 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-five 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 PRINCIPLES OF LIFE INSURANCE O * < .. -i Sg***" 2 .ig Iff Jr ;I Sii in in CD t- oo oi r- c< co 10 o cd os o ci ci SrHT^^^COO^OStfS COcO'-H'-ICa-'J'tOt-CO t-OO3Uit-OSiHCJeOeOC^YHCSCOc (MCOT)<-<^l/5CODt-C-OOCOOOt-t-DinT}iC<5iHOS eocccoi-i^t-o^t-cDtooNoo^ot-cieoooos oo' in o t- ci TJ! ci o os' o' o oo' in t- eo o o' eo o oo' t-t-rHCDC5'^C0 1 J o* o" -^f TjT rn" oo" o" rn" -*" TjT rjT T m" *" os" rjT eo" cf IH~ o" os" oo" t> to" m~ ^" eo" eg" o" os" t-" to *f cc i-T t-t-t_t-t-{OcocDDcoDODOnnmmnft THE RESERVE 197 ,H 00 in in 1^ 00 CO O 05 l> ^_ O ^ CO CO in in CO CO O t- t- m' co' r-1 ci t> -^ CM' 06 m' r-i t> CM* t> m" fc M | Ii *f -d ^ g CD ^a 1 S ': gi VH g II rH ^ O OO 00 l> CO q O q CO Oi CO C^ T* in q CO ^ in CM t^ 00 C rH CX> iH tH CM l> CO ^ OT co' o r-< t-^ in CM' T)J t- t~' CD TH oi CM' in o> CM oJ m' in TJI' in OT' ^ CM' CM' t- 06 t-- m' T*r-IOTOCOOTCOT-lcOt-COOT'HCOt-COOOOCOinr-IOCOCOCM-<*COCOiHCM'H coTHiot-ooinmt-Tj o" to" o" of to" to" o" w - Tj co of i- o co to in co i- o t- to o of t-" to" Tj co CN r^" o> r- to i- Tj to co o CM c< CM N c" CNJ CM TH rn o i- r- co co os t- CM" IH" oT in" TjT co i-T co" co oo" 06" r- co o m * o co oo c co o> t> to m co CM in co_ in t^ q oo OT os eo q co to o> co rH rH q q IH to TI< r-j q r-j t- CNJ os rn in co_ COrHmCOCOOOOi-IOOOOOOOO o co" m" co" o" oo" oT m m" o COinCOtOinOOCOt-^r-t^int-OO co" to" o" o" rjT oo" m" t-" t-" o" oo" co" t-" o co" o" of co" co" o" CM" in" ^" co" csT i-T of co" to" m" co" T-T of t-" to" -*" N" o" of t-" to" TI~ co" M" CM" i-T eOCOCOCOCO i-H JO CO SB w eo ?i co" o, 5 ^- S S. S o. of aT o" *t* co" oo o o "- 8 3 ^ S 3 32 CO H 1O C CO CO FH CO CO O (M ^ CO SO co o in 01 eo t- r-i rH ^H i-H W CM CO - 3SS _ OO-*OOO*iOOO-(TtiSt-OOOOOOCO^to co" 10" to" t-~ cT o" r-T eo" TJ<" ig" o" t^" co" os" o" -4" w" gps 6 ia oq III co co o co 53 8? S g S OS t- jo c- oo a T- c co -*' co' -. -. . ^ *, R. t- oo oo oT p -H -'icoc<*oo>t-co'feo COCOCOCOJOJOJOlAJO rH 0* CO * O CO t- THE KESEKVE 201 CO IO t- co 55 o <* i* 10 3 eS 3 g s s s s s 8 s s si s s s" s II Tf CO J CO CO i-i -i o 01 eo O> kO M IO i I kno^t-oepcot- 2S CO co 1-1 eo. 10 rji co" t-T o" of oo* eo" wf -t" co" o eo i-l i-H O t- C*. CO. i^. 1>^. l>. O5. IO, 5O, kO, C. CO. _ O. kO^ rH. CO. kO, 50^ CO. CO, CO. kQ. -H. T3<. r-^. CO_ W. ^^t-COO s s kO eO CO t- ~ Ct t-H CO l-i t- >-. - if S5* 5" f f if if jf if 2" S2" s" s" IS" 2' S* JH" ^ "-f 5O* g" jJ Jl Th jH g J-J CO jH OO t H > t-, cs. kft^ ko_ o. i-j. IN_ ec^ co_ ko. co. oo_ t-_ e a ^p O * t- Tf Tl* i'i? kn" co" of co" ko" co" eo" eo" w" *-* tT^rd^t^fcrcooir^ko 2 fe "2 o* -J O5 t- -l eo" co" ^H" co" co* Ti* W* o" co* eo* k" -.jT co" IN" i-T 202 THE PRINCIPLES 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 KESERVE 203 & J-a < *<& (M O O IO C5 O > I O CO * CO * CC CO CO t- OS t 1 t QO CO 1C O5 CO CO (M b- CO rt< CO CO OJ (N i I -H O CO b- (M 10 00 CO i ( (M (M " CO rj? O O U5 O 10 CO CO t- IIP! : 5 B fa O fc (M O O 10 05 05 I-H CO T^ GO CO CO 05* r-H IO O5 CO CO (M t^ CO TjH CO CO (N - tw CO QO r , ^a ^a 4- 3 S 3 5 10 10 10 10 rH I-H O I 1 e* (2) COLLECTIONS 10 PER CENT. OF RENEWAL PREMIUMS O O O 00000 q o q o o id td td td id >o Tt< GO ^ CO i-H r-H (M CO 1O O 10 "* 10 CO T* TJH CO OS "* GO r-H GO* CM O* td CM* td I-H (M CO * t- 05 i i O O O O lO oa co TJH o CD o w B 1 s *i S o t-i o> n II 31*51 IB-ill lain *Cq JGJ ^ a^i pq p. H a U 05 M o o o o q q q q id o to io* (M CO TH CADING H H > H POLICY h !*B P o & 1 P gr fl w ^ w w i ^5 O P^ ^ <"] ^ PM ^^ iij fW ^^ ^ W ^ /. - &j H^ ^^ C-i ^ W ^ "^ CO &j & o CO 03 O CT, o M 1 2 "1 17 274.34 260.82 3 3 796.05 788.74 793.37 g 18. 289.22 279.95 5' 861.01 856.03 859.18 5* 19 308.32 299.29 1 928.91 926.36 927.96 p 20 327.58 318.81 1,000.00 1,000.00 1,000.00 BIBLIOGRAPHY DAWSON, 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 PKINCIPLES OF LIFE INSUKANCE president of an American company justifying expenses im 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. 214r-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. Now 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 229 230 THE PRINCIPLES OF LIFE INSURANCE 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." 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 564,579 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 IXSUEANCE 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 SURKENDEK VALUES AND POLICY LOANS 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 4 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 PEINCIPLES 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 poUcies 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 SUKKENDER VALUES AND 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 2Vfc 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 vp|i^e Allowed in lieu thereof shall be at least equal to the net value of ttie 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." 3HUDNUT, 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. :i Tl^tf 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 fo-ity 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 4 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 three 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 policy, but the contract is now self-supporting. Furthermore, the policyholder 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 , EDWARD B., Notes on Life Insurance, 97-98, SUKKENDEK VALUES AND POLICY LOANS 237 their policies in order to provide a fund to meet the higher been responsible for greatly increasing the uses of other kinds X l ' keeper and salaried man of to-morrow and, having become , acquainted with the beneficial results of industrial insurance, he will be in a much better position to appreciate the value of )ther forms of insurance, such as ordinary life, accident, health, fire, etc. Magnitude of the Business. The success which the in- 275 276 THE PRINCIPLES OF LIFE INSURANCE dustrial companies have achieved is clearly indicated by the remarkable growth of the business, especially since 1890. 1 Beginning in the United States as late as 1875, the business has grown by leaps and bounds until it has reached enormous proportions. On December 31, 1913, twenty-nine industrial companies were operating in the United States, and their industrial insurance at that time represented 29,243,950 policies with a face value of $3,962,385,087, or an amount nearly equal to 24 per cent, of the total ordinary life insurance in force in all American companies. The admitted assets of these companies at the close of 1913, as regards their indus- trial business, amounted to over $910,000,000, the premium income received during the year to nearly $219,000,000, and the claims paid to $60,000,000. It is also worthy of note that by far the largest share of the business is controlled by three companies, and these it may be stated were the first to undertake this form of insurance in the United States. The combined industrial business of these three companies on December 1, 1913, represented 25,- 296,622 policies or over 86 per cent, of the total policies, with a face value of $3,632,031,830 or nearly 92 per cent, of the total insurance written. One of the companies carried nearly 13,000,000 industrial policies and another over 11,000,000, and 1 The growth of industrial insurance is indicated by the following table, compiled from the Insurance Year Book: YEAR NUMBER OF COMPANIES INSURANCE WRITTEN DURING THE YEAR NUMBER OF POLICIES IN FORCE AT END OF YEAR TOTAL INSURANCE IN FORCE AT END or YEAR 1876 1880 1885 1890 1895 1900 1905 1910 1913 1 3 3 9 11 18 20 22 29 727,168 34,768,035 93,736,727 242,250,959 380,832,362 566,037,936 661,097,015 749,717,264 845,962,307 4,816 228,357 1,360,376 3,875,102 6,943,769 11,215,531 16,869,758 23,044,162 29,243,950 443,072 19,590,780 144,101,632 428,037,245 819,521,573 1,468,474,534 2,309,886,554 3,179,489,541 3,962,385,087 INDUSTRIAL INSURANCE 277 their insurance in force amounted to $1,778,000,000 and $1,- 462,000,000, respectively. In 1909 the three companies re- ferred to had about 750 superintendents, about 3,800 assistants, and about 21,000 agents. Comparison of Industrial with Other Forms of Life Insurance. Although industrial insurance is a modified form of ordinary level premium insurance, and is in most instances written by companies which also write life insur- ance on the ordinary plan, there are certain fundamental characteristics which distinguish it from all other forms of life insurance. Briefly stated these distinctive characteris- tics are : 1. The premiums are payable weekly whereas in ordinary life insurance they are payable annually, semi-annually or quarterly. This may be regarded as the most important dif- ference since the feasibility of industrial insurance depends upon, and the organization of the company's agency system must be adapted to, this particular method of paying pre- miums. Experience has demonstrated the necessity of very frequent premium collections if life insurance is to be widely disseminated among the wage-earning class. 2. The premiums, instead of being payable at the office of the company as is usually the case in ordinary life insurance, are collected weekly by the companies' agents from the homes of the insured. 3. The amount of the insurance is " adjusted to the unit of premium," customarily five cents, or a multiple thereof, up to seventy cents. Thus in industrial insurance we speak of five-, ten- or fifteen-cent policies, and the amount of in- surance obtainable for that weekly premium will vary ac- cording to age of entry and will represent odd figures. In ordinary life insurance, on the contrary, the unit is the amount of insurance. We thus refer to $1,000, $2,000, etc., policies, and the factor that varies with the age of entry is the premium. 4. The insurance is extended to every member of the family, and the companies therefore issue both adult and infantile 278 THE PRINCIPLES OF LIFE INSURANCE policies, while in ordinary life insurance the business is con- fined almost wholly to adult risks. In nearly all the com- panies industrial insurance is made to comprise all ages be- tween one and seventy. Some of the smaller companies even insure children before they are one year old. With the exception of the differences just noted and the resulting differences in field and office methods, industrial insurance is essentially the same as ordinary life insurance. Premiums for both children and adults are calculated upon an actuarial basis, although, owing to the heavier mortality experienced among industrial risks, a special mortality table is used for computation purposes. The system is also based upon the legal reserve plan, and as will be noted later the policies issued contain nearly all the essential conditions found in ordinary life contracts. Adjustment of the Amount of Insurance to the Unit of Premium. Since the death rate decreases from birth to about age 10, it follows that the amount of insurance that can be given for a unit of premium, like five cents, will in- crease as the age of the child increases. Thus, in one leading, company, for example, the amount payable on a policy with a weekly premium of five cents " in the case of a child in- sured at age two next birthday is $12.50 when the duration of insurance has been less than six months, $25.00 when the duration is more than six months, but less than one year, $34.00 when the duration is one year, $40.00 at two years, $48.00 at three years, $58.00 at four years, $70.00 at five years, $110.00 at six years, $150.00 at seven years, and $190.00 at eight years." In the case of adults, on the contrary, the amount of insurance that can be given for a unit of premium must de- crease in accordance with the increasing death rate that occurs following about age 10. Thus in the aforementioned com- pany, " for a premium of five cents at age 10 the amount payable in the event of death after the policy has been six months in force is $150.00, at age 20 the amount payable is $105.00, at age 30 it is $79.00, at age 40 it is $57.00, at INDUSTRIAL INSURANCE 279 age 50 it is $38.00, and at age 60 it is $22.00." Usually infantile premiums are limited to ages under 10 and adult premiums to ages 10 to 65 or 70, inclusive. It is also the practice to restrict the maximum amount of insurance that may be taken at certain ages under either infantile or adult policies. Organization and Management of the Field Force. Owing to the weekly collection of premiums at the homes of the insured, it is necessary to organize the. agency system in industrial insurance with special reference to the needs of the business. To facilitate the efficient handling of the enormous volume of details necessarily connected with weekly collections, the company's territory is divided into districts which are usually made to coincide with the leading cities, although in the very large cities like New York, Philadelphia, etc., several districts exist. Each district is supervised by a superintendent who has a number of assistant superintendents and numerous agents under him. The agents are expected to collect all outstanding premiums, and, according to the system, each has assigned to him a " weekly debit " which rep- resents the difference between "the premiums of the total number of policies issued to a particular agency and the premiums of the total number of policies lapsed by reason of death, transfer or other causes." 2 Generally speaking an agent is expected to collect each week about $60 or $70, although in many instances the amount is considerably larger. In addition to this collection service, he is also required to solicit new business on both the indus- trial and ordinary plans. It is therefore essential, if agents are to be given sufficient time for the solicitation of new business, to restrict the amount that an agent is required to collect as well as to concentrate such collections as much as possible within a limited area. We are informed that "the collection system has been so completely developed that in the 2 HOFFMAN, FREDERICK L., " Industrial Life Insurance," in H. P. Dunham's The Business of Insurance, i, 469. 280 THE PRINCIPLES OF LIFE INSURANCE case of well managed industrial companies the average col- lection percentage runs almost 100." 3 All weekly collections are entered by the agents in a so- called " collection book/' these entries corresponding to those made in the policyholder's receipt book. Once each week the agent must also render an account to the company which furnishes a complete statement of all payments and arrears. Moreover, to discourage lapses as much as possible through the efforts of agents, commissions on new business are allowed only on the net increases, i.e. if the new business obtained in any week should represent a weekly premium of $1.00 and the terminations of old policies for reasons other than death or transfer should represent a weekly premium of 25 cents, a commission will only be allowed on the difference, or 75 cents. It is also customary for the companies to require their agents to write a certain amount of new busi- ness. Distinctive Features of the Policy. In most respects the industrial policy is similar to that issued to ordinary life policyhoiders ; 4 nor do the contracts of the various in- dustrial companies differ much in their essential terms. A few provisions, however, are so peculiar to industrial policies and have such an important bearing upon the business as to merit special mention. These may briefly be referred to under the following heads : 1. Benefits during the first year. It is customary for the company to pay only one-half of the insurance in the event of death before the policy has been in force six months, the full amount being paid if death occurs after six months from the date of the contract. In some instances the practice is followed of paying only one-third of the in- surance if death occurs during the first six months follow- ing the issue of the policy, one-half if it occurs after six months and within one year, and the full amount if it occurs after one year. 3 ibid., p. 468. 4 For a specimen industrial policy, see page 455 of this volume. INDUSTRIAL INSURANCE 281 2. Special provisions affecting the policyholder. Most of the privileges granted to industrial policyholders are also found, as regards the principles involved, in ordinary life contracts. Some of these provisions, however, must be adapted to conform to the special requirements of the business. Thus four weeks' grace is allowed the policyholders in the pay- ment of premiums, and reinstatement is usually permitted within one year from the date of lapse provided all arrears are paid and the company is satisfied with the insured's physical condition. The " incontestible " and " misstatement of age " clauses are similar to those found in ordinary policies. It is also the general rule to provide that the insured may pay his premiums at the home office so that, in case the agent should fail for some reason to collect the premium at the home of the insured, he is obliged to pay the same at either the home or district office before the expiration of the four weeks' period of grace. Some companies give the insured, in case he is dissatisfied with his contract, the privilege of surrendering the same within two weeks after its issue and receiving a refund of the premium. Other companies, again, give the insured the op- tion of converting his industrial policy into one on the ordi- nary plan, provided that when application for such conversion \ is made the insured has attained a stated age (usually 18 or \over), has paid all his premiums for ten or some other stipu- l\ted number of years, and can offer satisfactory evidence of insurability. In making such conversions it is customary to gke the full legal reserve as a surrender value and to apply the same in payment of premiums on the ordinary policy. It is also interesting to note that some of the companies allow their policyholders to participate in the management by voting either in person or by proxy; but the exercise of this right to vote will necessarily be limited when it is realized that one company granting the privilege recently had over 2,300,000 policies in force and another nearly 13,000,000. Like ordinary policies, industrial contracts contain cash, paid-up, and extension clauses to apply in the event of lapse,, 282 THE PKINCIPLES OF LIFE INSUEANCE but cash surrender values are not paid, as a rule, until after the policy has been in force for a period of, say, ten years. Until recently most industrial policies were issued on the non- participating plan, yet the leading companies followed the practice for years of distributing large surplus accumulations to their policyholders in the form of voluntary dividends, which might otherwise have been paid to the stockholders. 3. Provisions protecting the company. As previ- ously stated both infantile and adult policies are limited to certain ages as regards their issue, and also contain restric- tions as to the maximum amount of insurance that may be taken out at certain ages. Aside from these limitations, in- dustrial policies are comparatively free from the restrictions frequently found in ordinary contracts, especially as regards occupation, residence, military service, suicide, etc. The com- panies, however, have found it desirable to limit the powers of their agents by incorporating a clause which, to use the word- ing adopted by one large company, provides that "no con- dition, provision or privilege of this policy can be waived or modified in any case except by an indorsement hereon signed by the president, one of the vice-presidents, the secre- tary, one of the assistant secretaries, the actuary, the as- sociate actuary or one of the assistant actuaries. JSTo modifi- cation or change shall be made in this policy except such as is in accordance with the law of the state in which the same is issued. Xo agent has power in behalf of the company to make or modify this or any other contract of insurance, to extend the time for paying a premium, to waive any forfei- ture, or to bind the company by making any promise, or making or receiving any representation or information." 4. Rules relating to the beneficiary. Except in the case of minors, it is the general practice to require the bene- ficiary's specific consent to the insurance before the same will be written. Likewise, policies will not as a rule be issued, except for a limited amount, to non-relatives or others who do not possess an insurable interest in the life which is to be insured. " This means," to quote the rule of a certain large INDUSTKIAL INSUKANCE 283 company, "that the beneficiary must be dependent upon the insured for support, or that the insured is indebted to the beneficiary in an amount sufficient to justify the sum insured, or that the beneficiary has some other substantial pecuniary interest in the life insured, or will be liable for the expenses of the sickness and burial of the insured." Importance should also be attached to the policy requirement that " 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 designated, and recognized by indorsement hereon, or to the executor 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 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." BIBLIOGKAPHY DRYDEN, JOHN F., "Industrial Insurance." Yale Readings in Life Insurance, i, 382-397. HOFFMAN, FREDERICK L., " Industrial Life Insurance," in H. P. Dunham's The Business of Insurance, i, chap. 28, 452-488. , History of the Prudential Insurance Company of America. Newark, N. J., 1900. , "Industrial Insurance." Annals of the American Academy of Political and Social Science, xxvi, 103-119. CHAPTER XXII DISABILITY INSURANCE By BBUCE D. MUDGETT DEVELOPMENT OF DISABILITY INSURANCE A new clause has appeared in life-insurance contracts in the United States in recent years, granting protection against the risk of total and permanent disability. The first known instance of its kind appeared on October 16, 1896, when an American company issued such a policy on the life of its president. Since then interest in the clause has grown so rapidly that nearly one hundred and fifty companies are now using it. Insurance against disability is not in itself new. Under the name of invalidity insurance it forms a prominent feature of the workmen's insurance laws of a number of European governments, where protection has long been granted against both temporary and permanent invalid- ity caused either by accident or disease. As early as the eighteenth century invalidity insurance was furnished to members of the mutual aid societies of Germany and Austria and it was extended rapidly in the nineteenth century to many classes of workers. The friendly societies of Great Britain and the fraternal orders and labor unions in the United States have likewise paid disability benefits. With the stock companies in the United States insuring accident and health risks this sort of protection has, of course, held first place, but the value of accident and health policies has been greatly restricted by the fact that these companies issue a one-year term contract and possess the option, there- 284 DISABILITY INSURANCE 285 fore, of refusing to renew at the time when the insured may be most in need of the protection. The incorporation of disability protection in a life-insur- ance contract is a recent innovation, as stated above, and marks the introduction of a new principle, namely, that of permanent protection against the risk in question. Further- more, while the accident and health companies insure against disability of any duration, the clause used in life-insurance contract* in the United States covers only those cases which are both permanent and total. It is not, in itself, therefore, full and complete protection against disability, but a supple- mentary feature added to the life contract to cover contingen- cies not comprehended in insurance against death. Perma- nent and total disability may endanger the permanence of a man's insurance by cutting short his income and making it impossible for him to pay further premiums; or disability may have the same effect as old age the man being no longer a producer should be cared for by his accumulated capital. While the occurrence of this risk, therefore, places a man or his dependents in the same position as old age or death., the regular life-insurance contract furnishes no pro- tection against it. The German insurance companies were the first to incor- porate a disability clause in their life contracts. It was used there as early as 1876, and since 1900 has been adopted by most of the leading companies. Two forms of contract have been used, the first, issued in connection with regular term, life, or endowment policies, promising to waive payment of premiums after disability or to mature the policy and allow it to be paid in installments over a period of from ten to twenty years. The second form of contract is a life annuity payable from the time of disability until death, purchased independently of any insurance policy, and paid for by a single, or by annual premiums, each payment creating the right after three years to an annuity based on the age at which the payment is made. The disability insurance ceases in either form of contract at age 65. The Eussian companies 286 THE PRINCIPLES OF LIFE INSURANCE issue a clause with participating policies whereby, upon re- linquishing the right of participation the insured may receive disability insurance in lieu thereof; and in case of disability premiums cease and a cash payment of 50 to 75 per cent, of the amount insured is paid at once, the remainder at death or at the end of the endowment period. The disability clauses used in the United States are modeled closely on that form in Germany which is incorporated in a life-insurance con- tract and which promises to make the policy full-paid or to mature it when disability occurs. So generally has it been adopted that on January 1, 1912, sixteen years after its first appearance, the companies using the clause had on their books over 78 per cent, of all the insurance in force in the United States. And since the latter date this proportion has been increased by the addition of a number of the larger companies which had not previously adopted the clause. Reasons for the Disability Clause. This rapid extension in the use of the disability clause is due to two reasons. One lies with the agent; the other with the policyholder. The agent desires it because of its value as a factor in competi- tion, while the insured finds it a valuable means of guarantee- ing the permanence of his insurance because it covers a risk not contemplated by the usual life-insurance contract. The policyholder's reason is fundamental, of course, and the dis- ability clause must be tested ultimately by its value as an insurance measure. This, however, is probably not the im- mediate cause of the phenomenal interest shown in the clause in recent years. The history of life insurance in the United States is written in the policy contract. Successive changes in this document are indicative of changing attitudes on important insurance questions. For instance, the payment of cash surrender values was radically opposed by some companies until competition or statute law required such values to be given; and when once it was found that these privileges had a competitive value, they were advertised to the limit. So it is with the disability clause. It has been DISABILITY INSURANCE 287 bitterly opposed by some, but wide-awake agency managers have recognized it as a powerful competitive weapon. Many small companies have been organized in recent years in the South and West and for a time have confined their efforts to their immediate localities. Here the appeal to patronize home companies has given them a great advantage ; but with the normal growth of their business they have found it neces- sary and desirable to solicit insurance beyond local surround- ings and have come into competition with the older and larger companies. This is their opportunity to exploit a selling feature and they have found it in the disability clause. Of the companies using the clause on January 1, 1912, over 78 per cent, have been organized since 1901 and 70 per cent, of them since 1905. This motive of competition, however, is not sufficient to guarantee the permanence of the disability clause in the life- insurance contract. Before agents saw its business-getting possibilities it must have been recognized that the clause added a factor of real value to the insured. The question is : Is permanent and total disability a risk of any consequence to the average policyholder ? It will readily be understood that the idea back of the clause is to prevent the lapsing of a policy and the loss of insurance by that living death which leaves a man helpless to continue insurance, if he is depend- ent on the income from his services, and in a condition which from his viewpoint justifies the maturing of his policy, or at least justifies freeing him from the burden of further premium payments. This question can only be answered statistically, for it ia necessary to know the magnitude of the risk of total and permanent disability. According to figures derived from data of disability among fraternal society risks * the proba- bility of becoming disabled within one's life expectancy is as follows : 1 MUDGETT, BRUCE D., The Total Disability Provision in American Life Insurance Contracts, 8-10. 288 THE PRINCIPLES OF LIFE INSURANCE PROBABILITY OF AGE DISABILITY WITHIN LIFE EXPECTANCY 20 0460 25 0604 30 0803 35 1080 40 1466 45 1977 50 2652 55 3573 60 4758 65 6134 70 7477 In other words the chances that a person aged 20 will be- come disabled within his life expectancy are one in twenty- five; at age 35, one in ten; at age 45, one in five; at age 55, one in three ; and at age 70, three in four. These figures are based on actual experience among fraternal society risks and lead to the conclusion that the risk of disability is a very considerable one indeed. The policyholder, therefore, has an adequate reason for wanting his life contract supplemented by the protection furnished by the disability clause. Objections Urged Against the Disability Clause. While the disability clause has been thus generally adopted as a part of the life contract it has been the object of much criti- cism. The following are among the more important of the objections advanced : 1. It is not life insurance. The attitude is that this is a risk distinct and separate from life insurance and should be covered, if at all, by a company organized for this specific purpose. It is quite in line with the hazards under- taken by an accident or health company. This objection quite disregards the fact that the occurrence of permanent and total disability may necessitate the lapse of insurance that is badly needed, and that the protection offered by the accident and health companies is one-year insurance which the company may refuse to renew when the risk of disability DISABILITY INSURANCE 289 becomes great by reason of old age or disease. Eeal dis- ability insurance must comprise permanent protection against this risk. 2. Risk is small and interval brief between disability and death. The data on page 288 show the magnitude of the risk. At the younger ages the chances of disability are small indeed, and the larger figures for the older ages are due largely to disability occurring at an age covered by very few of the clauses in existence. Furthermore, on the basis of data compiled by Mr. Sidney H. Pipe, 2 the average interval between the time of disability and the time of death is found to be one year, four months, and twenty-eight days. This objection fails to recognize the true function of insurance which is the elimination of risk and not protection merely against a few well-known hazards. It is true that the figures quoted show the risk to be reasonably small, but the figures are true in the aggregate only and in individual cases the protection afforded may be very important. The size of the aggregate risk is, therefore, not a real criterion. There are many cases, for instance, where persons lose both legs or arms or become totally blind or totally paralyzed and live for years. It is for these individuals that the protection is important for there is no means in the ordinary policy con- tract whereby the insured is guaranteed protection under these circumstances. 3. Misrepresentation by agents. A familiar objec- tion is that agents are given an opportunity, knowingly or through ignorance, to misrepresent the facts and to claim more for the clause than it deserves ; and that great dissatis- faction may result in later years when a company attempts to construe its clause strictly. This is to some extent justi- fied, in view of the fact that a few clauses exist, the only apparent purpose of which is to furnish a talking point in competition. But nearly every important provision in the policy contract has undergone the same experience, and the 2 The Transactions of the Actuarial Society of America, ii, 178. 290 THE PRINCIPLES OF LIFE INSURANCE * failure of the companies to meet with great dissatisfaction is due to carefully written clauses and liberal interpretation. There is no reason to believe that this objection is funda- mental for it strikes at particular clauses rather than at disability insurance in general. 4. Difficulty of defining disability. The difficulty of defining disability, like the last objection, is largely a question of wording and interpretation. The clause should be so worded as to include within the scope of its benefits every legitimate case of total and permanent disability. Dis- satisfaction will doubtless arise with those clauses that have attempted to restrict the definition of disability in case the companies using them insist on strict construction, but the difficulties of the problem are at a minimum as compared with the situation facing accident and health companies in- suring against both permanent and temporary disability. The problem of malingering in connection with the determi- nation of temporary disability offers far greater difficulties than does the question affecting permanent disability and yet temporary disability is invariably covered by the com- panies in question. 5. The lack of disability statistics. Probably the most serious objection advanced against the adoption of the disability clause is that there is no scientific basis for ascer- taining the risk involved. In the short time elapsed since this clause first appeared in an American life-insurance con- tract there has indeed been no opportunity to collect data from the experience of these companies with which to meas- ure the risk of permanent and total disability. But the sub- ject has recently attracted the attention of American actu- aries and several studies of the disability risk in other fields have been made and presented at meetings of the Actuarial Society of America. German tables of invalidity based on the experience among railway employees and data from the friendly societies of Great Britain have both been used in calculating disability premiums for American companies. No actual use has been made of these premiums,, however, DISABILITY INSURANCE 291 since it is felt that foreign experience may not be a fair meas- use of the risk to which the old-line companies in the United States will be exposed. More reliable data for this purpose have been found in the experience of American fraternal so- cieties. Tables of disability and of mortality among disabled lives have been constructed from the records of certain of the larger fraternal orders, and the cost of disability insur- ance in connection with the life contract computed from these rates combined with the American Experience table of mortality. These premiums have been generally accepted among American actuaries as safe, and as a fair measure of the risk involved until experience of the old-line companies themselves is available. Indeed, the state of New York has already adopted one set of these rates as a basis for the valuation of disability contracts there issued. 3 THE DISABILITY CLAUSE IN PRACTICE There are, as previously stated, nearly one hundred and fifty life-insurance companies in the United States which had adopted a disability clause by the beginning of the year 1915. In the brief space of time since the clause first appeared, or since it has come into general use, there has been slight op- portunity for its provisions to become standardized by prac- tice, or for any standards to be set by state laws. Under the pressure of competition, therefore, a great variety of clauses has resulted. They differ as regards the restrictions imposed on their use, benefits promised, and in other ways, and it is by a comparison of these differences that the relative merits of the several contracts may be established. The disability clause in practice may be studied from four angles, viz: (1) risks not covered by the clause; (2) the definition of disa- bility; (3) age and time limits to the application of the clause; (4) benefits granted. 8 For a fuller discussion of the statistical data available for meas- uring the risk of disability see the author's The Total Disability Provision in American Life Insurance Contracts, chap. 3. 292 THE PRINCIPLES OF LIFE INSURANCE Risks Not Covered by the Disability Clause. Since the disability clause is in a more or less experimental stage, many companies have attempted to confine its use to those policies or those risks on which a normal mortality experience may be expected. Term insurance furnishes one of the mooted ques- tions to-day among insurance companies. Even among those companies which have sold a great number of term policies the fear has arisen that it may have been a mistake and that the company may suffer because of the large proportion of term insurance which it carries. As a probable result of these misgivings the disability clause is often refused on term poli- cies. If the objection to term insurance is the fear of ad- verse selection or of a high mortality as compared with other policies, this objection is properly corrected in the premium charged ; and if the disability clause is designed to guarantee the permanence of insurance in case of total and permanent disability, there is as much need for it with term policies as with any others. There is, however, a more serious objection to the inclusion of the clause in term policies. Many of these policies to-day allow renewal at the expiration of the term at a higher pre- mium, based on the age attained at the time of renewal; or allow conversion into some other kind of policy requiring a higher rate of premium, these privileges being granted with- out a new medical examination. The presence of a disability clause in a renewable-term policy may require the company to pay the higher premiums due after renewal, if disability occurs shortly before the end of the term, and the renewal privilege is exercised. This objection is likewise easily cor- rected in the premium charged for the disability clause. The insured should unquestionably pay the exact cost of the privi- lege of releasing him from premium payments. Convertible term policies offer greater difficulties. Such contracts might, after disability has occurred, be converted into short-term, endowments and under the guise of relief from premium pay- ments the insured might thus obtain an endowment at the expense of the company or of the other policyholders. In DISABILITY INSURANCE 293 this way the insured might convert a term policy with a $10 premium into a ten-year endowment costing $100 per year, and by the terms of his agreement compel the company to pay the $100 premiums. This would be equivalent to obtain- ing a ten-year endowment without paying for it. The solu- tion of this difficulty lies, not in refusing to issue the disa- bility clause on term policies, but in refusing to extend the waiver of premium benefit after the conversion of the policy. The main reason for disallowing disability benefits on joint- life policies as is done by a few companies, seems to be the difficulty of determining when the premium will be waived or how much of it will be waived, for joint-life policies com- prehend insurance against two or more lives. The question arises, therefore, whether the premium will be waived in case one insured person is disabled, or whether both must be dis- abled in order to obtain this relief. This problem should offer no difficulties to the actuary, for disability benefits can be made payable under like circumstances with death benefits. For instance, the ordinary joint-life policy matures upon the death of either insured; the disability benefit could be paid upon the disability of either insured. But even these actu- arial refinements are unnecessary and it is equally satisfac- tory, as is done in some cases, to waive one-half the premium in case of disability of one, or the entire premium in case both persons are disabled. Women are ordinarily excluded from the benefits of the disability clause. Disability is usually so defined as to mean inability to carry on any occupation for gain or profit, and since women frequently have no such occupation they are not considered as acceptable risks. Some companies exclude them without exception, and others make exception only in case of married women and women without occupation. Sub-standard lives are assumed to be subject to a higher rate of disability than normal lives and are therefore often denied the right to disability benefits. In the absence of any statistical basis to determine the truth of this assumption the restriction is probably desirable. Persons engaged in haz- 294 THE PRINCIPLES OF LIFE INSURANCE ardous occupations are unquestionably in a select class that will show a high rate of disability and are, therefore, often refused the benefits of the disability clause. Cases of partial impairment sometimes exist, as, for instance, where a person has lost a hand, a foot, or an eye, and these are sometimes made reasons for refusing the clause. A better method would be to make exception of those cases of disability affected by the partial impairment and allow the clause to operate in all other cases. Few of the foregoing restrictions appear in the clauses, but the companies give their medical directors full discretion to exclude the clause from any policy submitted to them. A number of companies, however, have advertised that they will make no restrictions whatever and will include the clause in any policy accepted by them. The Definition of Disability. The difficulty of ascer- taining what constitutes total and permanent disability is one of the main objections that has been advanced against this clause. Disability may be defined with reference to its effect upon the occupation or profession of the insured or it may be defined with reference to the causes of disability. In the first case the disability that is of consequence to the insured is that which renders him totally and permanently incapable of fulfilling the duties of his own occupation. An injury to the fingers of a concert violinist, for instance, may totally incapacitate him thereafter from carrying on the duties of his' profession and he is in this sense totally dis- abled. The same injury would be of little consequence to a commercial salesman. Loss of speech on the other hand would mean to the latter inability to follow his profession, but might scarcely affect the violinist. In this way it might be shown that there are many injuries, diseases, and defects that have vastly different effects on the earning capacity of men in different occupations. If protection is to be obtained against the financial consequences of disability these different results must be considered in defining the clause offering such protection. The usual form of definition requires that " the insured shall furnish due proof that he has become wholly DISABILITY INSURANCE 295 and permanently disabled by bodily injury or disease, so that he is and will be permanently, continuously, and wholly pre- vented thereby from performing any work for compensation or profit. . . ." This definition does not consider disability from the standpoint of its financial consequences to the in- sured. Literally interpreted, the violinist is not disabled by an injury to his fingers, since he may now become a sales- man. Such interpretation neglects the fact that transitions from one profession to another are difficult and sometimes disastrous to the person concerned. In spite of the fact that all clauses are stated in this way many companies no doubt will not interpret them with such severity as is sug- gested above. The practice of liberal interpretation is fol- lowed in connection with other features of the policy contract in cases where fraud and dishonesty are not present and such liberality will certainly be extended to the interpreta- tion of the disability clause. Disability may be further defined with reference to the causes of disability. From this viewpoint the clause quoted above has much to commend it. It promises benefits for disa- bility due to bodily injury or disease, and that bodily injury and disease probably cover the majority of cases is evident from the data on page 296. 4 Bodily injury and disease, therefore, cover all cases with the possible exception of the last or miscellaneous group, the composition of which is un- known. A large majority of clauses define disability in this way. Some add the following specific cases, taken probably from the contracts of the accident and health companies: " The entire and irrecoverable loss of the sight of both eyes, or the severance of both hands above the wrists, or of both feet above the ankles, or of one entire hand and one entire foot/' In a few cases specific mention is made of deafness and insanity as acceptable cases of disability; dumbness is nowhere referred to, but is equally important with the above. A very few companies agree to pay benefits upon the occur- 4 The Transactions of the Actuarial Society of America, ii, 179. THE PRINCIPLES OF LIFE INSURANCE NUMBER OF CAUSE OF DISABILITY CASES PER 1,000 TOTAL CASES 1. Consumption 234.0 2. Paralysis 127.8 3. Insanity 120.0 4. Diseases of the circulatory system 72.7 5. Diseases of the urinary system 52.9 6. Cancer 47.3 7. Injury 44.0 8. Balance . . 301.3 rence of disability from any cause whatsoever. There is no doubt as to the scope of this definition. A few companies issue clauses that place limitations upon the causes which will be acceptable for the payment of bene- fits. Some of these restrictions are of slight consequence, as the following examples show: Disability must not be due (1) to wilful or immoral acts on the part of the insured, (2) to intoxication, (3) to actual or attempted violation of law, or (4) to military or naval service in time of war. A few clauses refuse to accept bodily injury as a cause of disability. In the aggregate this comprises but 4.4 per cent, of air dis- ability according to the above data, but the risk of accident disability is, nevertheless, of much importance to the indi- vidual. The worst examples of restriction, however, are found in those few clauses which pay benefits only in case disability is due to accidental injury. Disease, which causes a large percentage of all disability, is not covered, and protec- tion is furnished against only 4.4 per cent, of the total risk. Age and Time Limits to the Application of the Clause. A necessary part of any disability clause is that which states the time when the risk begins, the circumstances under which it remains in force, and the time when it ceases to be effective, if at all. Benefits are usually promised " if the in- sured, while less than sixty years of age, after the first pre- mium has been paid to the company on account of this policy, shall furnish due proof to the company, while the policy is in full force and effect/' that he is disabled. The risk begins DISABILITY INSURANCE 297 in this case as soon as one full annual premium has been paid. A few clauses require the payment of two or even three pre- miums. This is equivalent to maintaining a probationary period of one or two years between the beginning of the life insurance and of the' disability insurance. Most clauses, as the above, continue the disability insurance while the policy is in full force and effect. Some state that there must be no default in the payment of premiums. The question that arises here is whether in the event of the lapse of the policy through default in premiums the disability protection stands on the same footing as the life insurance. Most policies allow thirty days of grace for the payment of premiums and some upon request by the insured allow the premiums to be paid automatically thereafter from the reserve. The question is, will the disability benefits be continued on the same terms? In many cases there is no way of answering this question from the phraseology of the clause. The few refer- ences to the period of grace in premium payments, if definite, usually continue the disability insurance during this time, al- though cases to the contrary exist. One clause gives the company the option of cancellation within the period of grace following any anniversary of the contract. The most liber- ally drawn contracts state that the clause operates " while the policy is in full force and effect," as above, or " during the continuance of the policy.' 5 This phraseology puts the life and the disability protection on equal terms. A very few policies limit the operation of the disability clause to the time during which premiums are paid. ^Thus in a twenty-payment life policy, the disability insurance lasts for only twenty years. This would be of no significance if the waiver of premiums were the only benefit granted, but the fact is in every instance of this sort the policy matures upon disability and is paid in some form to the insured. This limitation constitutes a serious indictment of the clauses in which it is found. In the clause quoted above benefits are paid only where disability occurs before the insured is sixty years of age. 298 THE PRINCIPLES OF LIFE INSURANCE This, or an equivalent, age limitation is found in a large majority of these contracts. Thr appears at first glance to be objectionable. The man who wants disability insurance wants protection throughout the entire period of his life. The main jeason why the limitation exists is probably the fact that our actuarial information regarding the chances of disability after age 60 is so imperfect that insurance of the risk is largely guesswork. But there is a more fundamental reason why protection is not needed after approximately this age. The clause stands as a guarantee that the permanence of a man's insurance will not be endangered by his becoming disabled. The " insurance " period of life, however, is the period of productivity, and it does not extend ordinarily be- yond sixty or sixty-five years of age. In other words, by this time the average man retires from active business or profes- sional life and his later years are, or should be, cared for by the accumulations previously made. There is no special reason, therefore, why disability insurance should cover this later period. Many of the clauses which set an age limit have not, how- ever, left the insured entirely without protection during the later years. Provision is made whereby, if disability occurs after the age limit has been reached, the premiums thereafter becoming due will be allowed to accumulate as a lien against the policy without interest. This is a highly commendable practice. A few companies issue clauses to apply without age limit. Benefits Granted Kinds and Amounts. Two classes of benefits are ordinarily given by these clauses, the one allow- ing the further payment of premiums to be waived without in any way affecting the values granted in the insurance con- tract; the other allowing the policy to mature and the value to be paid in some form to the insured. Payment of the pol- icy may take one of three forms: a fixed number of install- ments, a single cash sum, or a life annuity. Some clauses give only one benefit, others allow a choice. In case the waiver of premium benefit is given, its cost to DISABILITY INSURANCE 299 the company will consist of the number of premiums that will fall due between the time of disability and the time of death. The magnitude of the benefit will, therefore, depend statis- tically on the average time elapsing between disability and death. From the only American data bearing on the subject it appears that this period is one year, four months, and twenty-eight days 5 among fraternal society risks. Accepting these data as being approximately true for the old-line com- panies, the benefit will therefore equal an average payment of two premiums, for at the time of death the face value of the policy will be payable in any case. This fact explains the small cost of the disability clause. The above data likewise furnish a basis for estimating the proper value that should be given where maturity benefits are promised and for comparing this value with the values actu- ally given. If the average period between disability and death is one year, four months, and twenty-eight days, then the value of a policy at the time of disability, scientifically determined, will be that sum of money approximately 6 which with interest for one year, four months, and twenty-eight days will equal the face value of the policy, say $1,000. If this amount were given as a maturity benefit it would be exactly equivalent to the waiver of premium benefit so gener- ally available. The insured would hesitate to accept any smaller amount except under the pressure of urgent necessity if he realized this fact clearly. If the full face value of the policy were given at the time of disability its cost to the company would be only the difference between $1,000 due now and the value now (present value) of $1,000 due in one year, four months, and twenty-eight days, and no company would be increasing its liability to unwarrantable proportions by giving a value equivalent to $1,000 at the time of dis- ability. 6 The Transactions of the Actuarial Society of America, ii, 178. 8 precisely, it must be calculated on the basis of the probability of death among disabled persona. The difference is due to the eJffect jtf compounding mt.e.re&fc. 300 THE PRINCIPLES OF LIFE INSURANCE The ordinary installment benefits consist in the payment of specified amounts per year for a period of ten, fifteen, or twenty years. The amount is usually named as one-tenth, one-fifteenth, or one-twentieth of the face value of the policy. The discounted values of $1,000 paid in ten installments of $100 each, fifteen installments of $66.67, or twenty install- ments of $50 on a 3% per cent, interest basis, are, respec- tively, $861, $795, and $736. Thus the policyholder sur- renders for these amounts a policy that in less than one and one-half years would mature for $1,000. By giving a ma- turity benefit such as the above a company thereby actually decreases its liability. A few companies have provided for the payment of the policy as a continuous installment, that is, twenty guaranteed payments, and in case the insured lives beyond the period of these certain payments, the same yearly amounts will con- tinue until death. Considering the average life of a disabled person, this continuous feature will occasion but little extra liability. The first case of a continuous installment based on ten certain payments appeared in 1915. The settlement of a disability contract by the payment of a cash sum is offered by a few companies. The full amount insured is given in a few instances, but this apparent liber- ality is destroyed by the restrictions under which the benefit is paid, the clauses covering disability due to accidental injury only, and in some cases limiting the kinds of injury. Equally open to criticism are clauses which promise to pay half the face value on disability. The payment of the policy as an annuity is allowed in some cases after disability, the payment being so much per year until death. In one case $50 per year is paid; in another, $100 per year, but the latter is limited to five payments at most, thereby making the maximum recoverable under this contract equal in present value to $467, and since death is probable to occur in one and one-half years, the amount re- ceived in most cases will be far less than $467. Other an- nuities pay an amount, based on the age at the time of disa- DISABILITY INSURANCE 301 bility, which could be purchased by the face value of the policy, but the death rate among active lives is used in com- puting this amount and not the death rate among disabled lives. Payment of Dividends After Disability. Most life-in- surance contracts to-day are participating and allow the in- sured to share at periodic intervals in any surplus that has accrued from excess interest earnings, or savings in mortality, loading, etc. Many policies with an initial annual premium of twenty or twenty-five dollars receive a return in dividends of six, eight, ten, or more dollars per year after the policies have been in force over twenty years. The question is, will the company continue to pay these dividends after the insured has become disabled? The premiums charged for the disa- bility clause have been computed on the assumption that the initial premium charged will be waived, and not this premium less dividends. There is no reason, therefore, why the in-' sured should not continue to receive dividends on his policy after disability as well as before. In spite of this fact very few disability clauses make any reference to dividends, and the tacit assumption is that the companies do not expect to pay them after disability. A few clauses state definitely that dividends will be paid after disability, or that the waiver of premiums " shall have the effect of providing the same values and benefits as though premiums waived had been paid." Participation in surplus after maturity of the policy is on a different basis. The only element of surplus in which the holder of a matured installment policy has a right to share is surplus interest earnings. If the amount of installments is computed on a 3 per cent, interest basis and the company earns 4 per cent., the extra 1 per cent, is contributed equally by all the assets and therefore the recipient of the installments should receive 1 per cent, of the funds which still stand to his credit. Conclusion. The disability clause represents one of the most recent developments in the life-insurance contract. Ap- pearing in the United States first in 1896 and being unknown 302 THE PRINCIPLES OF LIFE INSURANCE in any general way before about 19 06, the clause has devel- oped without precedents to follow and the companies have necessarily faced two extremes in policy, that of giving the insured a feature worth while and that of giving him too much for the price paid and thereby perhaps endangering the future stability of the company. There has resulted a great variety of clauses, as the preceding pages have shown, and an utter lack of uniformity in the character of the disability contracts now in existence. Unlike in the extent to which they apply to all insured risks, unlike in their statement as to what constitutes disability, unlike as to the amount and nature of the benefits they grant, the clauses now in use do not enable one to state what a standard disability contract promises with the same definiteness that is possible with many other provisions of the life contract, such as surrender values, reserves, etc. A natural tendency, however, is already in evidence toward the standardization of these clauses, as is shown by the identical phrasing of certain parts of many clauses, and by the frequency with which many companies are revising their clauses. Some companies have already revised their disability contracts three or four times. It is a dangerous prophecy, therefore, to indicate any definite direction which the development of the disability jclause will take in the near future. But each succeeding change in the clause marks an advance and furnishes the policyholder with a more desirable contract. An illustration is the number of cases where clauses were issued originally granting a waiver of premiums, but were soon revised to permit the payment of the policy after disability in a speci- fied number of installments; the latter contracts in several instances have been again remodeled by the inclusion of the continuous installment feature. The rapidity with which the clause emerges from the ex- perimental form in which it now exists will probably depend on two factors, viz., the accumulation of experience by the life-insurance companies themselves by which they will be able to measure its cost with more scientific precision than DISABILITY INSURANCE 303 at present; and, second, the education of both insurers and the insuring public as to the economic value of the clause. The first named factor is a matter of time, and the necessary experience is accumulating as more policyholders are being insured under the clause and as claims are accruing. The economic value of the clause arises from the fact, as previ- ously explained, that circumstances may, and do, arise where a man's insurance will lapse through his inability to earn an income and therefore to pay the premiums and where therefore he will be in a condition which from his own view- point justifies the maturity of his policy or at least his free- dom from the burden of further premium payments. This latter factor is fundamental and must be the basis of any development of the disability clause that is to be permanent. BIBLIOGRAPHY MUDGETT, BRUCE D., "The Total Disability Provision in Amer- ican Life Insurance Contracts." Annals American Acad- emy of Political and Social Science, supplement, May, 1915. A study of the disability clause in actual operation in the United States. It analyzes over one hundred and twenty-five clauses now in use and finds them a complex of good and bad. This study is the only extended one of the subject that has thus far appeared. CHAPTER XXIII GROUP INSURANCE By RALPH H. BLANCHABD Group insurance, in its typical form, insures the lives of a group of employees under a blanket policy, at a reduced rate of premium, and without individual medical examination. The earliest known application of this plan was the writing of a group policy by the first chartered American life-insur- ance company on seven hundred coolies during their trans- portation from China to Panama. Present-day group insur- ance, however, is still in the earliest stages of its development, the New York Insurance Department having issued its first approval of a policy form in February, 1911. Group busi- ness is at present written by only a small number of compa- nies, but it is probable that its volume will increase very considerably in the near future. 1 Since this form of insur- ance is somewhat experimental in nature and in no sense standardized, any definition or description must be qualified in its application to particular cases. In the following pages are pointed out the essential principles of this type of insur- ance; the practical working out of these principles will vary from one company to another. The Group. The minimum number of employees which may be insured without medical examination varies from fifty to two hundred and fifty, 2 and these must be carefully in- 1 In April, 1914, the New York Insurance Department had ap- proved the group policies of five companies and there is one company writing this business outside of New York. 2 In Massachusetts, Georgia, Indiana, Iowa, Nebraska, North Carolina, Oklahoma, and Washington, it is illegal to insure any life without a medical examination. 304 GROUP INSURANCE 305 spected and passed upon as a group before they will be ac- cepted by the company. Such matters as sex, average age, and general health of employees, sanitary construction, up- keep of the plant, and other aspects of the environment of the workers are considered in determining whether the group is of a sufficiently high standard. This inspection performs the same function for the group as does a medical examination for the individual and empha- sizes the essential difference between group insurance and insurance of individuals. In the former c*ase the group is the unit of the risk and only those matters which affect it as a group should be considered in determining its desira- bility, in the latter the individual is the unit. It is essential that the underwriter, in approving a group, exercise the same careful judgment that is displayed by the medical examiner in approving an individual. If these general conditions are satisfactory each employee fills out a census slip stating his name, age, residence, duties, date of entering employment, and the amount of insurance desired. The premium necessary to pay for the insurance on each life is then computed; and a premium for the group secured, which is quoted to the employer. If the quoted rate is satisfactory and the employer decides to take out the insur- ance, each employee signs a personal application giving the same information as was contained in the census slip. The employer files a general application, giving a list of his em- ployees and certifying that the statements in their individual applications are true to the best of his knowledge and belief. New employees may be added to the group under the same terms, except that some companies require a medical examina- tion. Some companies also stipulate a certain period of employment before the new name may be added. 3 When a member of the group withdraws from the employ of the firm his insurance automatically ceases. Several companies give him the privilege, however, of taking out other insurance in 3 In Massachusetts additional lives may not be covered by the original contract; a new policy is necessary. 306 THE PRINCIPLES OF LIFE INSURANCE the company for an amount not greater than that for which he was insured under the group plan, at regular premium rates, but without the requirement of a medical examination. In all cases of additions or withdrawals the employer must immediately notify the insurance company. The Policy. The policy contract is usually of the one- year renewable-term type, subject to rate adjustments as ex- plained below. In some cases five- or ten-year term, endow- ment, and ordinary life policies are issued under the group plan. The general provisions of the contract covering grace for the payment of premiums, incontestability, restrictions an case of suicide and insanity, etc., are much the same as in regular life policies. The face value may be an arbitrary sum for each individual (usually $1,000) or may be equal to the salary of the insured, with a limit of $5,000 on any individual life. As stated in the definition, a blanket policy is issued covering the group. This policy is held by the employer and is accompanied by a register on which is recorded the particu- lars concerning each life insured. Some companies provide a certificate of insurance to be issued to each employee. A du- plicate of the register is kept at the home office of the company and all changes in personnel must be recorded in both the original and the duplicate. Rates. The premium rate for group insurance is con- siderably lower than would obtain if the lives were covered in the regular way. This is made possible by saving in loading and by expected saving in mortality cost, owing to the great care with which the groups are selected. The commissions paid for securing group contracts are lower and, since all companies require that the premium be paid by the employer,* the cost of collection is almost negligible and the lapse ratio is greatly lowered. The cost of inspecting the plant as a whole is also much smaller than would be the cost of indi- vidual medical examinations. In one company, issuing a participating contract, a separate department has been estab- * The employer may make arrangements with his employees to de- duct a part or the whole of the premium from their wages. GROUP INSURANCE 307 lished to handle its group business and distribute the savings, which are reflected to a greater extent in the quoted rates of the non-participating companies. These latter companies guarantee their rates for a term of five years, reserving the ' right to make such changes at the end of this period as their experience seems to warrant. The participating company guarantees its gross rate in perpetuity, adjustments to experi- ence being effected by the payment of dividends. Premiums are ordinarily paid monthly, adjustments being made for the withdrawal of old and the addition of new em- ployees. One company,, while covering each new life from the beginning of employment, makes no premium charge until the beginning of the following months and, to offset this, gives no premium credit for fractions of a month following with- drawal. Mr. H. Pierson Hammond, actuary of the Connecticut In- surance Department, recently inspected an establishment with a view to considering practically a concrete example of group insurance. The results of this inspection have been described as follows: "The employees of this establishment I have used as a unit for illustration. The rates upon which the cost for group insurance is predicated are those which have al- ready been used similarly in practice. The amount of insur- ance in each case is one year's salary. The number of em- ployees considered is 784, of which 344 are male, and 440 female. The total annual payroll is $811,000. The average age of these groups is about 38 and 28, respectively. The health of the employees, except in a few cases, appeared to be exceptionally good, no unusual amount of sickness having been reported among them. The offices are light and well venti- lated, the building comparatively new, and the environment generally excellent. In the tabulated census returns, I was struck with the distribution of the ages of the male employees as contrasted with the female employees. This was explained by the fact that the employer had added very few male clerks recently, but had taken in more than the usual number of female clerks. This tendency was particularly emphasized 308 THE PRINCIPLES OF LIFE INSURANCE by the fact that a number of young women had been added temporarily to the force to handle special work and some of these had been retained permanently by the employer. I have, therefore, presented the following results so as to show the information which was ascertained, in three groups, namely, male employees, female employees, and the total group: MALE EMPLOYEES FEMALE EMPLOYEES TOTAL GROUP Number of employees 344 440 784 Average age, years 38.4 28.5 32 8 Yearly salaries $560,800.00 $250,920.00 $811 720.00 Aggregate monthly cost Aggregate annual cost 1,018.89 12 226 68 278.06 3 336 72 1,296.92 15 563 04 Annual cost as a percentage of the payroll 2.2 1 3 19 " The above figures are based on the facts as presented by the employer. A few of the male clerks who have been em- ployed some time are above the average age of the group and are drawing salaries in excess of $2,500 per annum. This, of course, tends to raise the cost of the particular group which was selected. " The cost in the above example is based upon a participat- ing rate. To show the results upon the non-participating basis, Mr. Hammond has also calculated the aggregate cost based upon the American 3 per cent, yearly renewable-term rates loaded 12% per cent, for commissions and expenses as fol- lows: " Male employees, aggregate annual cost, $9,344.06, namely, 1.7 per cent, of the payroll. " Female employees, aggregate annual cost, $2,555.09, namely, 1.0 per cent, of the payroll. " Total groups, aggregate annual cost, $11,899.15, namely 1.5 per cent, of the payroll." Benefits. As pointed out above, benefits under the policy may be either an arbitrary sum or dependent upon salary. GROUP INSURANCE 309 In the latter case rates are quoted as a percentage of the payroll. Under some policies each employee is permitted to name a beneficiary, under others his relatives become entitled to payment in a definitely established order. . Again, benefits may be taken in a lump sum or in install- ments, the latter being most effective since the recipient is usually inexperienced in financial matters. One plan offered increases the payment from a burial benefit after two years' service to a life annuity of 20 per cent, of the wages after seven years' service, installments being paid for varying lengths of time should death occur between these periods. Since it is a cessation of annual income which is insured against, obviously an annual income is the most satisfactory form of benefit. If the employee retires on a pension this same plan offers a life annuity to his widow (or in install- ments to his children until they are eighteen years of age) amounting to 20 per cent, of the pension. Functions. The usefulness of group insurance may be considered from the viewpoint of the employer, of the em- ployee, and of society. The employer, by taking out this form of protection, binds his employees more closely to him, and inculcates something of the cooperative spirit. If the face of the policy is made equal to the salary list, he offers a reward for continued service. And all this is accomplished at the extremely low cost of about l 1 /^ per cent, of the payroll. Were this percentage added to wages or sala- ries it would receive little attention, but the fact of insur- ance for a substantial sum looms large in the eyes of the employee. Group insurance may be of importance to the workingman even if his employers do not pay the premium. A firm may arrange to take out a group policy solely for the purpose of enabling its workers to obtain the lower rates, thereby pro- tecting their families at a minimum cost. In this case the employer assumes the responsibility for the payment of pre- miums and acts as an accounting agency between the company and the insured. 310 THE PRINCIPLES OF LIFE INSURANCE Socially, insurance in groups has much the same justifica- tion as has workmen's compensation, and covers cases where the latter would not apply. Society demands that provision he made for the proper wants of its members and group in- surance assists in providing for a class which ordinarily has little ability or inclination to care for itself. It is further socially advantageous in that it accomplishes its results at a lower social cost than does ordinary life insurance or indus- trial insurance, because of the reduction* in expenses made possible. It has been suggested that there are grave possibilities of discrimination in granting group contracts with their lower rates. If the rates quoted are so low as to be unprofitable and require encroachment on the receipts from other forms of insurance they are obviously discriminatory. But with care- ful selection and adequate supervision there is every reason for recognizing the better risk and the savings in expenses by more favorable premium charges. It is one step toward more adequate recognition of the variability of risk and accurate adjustment of rates thereto. BIBLIOGRAPHY There- has been little written on the subject of Group Insur- ance, but the following articles may be referred to : MANSFIELD, BURTON M., " Life Insurance in Groups." Address delivered before the National Convention of Insurance Commissioners at Spokane, Washington, 43rd session, 1912, pp. 235-243. ROSENFELD, H. L., " Group Insurance for Employes of Banks and Trust Companies." Pamphlet reprinted from Trust Companies, Aug. 1912, pp. 99-102. GRAHAM, WM. J., "The Story of Group Insurance." An ad- dress delivered before the Life Underwriters' Association of New York. PAET IV ORGANIZATION, MANAGEMENT, AND SUPER- VISION OF LEGAL-RESERVE COMPANIES CHAPTER XXIV TYPES OF LEGAL-RESERVE COMPANIES Distinctive Characteristics of Each Type. Life insur- ance on the legal-reserve plan is transacted by three types of companies, namely, mutual companies, stock companies, and mixed companies. Briefly outlined, the essential features characterizing each type of company are the following : Stock companies, using the term in its strict sense, are those which have capital stock and which do not issue policies under which the insured is allowed to participate in the profits of the company. A stock company is controlled by those who own the stock, and the liability of both company and insured is fixed definitely in the contract. While the policyholders possess an interest in the reserve accumulated on their contracts, they are not interested in the surplus of the company, all profits derived from the business belonging to the stockholders. Mutual companies, again using the strict meaning, are those which have no capital stock and therefore no stock- holders. A mutual company is composed of the policyholders who own all its assets and who, theoretically at least, control its management through some system of voting. Although the well established mutuals now have no capital stock what- ever, it is usual in organizing such companies to start them with a guaranty capital, providing for a fixed rate of return while the stock is outstanding and for its retirement when the assets of the company reach a certain prescribed standard. For competitive purposes mutual companies, until a few years ago, issued non-participating policies of all kinds at very low rates. In recent years, however, various states have un- dertaken to regulate this matter. Thus in the state of New York they are permitted by law to do a participating business 313 314 THE PRINCIPLES OF LIFE INSURANCE only; while other companies organized in the state must elect to do all their business either on the participating or the non- participating plan. Outside companies doing business in the state are allowed to transact both classes of business, but are permitted to do so only if they file separate gain and loss ex- hibits for each class. Although non-participating policies may be issued by mutual companies, their business is almost entirely a participating one, the policyholders paying premi- ums considerably higher than necessary to meet the liability of the company and later receiving a refund (in the form of dividends) of such overcharges as the company may find it unnecessary to hold. Mixed companies combine certain features of both of the other types. While organized as stock companies, they issue policies on the participating plan, usually limit the rate of dividend to stockholders to a definite amount, distribute all other surplus earnings to their policyholders, and also grant policyholders some voice in the management of the com- pany. Sometimes no limitation is placed upon the amount that may be paid to stockholders, yet the issuance of partici- pating contracts will call for some sort of distribution of sur- plus to policyholders. In most instances the existence of capital stock in these companies had its origin in the legal requirement for a guaranty capital in organizing the com- pany, the law, however, not providing for the future retire- ment of the stock. In various states the law, besides fixing the maximum return that may be paid stockholders, also provides for the retirement of the stock when the company has become well established. Comparison of the Stock and Mutual Plans as Regards the Loading of Premiums. We may next pass to a discus- sion of the important differences between the stock and mu- tual plans as they manifest themselves in actual practice. In the first place it is to be noted that the gross premiums charged by mutual companies include a loading which not only amply covers all expenses, but also usually includes an additional amount to safeguard the company against any possible con- TYPES OF LEGAL-RESEKVE COMPANIES 315 tingencies. Then, if the premium proves to be redundant,, as is nearly always the case, the overcharge is returned to the policyholders in the form of dividends, thus giving them pro- tection at actual cost. Stock companies, likewise, usually load their net premiums, but the amount added does not as a rule- even cover expenses, the company relying upon excess inter- est earnings and saving in mortality to cover its requirements for expenses and contingencies. In actual practice, therefore, the stock company charges a lower rate of premium on non- participating policies than does the mutual company on par- ticipating policies. The stock company says in effect, to quote one description, "keep the dividend ['of the mutual company] in your pocket." It follows the plan of discount- ing the future i.e. of paying its dividends in advance by charging a guaranteed low premium; while the mutual com- pany asks a higher premium to start with and subsequently refunds the overcharges. In actual practice, therefore, a com- parison of the showing which stock companies make from the standpoint of ultimate cost of insurance to the policyholder and the showing made by a mutual company requires a com- parison of the net annual cost of the policy in the two com- panies over a series of years. The practical difference in the matter of charging premi- ums by stock and mutual companies may be illustrated by the following example of a $10,000 policy issued by a certain company some twelve years ago on the participating plan at a premium of $281.10, as compared with a $10,000 non- participating policy issued at the same time and under the same conditions at an annual premium of $227. As regards the non-participating policy, the annual cost of the insurance remains a constant, namely, $227. As regards the partici- pating policy, however, owing mainly to the accumulating yalue of the reserve and the excess interest earned on that increasing value, the net cost of the policy shows a steady de- crease. Thus, at the end of the first year the participating policy paid a dividend of $43.40, which, when deducted from the premium of $281.10, leaves a net cost of $237.70, as corn- 316 THE PRINCIPLES OF LIFE INSURANCE pared with the non-participating rate of $227. At the end of the sixth year the annual dividend on the participating policy had increased to $54.30, thus giving a net cost of $226. 80, or approximately the same as the premium of $227 charged for the non-participating policy. Thereafter the net cost of the participating policy grows less each year, while that of the non-participating policy remains the same. The foregoing example is chosen merely to illustrate the manner in which stock companies discount the future by charging a reduced rate of premium as compared with that charged by mutual companies, with the result that the non- participating plan gives the lower cost if the policy continues in force for a considerable number of years. The period in the life of the policy at which the total net cost under the two plans will be equal differs greatly and naturally depends upon the companies used for purposes of comparison. Much has been written concerning the question as to which plan will give the cheaper protection to the insured, and innumerable ex- amples are cited to illustrate one contention or the other. The showing made under the two plans will depend upon the companies under consideration, and the controversy concern- ing the subject has therefore consisted primarily of a dis- cussion of companies and their managements. It should be recognized that a true comparison of the two plans as regards the cost of insurance a comparison of systems and not of companies requires that the companies used for illustrative purposes should operate under precisely the same conditions, that their managements should have equal ability and integ- rity, that they should do approximately the same amount of business yearly, and that their policies should be alike in their provisions. Having in mind a comparison of systems, as dis- tinguished from companies, it may be said that in mutual insurance, if efficiently and honestly conducted, all of the overcharges are refunded to the policyholder and he receives his protection at actual cost, whereas under the stock plan an overcharge in the premium reverts to the benefit of the stock- holders. TYPES OF LEGAL-RESERVE COMPANIES 317 Arguments Urged in Favor of Each of the Plans for Charging Premiums. The argument most frequently urged in favor of stock company rates is that they are low, definite in amount and time of payment, and eliminate all element of uncertainty, thus enabling the policyholder to know the exact future cost of his insurance and to make provision therefor in much the same way as he does for his rent, mortgage inter- est, or any other fixed obligation. In the words of one sup- porter of stock companies, insurance policies issued on the non-participating plan are " plain business contracts which tell their whole story upon their face ; which leave nothing to the imagination ; borrow nothing from hope ; require definite conditions, and make definite promises in dollars and cents." 1 Another statement is to the effect that " the policyholder of a stock company knows just what his insurance will cost, now and in the future, everything being guaranteed a thing im- possible in a mutual company for the reason that one cannot know in advance what future dividends will be, or even that there will be any dividends at all." 2 It is further argued that under the stock plan the self-interest of the stockholders will secure, as well as any other system, a faithful manage- ment of the funds accumulated by the company for the bene- fit of its policyholders, and that the competition of other stock and mutual companies will keep down the cost of insur- ance to a fair basis. Stockholders, it is asserted, will be actu- ated by self-interest to select the ablest management, and in attempting to do this will not be interfered with by the policyholders. In favor of the mutual plan it is argued that there are no dividends to be paid to stockholders, that insurance is given at actual cost by returning in dividends all unnecessary over- charges, and that the affairs of the company may be con- trolled by the policyholders in such manner as they deem best 1 CRAIG, JAMES M., " Stock Life Insurance," in Howard B. Dun- ham's The Business of Insurance, i, 506. 3 DEXTER, GEORGE T., "Mutual Life Insurance," in Dunham's The Business of Insurance, i, 501. 318 THE PKINCIPLES OF LIFE INSURANCE for their interests. It is also pointed out that by charging higher premiums the mutual company possesses an important source of strength against periods of financial stress or other unforeseen contingencies. Stock companies, on the contrary, are not in a position in case of reverses to call upon their policyholders for additional contributions to meet losses, since the stockholders, being alone entitled to profits, must also bear all losses. Strength and safety are regarded as first considerations in life insurance, and in this respect it is im- possible to foretell the contingencies, such as wars, epidemics, greatly declining interest rates, oppressive legislation and taxation, inefficient management, etc., which may arise in the distant future ; hence the danger of companies assuming fixed obligations which run for many years and must be fulfilled absolutely without the company possessing the right of with- drawal or modification. In practice, however, both types of companies usually retain a considerable fund for emergencies so that the argument is applicable only in the event of very unusual contingencies. Furthermore, the argument that cer- tain stock companies possess a much greater accumulated sur- plus than certain mutuals is considered by the supporters of the mutual plan to constitute nothing more than " the dis- cussion of the merits of companies and not of systems ; just as would be the case if it were pointed out that the capital of most stock companies is so inconsiderable as to be negligible jn the nature of security." 3 The Stock and Mutual Plans Compared with Reference to the Control of Companies. The control of stock com- panies, as we have seen, rests with the stockholders, generally by means of proxy voting. Nearly always a majority vote carries with it complete control, although in some instances the minority is able to secure some representative in the com- pany's management through a system of cumulative voting. Control of mutual companies, on the contrary, rests in theory at least with the policyholder. All such companies allow s DEXTER, GEORGE T., " Mutual Life Insurance " in Dunham's The Business of Insurance, i ? 500. TYPES OF LEGAL-RESERVE COMPANIES 319r their policyholders to express their will by attending the meet- ings and voting in person. But it is clear that in the case of a large company doing business throughout the country it is impossible for more than a few of the total number of policy- holders to attend in person, hence in nearly all companies the proxy system is employed in one form or another. Some- times the proxies are good until revoked, while in other in- stances they are good only for the given meeting or for a limited period. Sometimes no member is allowed to vote proxies for more than a certain designated amount of insur- ance, like $100,000; while in other instances no limitation is imposed. In still other instances direct voting by mail is permitted. The foregoing distinction between control of companies by stockholders and by policyholders has not proved of much im- portance in the past. In either case experience has demon- strated that the company is usually controlled by a limited number of persons, and that the situation with respect to a, large mutual life-insurance company is similar to that pre- sented by other large corporations with thousands of stock- holders widely scattered. Experience has clearly shown that very few policyholders attend the meetings, and that proxies can usually be obtained in sufficient numbers by those who are interested in controlling the company. The average^ policyholder seems to manifest little interest in the manage- ment of the company in which he is insured, and, especially in view of the stringent regulation of the business by the' state, makes little effort to keep himself informed. The great majority of policyholders, moreover, even if desirous of at- tending the meeting or of expressing an independent judg- ment by proxy, are not sufficiently well informed to-day to vote intelligently on important matters that may come up for decision. Even when attempts have been made to organ- ize groups of policyholders in local associations with a view to bringing their influence more effectively to the attention of the company's management, the efforts have in nearly all instances met with little success 320 THE PRINCIPLES OF LIFE INSURANCE Arguments Urged in Favor of Each of the Plans of Control. The control of stock and mutual life-insurance companies has been the subject of as much controversy as was noted to exist with reference to the cost of protection under the two plans, and innumerable instances have been cited pro and con to support one or the other contention. The supporters of the stock plan point especially to the lack of interest which policyholders show in the management of mutual companies, that they rarely vote, and that the existing management may easily obtain a sufficient number of proxies to perpetuate its control. They assert that the difference is in reality only a theoretical one and that the self-interest of stockholders, since their own investment is at stake, is a guaranty that the company will be successfully man- aged. While admitting that few votes are cast in most mutual elections, those who favor the mutual plan assert that "life insurance is essentially mutual in principle," and that con- trol by policyholders, although it may not generally be exer- cised, nevertheless means that the members of the company possess the final power to express their will in the event of a grave crisis arising in the affairs of the company. They also point to the threefold danger: (1) of allowing a stock-con- trolled company to issue both participating and non-partici- pating policies, a plan which may make possible the fraudu- lent treatment of participating policyholders to the advantage of the stockholders; (2) of having all the assets of a company, including not merely the capital stock, but the reserve ac- cumulations in which the policyholder is vitally interested, come absolutely under the control of a limited number of stockholders without the possibility of withdrawal by the in- sured except at a great financial sacrifice or at the risk of being unable to obtain insurance elsewhere; and (3) of possibly placing the assets of the company within the power of un- scrupulous financiers who are interested in controlling the company for purposes totally at variance with the best inter- ests of the policyholders. Again, they argue, what assurance TYPES OF LEGAL-RESERVE COMPANIES 321 is there that a good management for the present will not be replaced in later years by an inefficient or even dishonest one? When such conditions arise the stock plan, so the sup- porters of the mutual plan assert, gives the policyholders no opportunity to express their disapproval effectively; nor may even the larger number of stockholders be able to effect a change since the controlling interest in the stock may be lodged in the hands of one or a few individuals whose inter- ests are furthered by the practices to which the policyholders and minority stockholders are opposed. Under the mutual plan, however, if the company's affairs become so bad as to arouse general dissatisfaction, it is possible to oppose the management with independent nominations. To accomplish this purpose various states have enacted laws which aim to give policyholders every possible facility for exercising their voting power if they so desire. The mere knowledge that the body of policyholders possesses this final voting power, it is felt, will restrain a management from going to the extremes that it might have no hesitancy in doing if it were in a posi- 'tion to perpetuate itself by virtue of a majority control of the company's stock. The Control of Mixed Companies. Mixed companies, or those which are organized as stock companies but which allow the insured to participate to some extent in the surplus and grant them some measure of voting power, do not pos- sess any great advantage over pure stock companies as regards control by policyholders. An examination of the various plans now in existence gives abundant evidence of this fact. A few permit stockholders only to vote for directors; while a considerable number, although allowing stockholders to vote in person or by proxy, require policyholders to vote in person, and in various instances still further limit control by the insured by restricting the voting power to those who carry a certain amount of insurance, like $5,000, or pay a certain annual premium, like $75 or $100. Such restrictions will amply safeguard the management against a loss of control 322 THE PEINCIPLES OF LIFE INSURANCE through the action of the company's policyholders, since it is practically certain that the number carrying $5,000 of insur- ance who will appear to vote in person will never even ap- proximate the number of shares, to each of which a vote is given. Various other restrictions, sometimes used in con- junction with those already mentioned but at other times constituting the only restrictions, may also be mentioned. Thus, it may be provided that one-half of the directors shall be elected by the stockholders and the other half by the members, or that the stockholders shall elect, say two-thirds of the directors, and the policyholders one-third. Again it is quite common to provide that only stockholders owning a designated number of shares may be directors, while in a lim- ited number of instances only may directors be either stock- holders or members. Under such restrictions only half the board with the president is needed for control on the part of the management, while if the stockholders are entitled to elect more than half of the directors, the voting privilege extended to policyholders is apt to be worthless. The methods adopted by mixed companies for allowing the 1 insured to participate in the profits of the company also- differ greatly in their details. Usually the dividend on the stock is limited to 7 or 10 per cent, per annum, or to this rate plus a certain proportion of the remaining surplus, such as one-fifth or one-eighth. In at least one instance the inter- est of the policyholders in the profits of the company shall be " as hereafter provided, unless otherwise expressly agreed between the company and the insured/' Another company limits the return on the stock to 7 per cent, plus the profits on non-participating business; while a few others place no limit upon the stock dividends, yet have been paying large dividends to policyholders. Provision for retiring the stock seldom exists, and where such provision has been made it is usually stated that the retirement shall occur only when it is voted by the members and that a certain proportion of the surplus, like one-fourth, may be applied for that pur- pose. TYPES OF LEGAL-RESERVE COMPANIES 323 BIBLIOGRAPHY CRAIG, JAMES M., " Stock Life Insurance," in Howard P. Dunham's The Business of Insurance, i, 503-512. DAWSON, MILES M., The Business of Life Insurance, 113-146. DEXTER, GEORGE T., " Mutual Life Insurance," in Howard P. Dunham's The Business of Insurance, i, 489-502. ZARTMAN, LESTER W., " Control of Life Insurance Companies." Yale Readings in Insurance, Life, i, 299-311. CHAPTER XXV ORGANIZATION OF COMPANIES HOME OFFICE ORGANIZATION In many respects the organization of a life-insurance com- pany is similar to that of other corporations which are con- cerned with the collection, investment, and disbursement of funds. It is the purpose of this chapter to outline the more important official positions, committees, and departments of the average large life-insurance company, and to describe briefly their respective functions and duties. In doing this it is recognized that the various companies present many differ- ences in their organization. 1 Generally speaking, the average large life-insurance company, aside from the numerous office 1 In his excellent lecture on " Office Organization in Life Insur- ance" (Yale Insurance Lectures, i, 112-125), Mr. John B. Lunger presents in schedule form the organization of the average large life- insurance company. His schedule is herewith reproduced. Since this chapter aims to discuss only the more important official posi- tions, committees and departments, Mr. Lunger's description of the duties of the other departments and committees is given briefly un- der the respective headings. Mr. Lunger's schedule is the following: Bdard of Directors Committees of the Board .......... [General Conduct Officials Charged with Executive f i Treasurer Officials Charged with Administra- tive Functions ................ [Superintendent of Agents Officials Charged with Advisory f Director Functlons ..................... [Counsel 324 ORGANIZATION OF COMPANIES 325 departments and special committees which handle the routine and technical work of the company, is managed by four groups of officials: those who compose the deliberative bodies, those who exercise executive functions, those who are intrusted OFFICE DEPARTMENTS: Agency Financial Actuarial Medical Legal Bookkeeping Where all of the company's financial opera- tions are summarized and classified. Auditing Where the company's receipts and disburse- ments are checked and passed upon by com- petent accountants. Claims Where all proofs of death are examined and passed upon, also all papers relating to ma- turing endowment policies and other contract obligations. Real-estate Loans . . . Where all applications for mortgages are con- sidered, the value of property appraised, and if the loan is made, records are kept of all payments of principal and interest. Policy- writing Which takes the applications which have been approved by the medical department and pre- pares and registers the policies applied for. Policy Loans Which looks after the requests of policyhold- ers for cash advances on the security of their policies. Inspection Which supplements the work of the medical department by making inquiry concerning the habits and financial standing of applicants. Policyholders' Bu- reau Which looks after all communications and queries from policyholders, formulates ways and means of keeping' them posted, and looks after delinquent policyholders. Editorial and Ad- vertising Which is charged with the company's periodi- cals, circulars, all printed matter for the use of agents, and the company's general and spe- cial advertising. 326 THE PKINCIPLES OF LIFE INSUEANCE with administrative duties, and those who serve in an advisory capacity. The Board of Directors and the Committees Chosen from Its Membership. The board of directors and the sev- eral committees of the board constitute the deliberative bodies. In a mutual company the directors are elected by the policyholders from among their own number, while in a stock company they are elected by the stockholders and in order to quality must be the owners of a designated number of shares. In mixed companies, as we have seen, the di- rectors are sometimes elected by the stockholders alone, some- times a certain number are elected by the stockholders and the others by the policyholders, and in still other instances both stockholders and policyholders elect all the directors and may choose the same from either the stockholders or policy- holders. But whatever the method of election, the board pos- Supply Which takes care of the printed matter of the company and distributes it in the home office and to the agencies in the field. It is often supplemented by a printing plant. Mail Which opens all incoming mail and distributes it amongst the offices of the company and the various departments. Also collects, makes up and addresses all out-going mail. Filing Which systematically stores applications for contracts, cancelled contracts, letters, and the replies thereto, books and cards no longer in use, and all of the many receipt forms and papers which it is necessary to preserve. COMMITTEES OF OFFICIALS AND CHIEFS OF DEPARTMENTS : Agency Methods and Conduct Composed of the chief of the Agency Depart- ment and his leading assistants. It considers the forms and terms of agency contracts, ques- tions as to the amount of business to be writ- ten in various sections of the country, the efficiency of the management of state and local agencies, and ways and means for increasing the agency organization, and for the better in- struction of agents. OKGANIZATION OF COMPANIES 327 sesses complete supervisory powers over the company. It is not only empowered to select the president and other principal officers, but may delegate to them such powers as it sees fit. It also meets at stated intervals to approve or disapprove the findings of committees, and to consider and pass judgment .upon all important matters concerning the general business conduct of the company. Since the transactions of a life- insurance company assume a great variety of forms, it is msually considered desirable that the directorate should be composed of men who represent various callings and possess wide experience. To expedite the proper fulfillment of its functions, and to bring its members into close touch with the business affairs of the company, the board divides itself into a number of standing committees. These committees vary in the different companies but usually are six in number : the executive corn- Review Composed of representatives of the medical, actuarial, and agency departments. It consid- ers and passes upon the applications concern- ing the acceptance of which there is a reason- able doubt. Clerical Efficiency. . .Made up amongst the heads of departments. It examines applicants for positions, passes upon their qualifications, reports the outcome to one of the leading officials, and is expected to keep track of progress made by new ap- pointees. (Claims Sometimes composed of members of the board of directors, but more usually is made up from the officers and heads of departments. It passes judgment upon all claims upon the company, especially those concerning the legal- ity or sufficiency of which there is reasonable doubt. Office Methods and Systems It states and adapts to the company's pur- poses all improved and simplified office meth- ods, examines and passes upon new forms, cards and registers, and regulates the work of each department so that it will fit smoothly into the work of every other department. 328 THE PRINCIPLES OF LIFE INSURANCE mittee and those on finance, general conduct, claims, agencies and accounts. Of these the executive, finance and general conduct committees rank as most important, while in certain instances the duties embraced under the headings of claims, agencies and accounts are relegated to special office depart- ments or to committees composed of administrative officials and chiefs of departments. The executive committee, con- sisting of the president and certain members of the board, has for its purpose the consideration and ratification of such mat- ters as bear a vital relation to the general business policy of the company. The finance committee, consisting of the president and treasurer of the company and a certain number of the directors, exercises a supervisory control over the com- pany's investments. It is this committee which approves or rejects the investments selected by the treasurer, and in order to avoid any mistakes in this important matter it is, as Mr. Lunger states, " a common rule that no investment shall be made unless it meets with unanimous approval." The com- mittee on general conduct consists usually of a certain num- ber of the directors and the chief administrative officers. As summarized by Mr. Lunger, it " regulates the expenses of the company, considers the reports of the chiefs of adminis- trative and supervisory departments and of the office com- mittees. It is expected to keep in touch with and pass judg- ment upon all matters of practical administration that can- not be brought before the executive committee of the board. In brief, it is the committee that observes the workings of the machinery and takes care that each part is in condition to work smoothly." Officials Exercising Executive Control. These usually comprise the president, one or more vice-presidents, each of whom has charge of a department, and the treasurer. The president is usually intrusted by the board of directors with large executive powers, and should not only be well versed in financial matters but should have a wide experience in the life-insurance business so as to interpret properly the results attained in the respective departments of the company, advise ORGANIZATION OF COMPANIES 329 the board of directors in supervising the general business conduct of the company, determine the best policy for it to pursue, and direct the work of the subordinate officials. He is also intrusted with the duty of selecting subordinate of- ficials and departmental heads. The several vice-presidents, each of whom usually has charge of a leading department of the company, must also keep in touch with the general business operations of the company so as to be in a position to assist the president in his duties, to assume his responsibilities (or that of a ranking vice-president) during his absence, and to be prepared to assume the office in the event of promotion. The treasurer, besides passing on the merits of the com- pany's investments so that those which meet his approval may be presented to the finance committee, is usually the custodian of the bonds, stocks and other investments held by the com- pany, and is intrusted with the duty of collecting the interest and dividends thereon. To invest the company's money in securities that are safe and yet will yield a return from 1 to 1% per cent, higher than the rate assumed for premium and reserve computations requires skill and a wide knowledge of the various classes of investments in which life-insurance companies are permitted to invest their funds. Great care must be exercised especially with regard to investments in real-estate mortgages since these involve a knowledge of values, the character of the mortgagor, and an examination of the mortgages and abstracts of title. As previously stated, life-insurance investments also consist to a large and increas- ing extent of policy loans, whose sole security is the value of the policy against which the loan is effected. Since real- estate and policy loans constitute so large a proportion of the total investments in life insurance, it is common for large companies to have two special departments a real-estate department and a policy-loan department to manage and supervise the same. Officials Intrusted with Administrative Functions. These are usually the comptroller, secretary and superintendent of agents. The comptroller is charged with the responsibility 330 THE PKINCIPLES OF LIFE INSUKANCE of overseeing the company's bookkeeping and of collecting premiums and interest from policyholders. The bookkeep- ing department ranks among the most important branches of the office work. It has charge of the numerous cash, investment and insurance accounts, and must record them in such a practical and scientific manner as to enable the com- pany to know at any time the progress of its business and to meet the demands of the various state insurance depart- ments for information. It must also be organized in such a manner as to permit a frequent proving of the correctness of its work. The secretary has charge of the company's correspondence, the minutes of the board of directors and its various committees,, and the company's records. He also) prepares the reports which are presented to the board of directors and its committees, and is frequently charged with the oversight of the office organization and the discipline of employees. The superintendent of agents selects and super- vises the company's agents and, as concerns the field force,, carries out the instructions of the head of his department (usually one of the vice-presidents) and of the committees which handle agency matters. Officials Serving in an Advisory Capacity. These are the actuary, medical director and counsel. The actuary's work has been described as "the forerunner of all the business to- be conducted," and to be well qualified " he must be well in- formed not only in the mathematical part of his profession,, but must have considerable practical knowledge of life in- surance before it will be safe to follow his advice." 2 His work is indispensable if the company wishes to conduct its business on a scientific basis. Previous chapters clearly indicate that premium rates and cash, paid-up, extension and loan values must be carefully ascertained before contracts can be written. The actuary also calculates the reserves and dividends of the company. From time to time it is nec- essary for him to devise policies to meet the needs of changing 2 ENGLISH, J. L., " Home Office Management," in Dunham's The Business of Insurance, chap. 20, p. 347. OKGANIZATION OF COMPANIES 331 competitive conditions and to comply with the requirements of the numerous laws adopted by the various states. The medical director supervises the company's force of medical examiners, selects the physicians who shall constitute this force, instructs them in their duties, and is the final authority to pass upon the insurability of applicants. The acceptance of a risk depends mainly upon his judgment, and in arriving at a conclusion he must consider the local examiner's certificate in conjunction with the facts obtained from the application and sometimes from other sources. The work of the medical department is usually supplemented by an inspection department whose function it is to inquire into the habits and financial responsibility of applicants. The legal department is charged with the responsibility of handling all of the company's legal matters. These include, among other things, the conduct of court cases growing out of contested claims, foreclosure proceedings, imperfect titles, etc.; the sufficiency and correctness of policy forms, agency contracts, bonds, notes, etc. ; the inspection of titles to property purchased by the company or upon which it has granted loans; and the analysis and interpretation for the benefit of the company of the statutory and court law governing life insurance in those states where the company operates. Other Departments. In addition to the foregoing, numer- ous other departments are necessary for the handling of the enormous volume of details that make up the work of a large life-insurance company. Most of these have been enumerated and briefly defined on pages 325 and 327, and need not be re- ferred to again. Mention may, however, be made of the fact that a considerable number of companies have, in addition to the departments already enumerated, one or more of three other departments, namely, a statistical department, a policy changes department, and a department of assignments. The function of the first is to tabulate the experience of the com- pany as regards the numerous classes of risks insured, the various types of policies written, the various classes of in- vestments made, etc. The data collected by the department, 332 THE PRINCIPLES OF LIFE INSURANCE if properly interpreted by it, should prove invaluable especially to the executive and actuarial departments in enabling the company to profit by past experience with a view to improving its future prospects. It is also apparent that in a large company numerous changes of beneficiaries will be requested by policyholders, and such changes frequently involve legal and other dangers which the company is anxious to avoid. During the early policy years numerous contracts are also changed with reference to the kind of insurance, the amount of premiums, or the amount of insurance, and all such changes require a careful adjust- ment between the old and the new contract. To facilitate the speedy and careful handling of such changes some com- panies have found it advisable to create a special depart- ment for the purpose. Furthermore, life-insurance policies are frequently assigned. Such assignments must be duly filed and acknowledged, and must be examined from the standpoint of legality and accuracy. While the companies do not hold themselves responsible for the correctness of policy assign- ments, they nevertheless desire to protect the insured by ex- tending advice and suggestions. To this end some of the companies find it advantageous to have a department of as- signments, the function of which is to examine carefully all assignments filed with the company and call the attention of the parties thereto to any inaccuracies or illegalities which it may discover. AGENCY ORGANIZATION AND MANAGEMENT While attempts have been made to sell life insurance directly to the public through advertising and circulars or through the medium of savings banks or certain governmental agencies like the post office, experience has shown that such methods met with little success. 3 Like any other costly article life insurance must be sold, and its benefits can be widely dissem- inated throughout the community only through the direct 3 As illustrative of the practical failure of such methods, see page 430 of this volume, ORGANIZATION OF COMPANIES 333 solicitation of salesmen. In fact their labor underlies the upbuilding of life insurance as a vital force in the community, and without their propaganda only the limited few would secure its protective influence. Especially is this the case since, as has been said, " It is but natural to procrastinate about a provision that needs must be made when one is in good health and does not need it, and that can be most ad- vantageously made when young and the contingency provided against probably, and at least apparently very remote/' 4 Relation Between the Home Office and the Field Force. For the reason just mentioned the agency department is often characterized as the most important branch of the home office. It is usually managed by one of the vice-presidents of the company, who is assisted by the superintendent of agents. The functions of the department are varied, and consist in securing agents and managers, assigning to them their re- spective territory, instructing them in their work, supervising the home-office correspondence and records pertaining to agents, formulating plans for improving the efficiency and loyalty of the service, and assisting the agency forces in any special difficulties that they may encounter. Frequently there are several assistant superintendents of agents, each of whom is charged with the duty of supervising the agency force in a designated group of states. Successful agency work requires not only the most effective organization but a close cooperative relationship between the home office and those in the field. To this end united action is emphasized as much as possible. Not only are all im- portant agency questions considered by special committees at the home office, but agents' meetings and conventions are organized with a view to enabling a free discussion of impor- tant questions vitally related to the agent's work and equip- ment. Many of the companies also devote much attention to the education of their agents in a proper understanding of the nature and uses of life insurance and in the methods of 4 WOODS, EDWARD A., "Agency Management," in The Business of Insurance, chap. 21. 334 THE PKINCIPLES OF LIFE INSURANCE salesmanship. Some companies conduct special courses along these lines while many others issue numerous educational leaflets explanatory of the various types of contracts and their uses, the arguments to be presented in selling the various classes of policies, and much other information of value to the agent in his daily work. It should here be stated that the agent, if he is to render the greatest service to his client and pursue his calling along professional lines, should be well informed concerning those phases of life insurance, such as the principles of rate-making, the operation of the reserve, the nature and sources of the surplus, etc., which are necessary to a correct answering of the numerous questions which are commonly asked of agents. To render expert service he should possess a thorough knowledge of the various types of policies and their usefulness under certain family and business circumstances, and of the various forms of settlement and their advantages, so that he may wisely fit the policy to the real needs of his prospective client. He should be thoroughly informed with regard to his company's invest- ments and its treatment of policyholders as regards surrender and loan values, and should be in a position to present the benefits of insurance clearly and forcibly. There are also many legal phases connected with life insurance, as, for ex- ample, in connection with the naming or changing of the beneficiary and the assignment of policies, an understanding of which will greatly enhance the agent's usefulness. Further- more, the agent should not consider his service to his client completed when the sale of a policy has been effected. In- stead, his advisory relation to the insured and the beneficiary should extend, if at all possible, throughout the life of the policy and, as regards the conservation of the proceeds, even after it matures. 5 Commissions Paid to Agents. For their- services agents s For an extended discussion of the way in which agents should view their profe&sion, see the address on " How the Life Insurance Agent Should View His Profession," published as Appendix I on pages 427 to 437 of this volume. ORGANIZATION OF COMPANIES 335 receive commissions and the method of paying them usually assumes one of two forms. One consists in paying a high commission, varying let us say from 30 to 50 per cent., on the first year's premium and a small percentage of, say, 5 per cent, (called a renewal commission) on subsequent pre- miums for a designated number of years. This method is particularly well adapted to those who aim to write permanent business, since renewal commissions mean an increasing in- come from year to year to the agent who exerts himself in the procurement of insurance which will remain on the books of the company. The other method consists of paying a some- what higher commission on the first year's premium than is allowed under the first method, the agent receiving no re- newals on subsequent premiums. This plan, it is appar- ent, is apt to be desired by those who consider the present more important than the future and who desire to receive a higher income at once in preference to waiting for the accu- mulating commissions that are received under renewal con- tracts. Types of Agency Organization. Four agency systems are used in the life-insurance business, viz : 1. The general-agency system, according to which a general agent is given exclusive control of a certain terri- tory with power to organize his efforts as he may deem best and to employ agents to assist him on such terms as he may see fit. 2. The branch-office system,, according to which branch offices are operated in various sections of the country, each being in charge of a manager and a cashier. Under this system the home office approves the contracts made with local agents, although the manager appoints and directs the same. 3. The direct-agency system, according to which the agents are appointed and supervised from the home office with or without the assignment of exclusive territory. 4. The brokerage system (of relatively much less importance than the other plans), according to which the con- 336 THE PKINCIPLES OF LIFE INSUKANCE tract is effected directly with the company but without any arrangement for the allotment of exclusive territory cr the .payment of renewal commissions. The General-Agency System. The first two systems have been adopted most generally as the plans for organizing and controlling the operations of agents. The general-agency sys- tem is the oldest and most widely used of the two plans, and aims to accomplish through general agents what the other system is designed to do through branch offices. According to the plan the company appoints a general agent to represent it within a designated territory over which he is given control, and by contract agrees to pay him a stipulated commission on the first year's premiums plus a renewal on subsequent pre- miums. In return the general agent usually agrees to devote himself to the upbuilding of the company's business in his dis- trict, to employ and supervise the local agents, to collect pre- miums, and to pay all expenses (save only the fee paid to medical examiners) connected with the operation of his agency. He is also empowered to engage sub-agents on such terms as he may deem best. Thus he may pay them all of his first year's commission plus a renewal somewhat smaller than that which he receives from the company, or he might pay all of the commission on the first year's premium and retain the renewals himself, or, again, he may retain a portion of both the first year's premium and the renewals. If the agency is already established when the general agent is appointed, the company will usually pay him collection fees on the pre- miums turned in on the business which his predecessors de- veloped, expecting that this income will be utilized for the upbuilding of the agency. If the agency, however, is just being established, the company will often advance to the gen- eral agent the capital necessary for development and reimburse itself out of the commissions accruing under his contract. Frequently the contract also requires the general agent to produce a stipulated amount of business within a designated time. Two classes of general agencies are described by Mr. Ed- ORGANIZATION OF COMPANIES 337 ward A. Woods in his article on " Agency Management/' 6 viz: (1) those where the general agent relies chiefly upon his own personal business for his main profit and considers the income derived from his sub-agents as of minor importance; and (2) those where the general agent subordinates his per- sonal business and aims to develop a large force of sub-agents with a view to deriving his chief profit from the marginal difference between the commissions and renewals paid by him to such agents and tfrose which he receives from the company. If belonging to the first class the general agent will consider his personal business of greatest importance and will select those prospective applicants which he can handle best himself. Needless to say such an agency is not as ad- vantageous to sub-agents as the second class where, although it should always be the aim of the general agent to obtain some personal business, he will nevertheless promote the welfare of his agents in preference to the interests of himself or his office. As Mr. Woods explains : 7 It should be the policy of the general agent to subordinate his own interest and that of the office to his agents; to have them feel that their interests are preferred, that they will be given first opportunity to profit by leads of all kinds secured by the office; in all cases of conflict of interest to give all reason- able preference to sub-agents. Some agencies further protect them by refusing business from all outsiders or by declining to pay, or permitting their agents to pay, so-called " helpers or handshakers" or any outsiders any part of their commissions in any way, causing it to be understood that the interests of its agents are first in the agency. Such an agency will be built up slowly, because obviously the small marginal commission upon first, if any, and renewal, premiums will be slow in ag- gregating any considerable amount; but it should ultimately exceed what will be possible for the first form of general agency. 6 For an excellent discussion of the nature of a general agency and the business policy which such an agency should pursue, see the article by Mr. Edward A. Woods on " Agency Management," chap. 21 of Vol. I of H. P. Dunham's The Business of Insurance. This article is limited to a discussion of the general-agency system. 7 DUNHAM, H. P., The Business of Insurance, i, 360. 338 THE PRINCIPLES OF LIFE INSURANCE When thoroughly established the latter will not be so dependent upon the personal effort of the general agent and will gradu- ally attract more and more successful agents to its standard. 8 The Branch-Office System. As contrasted with the gen- eral-agency system, this plan is more recent in its develop- ment and is gaining in relative importance especially among the large companies. Its purpose, as already explained, is to establish branch offices in various districts in charge of a manager and cashier. The manager, usually selected because of his success as an agent, is charged with the responsibility of securing and directing agents within his territory and of instructing and otherwise helping and encouraging them in their work as solicitors. The cashier, on the other hand, to 8 Attention may here be called to the increasing tendency towards specialization in some of the large agencies. Mr. Woods writes in this connection: " The future large, successful agency will be further specialized in that its most experienced and expert closers will be more eco- nomically employed in giving their time to closing cases jointly with agents who are better able to bring in prospects than to close them. Joint work will be increasingly the rule, as it is in impor- tant cases in medicine and law, and it will be the business of the younger and less experienced agents more to hunt up persons inter- ested in or needing life insurance and, by utilizing the skill of the expert closer, acquire commissions more economically and efficiently, just as the able lawyer or physician employs assistants to prepare cases or make the early examinations of patients. Some large agencies have bureaus, referred to above, which supply prospects, giving the agent sufficient data and information as to persons re- quiring insurance, able to get and pay for it, and the reasons to be presented why it should be secured. These prospects, while, of course, they supplement the agent's own natural clientage, can be much more cheaply secured by a bureau established for this pur- pose than by the agent, whose time is more valuable when employed in the work of developing cases. " Such an agency will further have specialists in various kinds of insurance, to whom all such cases will be brought and worked as joint business. It will, for example, probably have one or more agents who make a specialty of: Income Insurance, Corporation or Partnership Insurance, Insurance to Protect Bank and Other Cred- its, Insurance for Philanthropies and Charities, Employee Insurance, and Annuities. These men will be experts in these lines and the general economic questions affecting them." ORGANIZATION OF COMPANIES 339 quote Mr. Lunger, " is charged with the collection of pre- miums and the interest on policy loans and with the keeping of all office records. He is expected to look after all corre- spondence in connection with applications and policies, notify delinquent policyholders of their obligations, attend to filling in proofs of loss, applications for policy loans and payment of maturing endowments and answer all communications from policyholders which are not of sufficient importance to be referred to the home .office. He is also charged with the supervision, efficiency and conduct of the clerical staff. As in the case of the officials at the home office, the managers, cashiers and clerks at the branch office are paid by salary, although the manager sometimes receives extra payments (bonuses) for increasing the volume of business through his office and for adding to the number of productive agents." 9 Arguments Advanced in Favor of the Two Plans. Much has been written about the relative merits of the gen- eral-agency and branch-office systems, some supporting one plan and some the other, and it may be well to indicate the principal contentions. The general-agency system, it is argued, has the twofold advantage of definitely fixing the cost which the company incurs in securing its business ; and of re- lieving the company of the trouble connected with the super- vision of many agents and the risks incident to the financial relations into which the company would otherwise have to enter with numerous agents. The supporters of the branch- office system, on the other hand, maintain that it is more economical because of the more prompt collection and re- mittance of premiums, agents under this system being re- quired to make prompt payments, and all collections of pre- miums and interest being deposited at once to the credit of the company and thus made available for immediate invest- ment. This contention has reference to the common practice of allowing general agents a considerable period of grace in 9 LUNGER, JOHN B., "Organization of Agencies: Details of the Branch Office System," Yale Insurance Lectures, i, 131-132. Thia .article furnishes an excellent description of the branch-office system. 340 THE PKINCIPLES OF LIFE INSURANCE making their collections and remittances, thus leading to the piling up of bank balances in favor of the agency or to slackness on the part of policyholders in paying their pre- miums. It is further argued that the general-agency system causes a lack of uniformity since the general agent can con- trol and pay his agent as he pleases, whereas under the branch- office system " the company conducts all of its agency affairs directly from the home office through its own branch offices, rented in the company's name, and placed in charge of man- agers under salary. ... In a few words, the company acts as its own general agent, develops its own plan for the super- vision, education and control of agents, and so conducts its affairs that any margin of profit in commissions reverts to the company for the benefit of its policyholders instead of going to a general agent." 10 Again, under the general-agency system soliciting agents have direct relations only with the general agent, he being the only representative of the company with whom they come into business contact. It, therefore, follows that unless the general agent calls the company's attention to the fact, the records and abilities of competent solicitors may remain unknown to the officials of the com- pany. BIBLIOGRAPHY DAWSON, MILES M., " An Analysis of Agency Systems," in The Business of Life Insurance, chap. 16. DUNHAM, S. C., " The Systematic Training of Agents." Pro- ceedings of the Association of Life Insurance Presidents, 1910, 88. ENGLISH, J. L., " Home Office Management," in H. P. Dun- ham's The Business of Insurance, i. 343-356. LUNGER, J. B., " Office Organization in Life Insurance." Yale Insurance Lectures, i, 113-125. , " Organization of Agencies in Life Insurance : De- tails of the Branch-Office System." Yale Insurance Lee- . tures, i, 126-143. 10 LUNGER, JOHN B., " Organization of Agencies," Tale Insurance Lectures, i, 136. ORGANIZATION OF COMPANIES 341 WOODS, EDWARD A., "Agency Management," in H. P. Dun- ham's The Business of Insurance, chap. 21, pp. 355- 373. CHAPTER XXVI LIFE-INSURANCE INVESTMENTS Considerations that Should Govern Companies in Mak- ing Their Investments. The investment of life-insurance funds is important chiefly because of the fact that the com- panies must maintain reserves (which we have seen represent advance collections frbm policyholders) for all the contracts issued on the life and endowment plans, and that their obli- gations under these contracts do not mature as a rule until the distant future. Since these reserve funds, constituting over four-fifths of the total funds held by American companies to-day, serve as a guarantee for the payment of claims, it is of the utmost importance that the greatest care should be exercised to conserve them properly against loss. This is es- pecially true since the mission of life insurance is a peculiarly sacred one, the insured relying upon it in the great majority of instances as the principal means of protecting his dependents against want. The great majority of contracts, as already noted, will run for many years before maturing and an in- creasingly large number have for their purpose the provision of a certain income for the beneficiary for life, thus in ever so many cases involving an obligation on the part of the company which will extend over a period of fifty or seventy-five years. Life-insurance protection to be real must be absolutely re- liable, and life-insurance funds must, therefore, be in- vested with such care as to preclude during all this time the possibility of failure on the part of companies to meet their obligations. Almost the greatest calamity that can be im- agined is the inability of a company to meet its contracts on which the insured has paid premiums for years and upon which he is placing dependence, and thus leave unprotected 342 LIFE-INSURANCE INVESTMENTS 343 the home which it is- the fundamental purpose of life insurance to hedge against the loss of the earning capacity of the bread- winner. But while the absolute security of the principal is the chief consideration that should guide companies in making their investments, four other factors should also be borne in mind. Briefly enumerated these are : 1. It should be the purpose of the companies so to make their investments as to yield the largest return consistent with absolute safety. Needless to say life-insurance investments must give a return at least equal to the rate which has been assumed for premium and reserve computations. But this rate is so low at present, being only 3 or 3y 2 per cent., that the companies' investments may easily be made to-day to yield a higher rate and thus reduce the cost of insurance to the policyholders who contribute the funds. To accomplish this purpose safely investments should be so distributed, both as regards the number and classes of investments, that the company may secure the benefits of the law of average and have a loss in one investment balanced by a gain in another. As a rule, adverse tendencies in one class of investments will be equalized by favorable tendencies in another. 2. It should be the purpose of companies to invest a con- siderable proportion of their funds in long-term investments. Such a course will not only lower the expense of maintaining the investments, but is apt to secure a better yield over long periods of time. 3. Since the companies have followed the practice of issuing contracts which promise loan or cash surrender values upon demand by the insured, they should protect themselves against any unusual demand of this character by investing a fair proportion of their funds in securities which are readily con- vertible into cash. 4. But with the exception of surrender values and policy loans, and the latter we have seen are now often subjected to a sixty- or ninety-day restriction, life-insurance companies are practically exempt from the dangers connected with 344 THE PRINCIPLES OF LIFE INSURANCE demand obligations. In this respect they differ essentially from banks and other financial institutions which accept de- posits subject to demand and must, therefore, fortify them- selves against unusual withdrawals in time of emergency by keeping most of their funds in the form of liquid assets. A life-insurance company's chief liability, on the contrary, is for the payment of death benefits and maturing endowments, and such payments can be estimated with remarkable precision. Not only may life-insurance companies therefore invest a large proportion of their funds in long-term securities but the greater part of their investments need not be so readily salable for cash as those held by most other financial institutions. Since their daily claims can be estimated accurately it is also unnecessary for the companies to keep large and unproductive cash balances on hand. State Regulation of Investments. Recognizing the vital relationship between the conservative handling of life-insur- ance funds and the ability of the companies to meet obligations which extend over long periods of time, nearly all the states have undertaken to regulate life-insurance investments in one form or another. Some of the more specific regulations will be referred to in the discussion of the various types of in- vestments. Suffice it to state that most of the legislatures take the position that the companies have undertaken trusts of the greatest importance and that those who are named as beneficiaries thereunder should be protected by law to the fullest extent possible. To this end the several states have enacted laws which require the companies to invest their re- sources in such securities as will yield a reasonable return and which, as regards both principal and yield, will be so un- questionably safe as to secure policyholdefs during the many years that may elapse before their contracts mature. While most of the states specify the particular securities which savings banks may invest in, that method has not been followed in the case of life-insurance companies. Instead, the laws are here concerned with classes of investments rather than specific bonds, stocks, and other securities. They either LIFE-INSURANCE INVESTMENTS 345 definitely prohibit or approve certain classes of investments. 1 Great lack of uniformity, however, exists in the requirements and restrictions adopted by the different states. All the states permit investments in government bonds. Some limit bond investments and mortgage loans to those of the home state, while others prohibit companies operating within their bounda- ries from investing in the stock issues of any corporation. A few exclude the securities of all mining and manufacturing companies, and of all corporations that have failed to pay their regular interest and dividends at any time during a designated number of years. While some states specify the margin that must exist in the case of collateral loans, others do not. Real-estate mortgages, available for life-insurance companies, are usually carefully defined, the value of the property being generally twice the amount loaned. Some of the states have also shown a decided tendency to limit a com- pany's holdings of real estate to what is actually necessary for the convenient conduct of business. Some of the states have also sought to enlarge the field for their own securities by adopting legislation which compels insurance companies to invest a large portion of their reserves in such securities. It is also general to require the companies to make to the insurance department of the state annual statements which i The effect of such legislation, generally speaking, is to limit life- insurance investments to the following classes: 1. Bonds of the United States and of the state under considera- tion. 2. Bonds of cities or counties within the state on which there has been no default in interest. 3. Bonds of any other state on which there has been no default in interest and which, it may be provided, must sell at a certain price at the time of purchase. 4. The bonds of solvent dividend-paying corporations, and in most states also the stock of such corporations. 5. First real-estate mortgages where the property is worth double the amount of the mortgage. 6. Such real estate as may be needed for the convenient conduct of business, or which may come to the company by way of foreclosure on mortgages held, or which it takes as additional security for the protection of a loan. 346 THE PKINCIPLES OF LIFE INSUKANCE give a complete and detailed list of investments, together with such other information as the commissioner may request. Numerous other restrictions have been adopted by various states but only a few need be enumerated for illustrative pur- poses. Thus it is common to provide that not over one-half of the capital stock of a company may be invested in mort- gages on real estate and not over one-tenth in a single mort- gage, that no loans on personal security may be made, and that the directors are held personally liable from any loss from investments which are not made according to law. Many of the states also prohibit officers and directors from receiving any commission or profit upon purchases or loans made by the company; while in other states it is provided that companies may not enter into underwriting participa- tions or transactions for joint account. It should also be noted that while some states have enacted practically no legisla- tion for the regulation of life-insurance investments, the in- surance commissioners in such states usually possess discre- tionary powers in the matter and generally pursue a course along the lines adopted in other states. The Extent and Character of Investments. Through their enormous investments life-insurance companies to-day exert a powerful influence on the upbuilding of the nation's industrial life. Two hundred and fifty-nine companies, re- ported in the 1913 Insurance Year Book, possess total admit- ted assets of $4,658,696,337, and at present this gigantic fund is increasing annually at the rate of about $250,000,000. As stated on page 26, the significance of these large totals be- comes apparent when it is stated that they represent the contributions over a long series of years of millions of policy- holders each of whom has contributed 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. Of the funds on hand at the close of 1913, $3,903,- 615,175, or 83.8 per cent, of the total, represented the re- serve value of policies; $522,334,468, or 11.2 per cent., sur- LIFE-INSUKANCE INVESTMENTS 347 plus to policyholders ; $111,373,932, or 2 A per cent., unpaid dividends; and $121,372,762, or 2.6 per cent., all other lia- bilities. The character of the investments and the relative importance of each class is indicated by the following table: TYPES OF ASSETS AMOUNT PERCENTAGE OF TOTAL Real estate owned $ 165 648 871 3 5 Real-estate mortgages 1 617 873 512 34 7 Bonds owned 1,908,943,098 40.8 Stock owned 85,879,873 1.8 Collateral loans 20,590,870 .4 Premium notes and policy loans. . . . Cash in offices and banks 657,994,947 73 112 720 14.1 1 6 Net deferred and unpaid premiums . . All other assets . .... 63,397,935 65,254,511 1.4 1 4 Judging from the foregoing table, bonds and real-estate mortgages are by far the most important, representing re- spectively 40.8 per cent, and 34.7 per cent, (or over three- fourths when combined) of the total assets of the companies. If we add to these the item of premium notes and policy loans we find that three out of the nine classes of assets rep- resent nearly nine-tenths of the total. Eeferring again to our former discussion of the influence of life-insurance in- vestments as a factor in our industrial development it was noted 2 that the investments of nearly $2,000,000,000 in bonds and stocks will be found fairly well distributed over the principal transportation and other corporate properties of the country and represent a very substantial part of the total funds that have been necessary for their development. The $1,600,000,000 of real-estate mortgages also represent invest- ments in properties located in all parts of the country. Be- cause 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 2 See page 26 of this volume. 348 THE PRINCIPLES OF LIFE INSURANCE cities and towns, but for many years the companies have granted loans upon western farming lands, thus enabling the purchase; stocking and cultivation of large areas. Nature and Merits of the Various Types of Investments. Having enumerated the several classes of life-insurance investments we may next pass to a more detailed discussion of their nature and relative merits. For this purpose the several types of assets may be considered conveniently in the order of their importance : Bond investments. These are principally of two kinds, viz, the bonds of standard railroad companies and government, state, and municipal bonds. Standard railroad bonds not only meet the requirements of safety, but usually run for long periods, yield a fair return, are readily con- vertible into cash, and in most instances, although subject to considerable market fluctuations, show a tendency to increase in value in the course of years. To ascertain the security of such bond issues it is necessary to examine the reports of railroads for a series of years with a view to noting the in- crease or decrease of gross earnings, the nature, stability and future prospects of this traffic, the expenditures for main- tenance and improvements to keep the property in the best working condition, and the extent and stability of the net earnings as measured from the standpoint of the require- ments of the particular bond issue under consideration. The utmost care is exercised to select only such issues as are fortified, judging the matter from the standpoint of a series of years, with a big margin of safety as regards net earnings. Bonds of public utility enterprises and of industrial corpora- tions are not regarded with much favor by the conservative companies. The first, as a rule, depend too much upon legislative franchises and are therefore subject to political attacks; while the latter are too dependent upon good per- sonal management and too severely affected by business de- pressions. State, municipal, county, township and school district bonds are regarded by many writers on the subject as constituting LIFE-INSURANCE INVESTMENTS 349 probably the best class of life-insurance investments. Al- though the issues are frequently not large, the companies often succeed in securing all or nearly all of the issue when it is offered for competitive bids. The interest yield is, as a rule, somewhat higher than that obtained on good rail- road bonds and the issues usually run for considerable periods of time. Most of the issues, however, are not listed and theref ore,. although having the advantage of being compara- tively free from market fluctuations, are not so readily con- verted into cash as listed bonds. But, as has been seen, a life-insurance company is not under the necessity of having a very large proportion of its resources in the form of liquid assets. It may, therefore, supplement its holdings of rail- road bonds with a considerable line of municipal and other public bonds. The attractiveness of railroad and government bonds to insurance companies is indicated by the fact that, whereas such investments aggregated only about 22 per cent, of the total assets of the companies in 1890, this percentage had increased to 40.8 per cent, in 1913. An examination of the assets of some of the largest companies doing a foreign business also shows a liberal holding of low interest-bearing foreign government bonds, a fact chiefly attributable to the laws of certain countries which require insurance companies, if they wish to transact business there, to invest a certain proportion of the reserve value of policies in securities of that country. Real-estate mortgages. This type of asset represents over one-third of the total assets of life-insurance companies. Such investments, when carefully placed and when restricted to desirable classes of property, constitute a safe and excellent investment for life-insurance funds. They yield a better re- turn than do standard railroad bonds, and are not subject to such frequent market fluctuations as listed securities. Usu- ally the states limit such investments to one-half the ap- praised value of the property given as security. Most of the companies also follow the practice of confining such loans to improved property, i.e. ordinary residences, cultivated farms, 350 THE PRINCIPLES OF LIFE INSURANCE and business properties which yield a satisfactory income and are available for general use. Properties devoted to special uses, such as hotels, theaters, churches, factories, expensive residences, etc., are generally excluded. While possessing the advantage of a high interest yield combined with great safety, real-estate mortgage investments require special super- vision and a considerable outlay in the form of investment expenses. As previously noted, many of the companies possess a real-estate loan department which is charged with the re- sponsibility of keeping the mortgaged premises under ob- servation and of seeing that the buildings are kept in proper repair and that all taxes are paid. Care must also be ex- ercised in ascertaining the completeness of the title to the mortgaged premises, and any other mortgages and incum- brances that may stand against the property. Premium notes and policy loans. The nature and remarkable growth of such loans have already been discussed, 3 and need not again be referred to at length. They represent advances to the policyholder, the policy itself being assigned to the company as security. Since such loans are limited to the reserve value of the policies, and in many instances to less, they are really advances against cash deposits made by the insured to the company, and are, therefore, absolutely safe. Usually 5 or 6 per cent, interest is charged on the loans and the insured usually has the right to repay the loan at will or to continue the same indefinitely. Should a policy on which a loan has been made be surrendered or lapsed the company deducts the total indebtedness from the surrender value. Real-estate holdings. Such holdings include all property that has come to the companies by way of foreclosure proceedings on mortgages held or which is required for the convenient conduct of their business. The ratio of such hold- ings to the total assets of the companies is to-day only 3.5 per cent., although in 1910 the ratio stood as high as 10 per s See page 242 of this volume. LIFE-INSURANCE INVESTMENTS 351 cent. Serious abuses were at one time connected with this form of investment, such as, for example, the construction of large office buildings chiefly for advertising purposes but which yielded on the investment even much less than the as- sumed rate of interest, and the renting of quarters in said buildings to interested parties for long periods of time at nominal rents. To prevent such abuses many of the states have enacted laws which restrict real-estate investments to property necessary for the convenient conduct of business, and which require that such property as may be acquired through the foreclosure of mortgages must be sold within a stipulated number of years. Stock investments. This form of investment has been the subject of much adverse criticism during recent years, and the ratio of corporate stocks to the entire assets of the companies was only 1.8 per cent, at the close of 1913 as compared with nearly 6 per cent, in 1900. Not only did some of the companies, although not obliged by law to omit such investments, advertise the fact that none of their assets were invested in stocks, but the states are showing a distinct disposition to enact legislation prohibiting the investment of life-insurance funds in such securities, or in loans whose collateral consists of stock to one-third or more of its value. Various considerations have led to this type of legislation. Life-insurance funds are considered as trust funds and should, therefore, not be invested in speculative securities. The New York insurance investigation of 1906 also showed clearly that, if insurance companies are allowed to invest in stocks, it becomes possible for some of their officials to organize and finance banks, trust companies and other corporations for purposes of private gain. It is also argued that stock owner- ship amounts to engaging in the business of the corpora- tion whose stock is held, and in this respect it should be noted that much of the stock owned by life-insurance com- panies consisted of bank and trust company stocks, the amounts held being frequently so large as to give the com- pany control over said banks or trust companies or at least 352 THE PKINCIPLES OP LIFE INSUKANCE a heavy representation on their boards of directors. This sit- uation various legislatures considered highly undesirable. Life-insurance companies, it was felt, are organized to write insurance and not to engage (by virtue of stock control) in banking, railroading, and other business enterprises. Cash in offices and banks. Although amounting in 1890 to over 4 per cent, of the total assets, this item had decreased to 1.6 per cent, in 1913. This item at one time also lent itself to much abuse on the part of certain com- panies which kept large sums on deposit in certain financial institutions with which their officers were affiliated at a rate much below that assumed for premium and reserve compu- tations. The balances at present are not disproportionate to the amounts usually kept on hand in most other lines of business. The business of life insurance, we have seen, is so certain in its financial operations that it is unnecessary for companies to retain large sums in cash. It should, therefore, be the policy of a well managed company to avoid large cash balances by investing promptly its net income. Unpaid and deferred premiums. The proportion of assets invested in this form was only 1.4 per cent, at the close of 1913. Very few businesses, it has been asserted, " carry so little in uncollected accounts/ 7 Collateral loans. Generally speaking, these loans are not favored by the companies and to-day represent the very small ratio of only .4 per cent. Such loans are much better adapted to commercial banks than to investment insti- tutions which make a specialty of investing in bonds and real- estate mortgages. They seldom run for more than a year and in many instances for only six months, require frequent re- newal, and necessitate an adjustment of the interest to meet current rates. The collateral required usually consists of approved railroad bonds and standard dividend-paying stocks with a current value 20 per cent, in excess of the amount loaned. Rate of Interest Actually Earned. Although the inter- est on high-grade investments has shown a decided downward LIFE-INSUKANCE INVESTMENTS 353 tendency during the past thirty years, the annual return on life-insurance investments still averages considerably over 4 per cent. According to the 1913 Insurance Year Book the rate of interest earned on the mean invested funds of twenty-nine of the largest American companies averaged 4.79 per cent, for the five years from 1909 to 1913, inclusive, and 4.76 per cent, for the twenty years from 1894 to 1913. Of the twenty-nine companies under consideration three earned an average rate exceeding 5% per cent, during the years 1909- 1913, thirteen 5 per cent, or over, and sixteen between 4^ per cent, and 5 per cent. These rates clearly show that life- insurance companies by widely diversifying their investments may obtain on the average very satisfactory interest re- turns on their funds without departing from the principles of conservative investment. Method of Arriving at the Rate of Earnings. Ordina- rily the rate of interest on an investment is ascertained by di- viding the amount of interest received during the year by the amount invested. In life insurance, however, this simple method cannot be applied since the companies are constantly increasing their funds during the course of the year, partly because the payments received from policyholders exceed claims and other expenditures and partly because interest earnings are constantly coming in and are immediately re- invested. In other words the funds invested at the end of the year are., as a rule, considerably higher than the funds invested at the beginning of the year, and it is, therefore, necessary to ascertain the rate on the mean invested funds. While there is no one method universally followed by the companies in this respect, the general plan most commonly used has been explained by Mr. Henry Moir as follows : 4 If the interest earned in any year were divided by the funds invested at the beginning of the year, then those companies which had a large increase in their funds would appear too favorably in the comparison. On the other hand, if the year's * More, HENRY, Life Assurance Primer, 48. 354 THE PEINCIPLES OF LIFE INSURANCE interest were divided by the funds at the end of the year the converse would hold. For measuring the interest earned by life-assurance companies a middle course is usually followed, and the following formula has been suggested as a good basis, namely : Average rate earned = A ~4 _h> 1 In which I represents the total interest earned during the year; A the funds at the beginning of the year; and B the funds at the end of the year. BIBLIOGRAPHY DAWSON, MILES M., " Investment of Funds," in The Business of Life Insurance, chap. 27. DUNHAM, SYLVESTER C., " Investments by Life Insurance Com- panies." A lecture delivered before Yale University on December 4, 1905. HIMER, J. W., " Life Insurance Investments," published by the American Academy of Political and Social Science in its volume on " Insurance," pp. 76-88. LUNGER, JOHN B., "Investment of Insurance Funds." Yale Insurance Lectures, i, 144-161. Proceedings of the Sixth Annual Meeting of the Association of Life Insurance Presidents, New York, 1912. Report of the New York Legislative Insurance Investigating Committee, x, 382-392. ZARTMAN, LESTER W., The Investments of Life Insurance Com- panies. New York, 1906. CHAPTER XXVII GOVERNMENT SUPERVISION OF LIFE INSURANCE Few business institutions, if any, have been subjected to such strict and detailed government supervision as life in- surance. The reasons for this become clear when we consider the vital relation which life insurance bears to the family and the community. We have seen that its mission is a sacred one, that the trust funds it holds run into the billions, and that millions of people rely upon it as the principal means of protecting the home against the deprivations occasioned by premature death. The great majority of contracts, as already noted, run for many years before maturing and frequently involve an obligation on the part of the company extending over fifty or seventy-five years. Yet despite the almost universal use of life insurance and its vital importance to those who purchase it, very few per- sons, as we have noted, take a direct interest in acquainting themselves with the management and business policy of the companies in which they are insured. In practically all cases the companies are controlled by a limited number of persons who have little or no difficulty in securing the neces- sary proxies to perpetuate their control. Even assuming that any considerable portion of the vast number of policyholders could be induced to take an interest in the condition of the company in which they are insured, it is clear that very few are sufficiently posted in life-insurance matters to ascertain intelligently the true state of affairs. Life insurance is necessarily a technical and complicated subject and the real condition of a company can only be determined by laborious and expert examination. In view of conditions like those just recounted, it will readily be admitted that life insurance 355 356 THE PRINCIPLES OF LIFE INSURANCE is a fit subject for some sort of government regulation designed to protect the public adequately against mismanagement and unjust practices. State Versus Federal Jurisdiction. In the United States the general supervision of all forms of insurance is undertaken solely by the several state governments, and since many of the larger life-insurance companies transact business in all, or nearly all, of the states, there has long existed a strong movement in favor of supervision by the federal gov- ernment under its powers to regulate interstate commerce. The United States Supreme Court, however, beginning with the famous case of Paul v. Virginia? has repeatedly refused to declare an insurance contract an instrumentality of com- merce, and has asserted the doctrine that "there is no doubt of the power of the state (using that term as contrasted with the federal government) to prohibit foreign insurance com- panies from doing business within its limits. The state can impose such conditions as it pleases upon the doing of any business by those companies within its borders, and unless the conditions be complied with the prohibition may be absolute." In the absence of national supervision the entire oversight of the insurance business is relegated to the several state govern- ments, and this situation, according to leading authorities, can only be changed by enabling Congress to legislate on the subject through an amendment of the federal Constitution. Under existing conditions, therefore, the several states can prohibit non-resident companies from making contracts within their borders, except upon such conditions as the states may prescribe, and it follows that a company doing business in many states will be subject to the supervisory control of numerous separate governments. Officials Intrusted with Supervisory Control and Their Duties and Powers. In the great majority of states super- visory control over insurance companies has been intrusted to an insurance official, usually called the superintendent or iPaul v. Virginia, 8 Wall. 168 (1868). GOVEKNMENT SUPEKVISION 357 commissioner of insurance, who is either appointed by the governor or elected by popular suffrage, and who is placed in charge of a separate department of the government. Uni- formity among the states in this respect, however, does not exist, and a considerable number attach the responsibility of supervising insurance companies to some other department of the government. At the close of 1913, seven states still in- trusted such supervisory control to the state auditor, four left it to the secretary of state, one made the state treasurer the supervising officer, and one divided the control between the secretary of state and the treasurer. Many of the states have enacted a large body of statute law governing insurance, while others are still very backward in this respect. Although the legislatures and courts of the several states play a prominent part in the enactment and interpretation of insurance legislation, the actual super- vision of the companies and the enforcement of the laws is performed by the insurance commissioners. These officials are usually vested with large discretionary powers. It is the duty of the commissioner to see that all insurance laws are properly complied with and that all the companies transacting business in the state are solvent according to some prescribed standard. His permission must be obtained before a foreign company can enter the state, or before an agent of such com- pany can solicit business. Every company is obliged to ren- der an annual statement of its condition and business in the form and manner prescribed by the commissioner, and he has also the power to require at any time statements from the officers or agents of any company operating within his state on any matters on which he may desire to be informed. To facilitate examinations he is empowered to require free access to all books and papers of any company or agent operat- ing in the state, to summon and examine any persons under oath relative to the affairs and condition of any such company, or, for probable cause, to visit the company at its principal of- fice for the purpose of investigating its affairs. -Failure or re- fusal to render any statement required within the time and 358 THE PRINCIPLES OF LIFE INSURANCE manner prescribed by the commissioner, or to permit any examination requested, subjects the company to heavy money fines or to the danger of having its license revoked. His other important duties, as summarized on another occasion 2 may be stated as follows : Power is given the commissioner to suspend the entire busi- ness of any company by revoking or suspending its license if in his opinion the company does not comply with any pro- vision of the law, or whenever its assets appear to him insuf- ficient. He must see that the company has made the proper deposits of approved securities; that it makes a correct return of the taxes which are imposed by law; and that a resident of his state is appointed the attorney of the company so that in the event of litigation legal process may be served without the citizens being obliged to go outside of the state to serve the papers. It is also his duty to see that the assets of all com- panies organized in the state are properly invested in the form prescribed by law. He has supervisory power over the organiza- tion of all companies from the time that the articles of agree- ment are arranged until the company is ready to begin the writing of policies, and in every stage of the organization and in all matters pertaining thereto, it is necessary for the or- ganizers of the company to have his approval. Finally, he owes it to the public as well as the companies to do all in his power to exterminate improper or unlawful insurance schemes. Numerous other duties and powers might be enumerated, but those mentioned will suffice to show that the insurance com- missioner is clothed with extraordinary powers, and that con- sequently the personality of the commissioner is a factor the importance of which cannot be overestimated. Subject Matter to Which State Legislation Especially Applies. Having outlined in a general way the duties and powers of the officials intrusted with the supervision of in- surance companies, we may next outline in detail the particu- lar functions which it is the purpose of government regula- tion to perform and the. particular subjects and practices to which it is applied. While space forbids a detailed discussion 2HUEBNEB, S. S., Property Insurance, 245-246. GOVEKNMENT SUPERVISION 359 of all the legislation which has been adopted in the different states, practically all the important laws may be grouped con- veniently under the following seven heads : Standard of solvency. Companies are required by law to charge themselves with a minimum reserve as a lia- bility. While the legal reserve requirement is not uniform in all the states, it may be said that nearly all the leading states require companies to maintain reserves on policies issued since about 1900 which shall at least be equal to those based on the American Experience table of mortality with interest at 3% per cent. In some states reserves computed on a 4 per cent, basis are acceptable, while in others the companies, if they base their computations on an interest rate lower than that pre- scribed by law, are obliged to hold the higher reserves that re- *sult. On policies issued prior to about 1900 the reserve stand- ard is usually based on the American Experience table with 4 per cent, interest. Organization and admission of companies. Al- though the organization of insurance companies is governed largely by the law applying to the organization of corpora- tions in general, most states have seen fit to supplement their general corporation law with special acts pertaining only to in- surance companies. Level-premium companies are usually re- quired to deposit with the state approved securities to the value of $100,000 or some other designated sum. The manner of incorporating companies and the conditions under which they can begin business are also prescribed, and frequently the retirement of the guaranty stock of a mutual company and the maximum interest return that the holders of such stock may receive are fully set forth. Much of the legislation in most states is concerned with the conditions under which foreign companies may enter the state, and usually relates to their ability to meet their obligations, to the licensing of their agents, and to the filing of a copy of their charter, a certificate showing that they are authorized to transact business, a copy of all their policy forms, and a. complete statement of their financial condition , and valuation of policies. In order that 360 THE PRINCIPLES OF LIFE INSURANCE legal process may be served., a foreign company must also ap- point a resident of the state its attorney. Various states also forbid the removal of suits from state to federal courts. Publicity through annual statements and examina- tions. All states require the companies transacting business within their borders to submit annual statements relative to their operations and financial condition. These statements, made out according to the form prescribed by the insurance department, usually show in detail the company's assets and liabilities, income and expenditures, a gain and loss exhibit, a schedule of all classes of investments by kind and amount, and an exhibit of the number and kind of policies written during the year, the amount and kind of insurance in force, and the amount of insurance terminated in various ways. The statements thus received are published in the annual reports of the insurance departments and are thus available to the public and to the representatives of competing companies. As a rule the statements, as adjusted by the commissioner, must also be published a designated number of times in one or more daily or weekly newspapers of general circulation, the companies to attend to the details of publication. To fur- ther protect the public, insurance commissioners are authorized to make periodical and, for probable cause, special examina- tions of the affairs of the companies, and to publish the result of such examinations whenever they deem it to the best in- terests of the public to do so. The periodical examinations involve an appraisal of the company's assets, a determination of its liability, and an inspection of its books and records. Equitable treatment of policyholders. Eeference is had here chiefly to those provisions of the law which aim to prevent discrimination and misrepresentation, to standard- ize policy provisions, and to bring about economy of manage- ment. Discrimination between insurants of the same class and equal expectation of life, as to rates, benefits or conditions of the contract is prohibited under heavy penalties in most of the states. Nearly all the states also prohibit an agent or other representative of a company from giving, as an induce- GOVERNMENT SUPERVISION 361 ment to insure, any direct or indirect rebate of premiums payable or any other valuable consideration not specified in ;he contract. In this connection numerous statutes also pro- libit the officers and representatives of any company from giv- ing or selling as an inducement to insurance, or in any con- nection therewith, any stock or other securities of any insur- ance company. No person connected with any life-insurance company, ac- cording to the law of many states, is allowed to issue or' cir- culate directly or indirectly, any estimate or statement which misrepresents the terms, benefits and advantages of any policy which his company issues, or the dividends to be paid thereon. The use of any name or title of any policy which misrepre- sents the true nature thereof is likewise prohibited. Nor may any representative of a company resort to misrepresentation with a view to inducing any policyholder in another com- pany to lapse, forfeit or surrender his insurance. State- ments of the insured are declared by the laws of some states as constituting representations and not warranties. 3 Mis- representations are not considered as voiding a policy unless the same are of material importance. Not only do all the states, as we have seen, protect the insured against excessive forfeitures in case of surrender and lapse, but many have un- dertaken in recent years to adopt certain standard policy pro- visions ; to require all life and endowment policies to contain or to exclude certain prescribed provisions; to compel com- panies to print prominently on the face of the policy a plain description of its character, dividend periods and other pe- culiarities, so that the holder thereof shall not be liable to mistake its nature; and to require all policy forms and in- dorsements to be filed with and approved by the commis- sioner. Lastly, it should be stated that many of the states have shown a strong disposition to regulate the expenses of companies and to prevent the accumulation of unnecessary surplus funds. To this end laws have been enacted which (1) 3 For a discussion of representations and warranties, see pages 375 to 379 of this volume. 362 THE PRINCIPLES OF LIFE INSURANCE prescribe the methods of allotting dividends; (2) prohibit the payment of pensions, political contributions and excessive commissions ; and ( 3 ) place a limit upon salaries, the amount of expense which may be incurred to secure new business, the amount of surplus that may be withheld from policy- holders, and the amount of new business that may be writ- ten. Taxes and fees. A study of the insurance laws of the different states shows a remarkable absence of uniformity in the way life-insurance companies are taxed. Some states levy the tax on all or a part of the companies' assets; others tax their net receipts; but by far the greater number tax the gross premiums, the rate varying all the way from 1 to 3 per cent. In addition to these taxes there exists a great variety of license fees, fees for filing charters, statements and other papers, and in some states municipal license fees. A recent compilation showed that total taxes and fees paid by life-insurance companies operating in the United States ag- gregate annually approximately $12,000,000, a sum consid- ered grossly excessive by those who wish to see the state en- courage the widest possible dissemination of the benefits of life insurance. The present heavy taxation of life insurance is attributable chiefly to general ignorance on the part of the public and the lawmakers of the true nature of legal-reserve insurance, and to the fact that taxes on this business, especially those levied on gross premiums, are so easily collected. Prob- ably not more than one out of every twenty policyholders understands the true function of the reserve. The general public and the lawmakers see only the billions in assets that are being accumulated, and naturally conclude that such huge funds should be taxed like any other property, overlooking the intimate relation that life insurance bears to the welfare of the family and the state, as well as the fact that the large reserves referred to represent merely the accumulations of millions of policyholders which are held in trust for them which are necessary for the fulfillment of the companies' GOVERNMENT SUPERVISION 363 obligations to the insured for the protection of his wife and children. To a large extent the heavy tax burden is also traceable to the fact that as regards most states the com- panies operating therein are foreign companies and for that reason, especially when it is believed that they take millions out of the state, are not regarded as entitled to leniency. .The taxation of life-insurance companies has long been a much discussed subject. Among students of the question there is a very widespread conviction that the states in this country, instead of repressing the growth of life insurance through excessive taxation, should adopt a policy of encourag- ing the widest possible use of its beneficent protection among their citizens as is done by practically all other leading civilized nations. The supporters of this view take the posi- tion that a life-insurance policy in itself constitutes a self- imposed tax, and that it cannot properly be regarded as in- come-producing property. Their contention is that life-in- surance policies merely represent funds accumulated through the sacrifice of the insured for the protection of dependents, and thus not only benefit the entire community but relieve the state of the necessity of supporting large numbers who would otherwise be dependent on charity. They, therefore, hold that the business should not be taxed more than is neces- sary to pay for the cost of its proper supervision. Other main subjects covered. To the foregoing groups of subjects two others should be added, viz, the regula- tion of investments and the supervision of agents. These, however, need not be discussed here since the first was covered in the chapter on " Life-Insurance Investments " and the second will be treated in the chapter on " The Law Pertaining to the Agent." State Supervision in Practice. Although the insurance departments of certain leading states have exercised an ef- ficient supervision of the life-insurance business, this cannot be said of the great majority. The complaints most com- monly heard against the present system of regulation refer to the results which are the necessary outcome of supervision 364 THE PKINCIPLES OF LIFE INSURANCE on the part of fifty-two different states and territories, and which grow out of the many different laws enacted and the different demands and rulings of the insurance commissioners. The most important of the results referred to may be de- scribed briefly. Attention has already been directed to the heavy taxation imposed by the states and the lack of uniform- ity in the methods of taxation. A similar lack of uniformity also manifests itself in the other legislation. As the writer stated on another occasion : 4 " Each year witnesses the en- actment of a multitude of new laws by the state legislatures; also a change in numerous existing laws, as well as the intro- duction of a large number of bills never intended to become law. In fact, bills affecting the interests of insurance com- panies in one way or another are said to be introduced in our state legislature at the rate of approximately six hundred a year." Another result growing out of state supervision con- sists of the conflicting rulings of the different state courts on almost every important legal phase of the subject; and the rulings of the state courts, again, are often at direct variance with those of the federal courts. Attention should also be called to the abuse of unnecessarily duplicating ex- aminations at the expense of the companies, and frequently for no other reason than the profit of the examiner. State Versus National Control. Life-insurance officials are almost a unit in believing that it is impossible to over- come the difficulties of unifying the action of half a hundred legislative bodies and the same number of supervising of- ficials, and therefore favor a system of national control which will eliminate state supervision of interstate insurance. They point to the fact that the proportion of life insurance writ- ten by American companies in the states where they were organized is surprisingly small. A compilation made a few years ago by the writer shows that in the case of twenty leading companies, transacting nearly nine-tenths of the total ordinary life insurance in the United States, only 15.5 per cent, of the total amount of their outstanding policies was ob- *HUEBNER, S. S., Property Insurance, 248. GOVERNMENT SUPERVISION 365 tained in the home state and only 12.6 per cent, of the total premium income was derived from that business. Even in the case of the four largest companies domiciled in the wealthy and thickly populated state of New York less than one-fifth of their total business is intrastate and over four-fifths is interstate and international. The advocates of national control wish to have the federal government assume exclusive regulatory power over all insur- ance transactions between the states, but do not intend to interfere with the constitutional right of each state to super- vise its own home companies and purely intrastate transac- tions. As previously stated, national supervision cannot be established unless the Supreme Court of the United States reverses its former rulings and holds insurance to be com- merce, or, as an alternative, the federal constitution is amended. Aside from the present legal obstacles to the plan, the advocates of national control believe that it would bring about the following desirable results : 1. Centralized supervision by experts would provide for a much greater degree of publicity and would protect the busi- ness against sectional and retaliatory legislation. Not only would the reports to and the examinations of the federal supervising department entitle a company to admission in any state, but such reports and examinations would carry greater weight in both this and foreign countries. The present lack of uniform insurance legislation, it is believed, would largely be obviated, and relief would be afforded to the companies against the evils resulting from variations in the rulings of numerous insurance commissioners. It is also argued in this connection that centralized control would be more effective than state control in eliminating fraudulent insurance con- cerns. 2. The large expense connected with supervision by half a hundred separate departments would greatly be avoided. Duplication of reports and examinations, as well as the pub- lication of voluminous reports all of which contain about the same information, would be obviated. Several million dollars 366 THE PRINCIPLES OF LIFE INSURANCE of wasteful expense, it is asserted, might be saved annually in this way. 8. A more equitable, uniform and less burdensome policy of taxation than now exists, it is hoped, would also result. As one supporter of national supervision recently remarked con- cerning the present system of taxing life-insurance business : & Under the system of state taxation, the man who pays his premiums into a life-insurance company is frequently taxed twice, and in some cases three times. That such burdens should be placed upon men, because having to provide for their families they must needs have recourse to life insurance, is a national disgrace, excused only on the ground of ignorance of the real nature of the business. Since much of this taxation is the result of jealous fear of the states that the others are profiting through the insurance business at their expense, na- tional supervision would bring at least partial relief from this burden. BIBLIOGRAPHY DAWSON, MILES M., The Business of Life Insurance, chaps. 31, 32 and 33, pp. 334-387. FACKLER, EDWARD B., " Governmental Supervision," Notes on Life Insurance, chap. 24, pp. 115-124. GEPHART, W. F., Principles of Insurance, chap. 10, " The Rela- tion of the State to Insurance," pp. 231-255. HARDISON, F. H., " State Supervision of Insurance," in H. P. Dunham's The Business of Insurance, iii, 16-37. Insurance Year Book, 1913, 1-105. This portion of the Year Book, published by the Spectator Company, furnishes a synopsis of the statutory requirements applying to old- line companies, assessment associations and fraternal or- ders. McCALL, JOHN A., " The Regulation of Life Insurance in the United States and Foreign Countries." Yale Insurance Lectures, i, 200-217. WOLFE, S. H., " State Supervision of Insurance Companies. Annals of the American Academy of Political and Social Science, xxvi, 137-152. ZARTMAN, LESTER W., Yale Readings in Life Insurance, chaps. 23-25, pp. 312-381. s ZARTMAN, LESTER W., " Mistakes in State Regulation," Yale Insurance Readings, i, 331. PAET V IMPORTANT LEGAL PHASES OF LIFE INSURANCE CHAPTER XXVIII LEGAL INTERPRETATION OF THE POLICY AND APPLICATION General Rules Underlying Court Decisions Affecting Life Insurance. Policy forms are necessarily general in character, and are drawn to meet a general situation and not with reference to particular cases. Yet, it is apparent that innumerable instances arise which require a special interpre- tation of the general terms of the contract in order to realize the essential purpose of the contract, viz, to protect against loss. There is scarcely a provision in the policy to-day which has not been the subject of interpretation by the courts, and there are few provisions concerning which, chiefly because of ambiguity in the wording, varying circumstances surround- ing the loss, or statutory requirements, there are not conflict- ing opinions. Frequently also the interests of the insured seem at variance with the interests of the insurer, with the result that the attitude of state legislatures has often been one of hostility. Under these conditions, it is to be expected that disputes will frequently occur as to the interpretation which shall be given to the general provisions of the policy when unexpected circumstances surround the particular loss. But however great the conflict of authority has become, there are certain legal principles which underlie the interpretation of the application as well as policy provisions, and which are kept in mind by the courts as guiding principles in their efforts to interpret the contract. Briefly summarized, the impor- tant principles to which reference is had are the following: 1. Unlike fire-insurance contracts, life-insurance policies, although the indemnification of the value of the human life in case of premature death should be their essential object, 369 370 THE PRINCIPLES OF LIFE INSURANCE cannot be regarded by the courts as purely contracts of in- demnity. Instead, these contracts are held to be "contracts to pay a certain sum in the event of death." This general ruling has an important bearing upon the subject of insurable interest in life insurance, and will be referred to further in the chapter on "Insurable Interest." The chief difficulty that the courts have encountered in disposing of this legal phase of the subject seems to have presented itself in those cases where creditors (or persons similarly situated) take out policies on the lives of their debtors with a view to securing the indebtedness. In such instances some leading authorities hold that life-insurance contracts are for indemnity only. 2. Whenever the wording of any provision in the contract permits of more than one construction the courts will give the benefit of the doubt to the insured on the ground that the insured is obliged to take the form of policy offered by the companies and which was framed by them in their own in- terest. Forfeitures are not favored by the courts, and con- flicting provisions or ambiguous language will, therefore, be so construed as to give effect to the contract. As the United States Supreme Court has ruled : x " Where a policy of in- surance is so framed as to leave room for two constructions, the words used should be interpreted most strongly' against the insurer. This exception rests upon the ground that the companies, attorneys, officers, or agents prepared the policy and it is their language that must be interpreted." Admitting that this is a reasonable rule where the company is free to frame the policy, the question arises as to whether this same ruling should be applied where the policy form, or portions thereof, are prescribed and made compulsory by law. 2 Judging from the case of Matthews v. American Central Insur- ance Company (154 N. Y. 449), which decided the question 1 Liverpool Insurance Company v. Kearney, 180 U. S. 132. 2 At a recent date New York and Ohio had statutes providing for standard clauses in life-insurance policies, while a number of other states have statutes providing for standard policies which " may be issued and delivered." POLICY AND APPLICATION INTERPRETED 371 favorably to the insured as regards the New York Standard Fire Policy, it would seem probable that a similar con- struction might be extended to standard life-insurance poli- cies. 3 3. Since policy forms are necessarily general in character and cannot meet all particular contingencies, although this is not so generally true* in life insurance as in fire and other forms of property insurance, it follows that special or written agreements must often be indorsed on the contract with a view to modifying the original terms of the policy form. Where this is done, it is a universally recognized principle that whenever there is a difference in meaning between any indorsement and the policy form itself, the superimposed parts of the contract, whether written, stamped, or printed, control the regular provisions of the policy. This principle is based on the theory that indorsements on the policy must be considered as later in date than the policy itself, thus representing the latest agreement between the parties. If ambiguity exists in the wording of any such indorsements, the insured must again be given the benefit of the doubt. Similarly, if the written portion of the regular policy is inconsistent with the printed portion, the former will be upheld since it refers to this particular contract as dis- tinguished from the general form which the parties frequently do not bother to revise in conformity with the written por- tion. 4. In the absence of conflicting provisions or ambiguity in 3 The court in this case decided that : " The policy, although of the standard form, was prepared by the insurers, who are presumed to have had their own interests primarily in view, and hence, when the meaning is doubtful, it should be construed most favorably to the insured, who had nothing to do with the preparation thereof. Moreover, when a literal construction would lead to manifest in- justice to the insured and a liberal but still reasonable construction would prevent injustice by not requiring an impossibility, the latter should be adopted because the parties are presumed, when the lan- guage used by them permits, to have intended a reasonable and not an unreasonable result." 372 THE PKINCIPLES OF LIFE INSUEANCE language, however, no discretion can be exercised by the court to modify the contract in such a way as to bring about an adjustment which it may regard as more just than the strict enforcement of the contract as it stands. 5. Generally speaking, the construction of the contract will be according to the laws and usages of the place where the contract is made. 4 The Application and Its Interpretation. An applica- tion for life insurance may be defined as the insured's pro- posal to the insurer for protection, and may be considered as the beginning of the policy contract. In this document the applicant is required to give true answers to a large number of questions, relating principally to his personal and family history, habits, age, total insurance already taken out, and other applications for insurance which are either pending or have been postponed or refused. The policy usually stipulates that insurance is granted in consideration of the application * In discussing this rule and exceptions thereto, Richards makes the following comments: "This rule is peculiarly appropriate to this branch of the law because in insurance there may be several places where the contract is operative one place for the payment of premiums, another for the payment of loss, and a third for the location of the subject of insurance. But if the policy provides that the premiums and loss are to be payable at the home office, the latter place would seem to be the place of performance, and there would in that case be cogent reason for holding, in analogy to the general rule, that its law is to prevail in the construction of the policy. It is often important to determine by what law the validity and effect of the policy are to be governed, because the statutory provisions, as well as usages and decisions, relating to the insurance contract vary greatly in different states, and such statutes generally have no extraterritorial effect. " If the policy provides that it will not be binding until counter- signed at a certain agency, the agency is ordinarily the place . of contract; so if the policy is sent to the agent for delivery on receipt of the premium; but if the application is accepted at the home office, and the policy mailed from there to the applicant in another state, the home office will be the place of contract. As a general thing the contract is considered made where the last act necessary to complete it is done." RICHAKDS, GEORGE, Treatise on the Law of Insurance, 113-114. POLICY AND APPLICATION INTERPRETED 373 for the policy, which is declared to be a part thereof, and most generally contains an additional clause to the effect that the policy and the application therefor (a copy of which is attached to the policy when issued) " constitute the entire ; contract between the parties." At a recent date thirteen states had also adopted laws requiring the annexation of ap- plications to policies, on penalty of the company being estopped tfrom denying the correctness or truth of such application; .while eleven states have adopted statutes requiring every policy to contain the entire contract between the parties and forbidding the incorporation therein by reference, of any rules, application or other writings unless the same are indorsed upon or attached to the policy when issued. Since the ap- plication is the basis of the policy contract, and especially in view of the fact that the answers to the questions contained ' therein are frequently warranted by the applicant to be [irue, it is important to note the attitude of the courts in con- struing disputes that grow out of misstatements made by the applicant. The facts in this respect may be conveniently summarized under the following: 1. Statements as to health, freedom from disease, habits, and medical attendance. An unusually large number 'of decisions have been rendered in connection with such statements, owing principally to the varying phraseology used by the companies in formulating the questions. While much depends upon the exact phraseology used in determining whether or not the contract has been violated, the courts have generally taken the view that the expression " good health," ;or words to that effect, does not preclude indispositions but means freedom from such diseases or ailments as tend to un- dermine the general healthfulness of the system. 5 If such words as " to the best of my knowledge or belief " are used to qualify the applicant's answers, the insurer, in order to avoid the policy, must show that the insured acted in bad faith and had actual knowledge of the facts. But as Richards points 5 Plumb v. Pennsylvania, etc., Insurance Company, 108 Mich. 94, 65 N. W. 611. 374 THE PKINCIPLES OF LIFE INSURANCE out : " Without such qualifying words, where the answer of the applicant is made in good faith and relates to an unknown and obscure disease, or to a long list of diseases, some of them obscure, the courts are disposed to construe the answer as relating to matter of opinion, of the applicant rather than to matter of fact." 6 Answers relating to habits, while regarded by the courts as matters of fact rather than opinion, have in many in- stances been construed leniently, as may for example be judged from the expression of opinion of the United States Supreme Court that one occurrence of delirium tremens does not necessarily violate a warranty covering temperate habits. 7 Similarly, the courts, while holding that untrue answers to questions relating to medical attendance or consultation with physicians invalidate the policy, will, whenever possible, es- pecially if the questions are in the least ambiguous, interpret the language favorably to the insured. 2. Statements relating to family relationships and family history. Untrue answers of the applicant to ques- tions relating to his family relationships have, in nearly all instances, been held to invalidate the policy. With respect to family history, however, the courts have shown reluctance to nullify a policy where the insured's incorrect answers were not made in bad faith. In other words the courts have manifested a strong tendency to construe statements of this class, if made in good faith, as mere representations or mat- ters of opinion on the ground that such questions are in the mature of collateral inquiries and that the applicant can Aardly be expected to keep himself thoroughly posted as regards the ages at death, the condition of health during fife, and the causes of death, of his relatives and ancestors. 3. Statements relating to the age of the applicant. It must be apparent that the insurer is entitled to a cor- rect statement of the insured's age, since the rate of premium is based on that age. In the absence therefore of any policy e RICHARDS, GEORGE, Treatise on the Law of Insurance, 482. 7 Insurance Company v. Foley, 105 U. S. 350. POLICY AND APPLICATION INTERPUKTKJ) :\7'> provision relating to the matter, the courts have consistently held that an understatement of age increases the risk as a mat- ter of law and will void the policy. Such a harsh conse- quence is avoided to-day by a clause which provides for an adjustment by stipulating that " if the age of the insured has been misstated, and the error shall not have been adjusted during his lifetime, the amount payable hereunder shall be such as the premium paid would have purchased in the correct age." Some thirteen states have also provided by statute for a similar adjustment of errors in age. 4. Statements relating to other insurance and to rejected, or postponed applications. The importance of in- quiries along these lines as a means of preventing over- insurance and uncovering or preventing attempts at fraud is obvious, and false answers to such inquiries have been con- sistently held to invalidate the policy. The only question of importance in this respect, concerning which court decisions do not agree, is whether the term "other insurance," when used in the application of a regular insurance company, in- cludes certificates issued by and applications made to fraternal and mutual benefit societies. Most of the cases rendered take the position that only policies or applications in regular companies are included in the inquiry, although some of the courts regard fraternal orders and other benefit societies as insurance concerns and, therefore, consider membership therein as "other insurance." The doubt occasioned by this conflict of legal opinion, can, however, easily be overcome by making the inquiry in the application specifically cover benefit certificates as well as other insurance in companies. Warranties and Representations. A policy contract be- ing based upon the answers to the questions contained in the application, it follows that material misstatements by the applicant should place him in the moral position of one who secures a thing of value through misrepresentation and false pretense. In many instances, however, the tendency of court decisions has been in the direction of protecting the insured by giving him the benefit of the doubt wherever possible and 376 THE PBINCIPLES OF LIFE INSURANCE by placing favorable constructions upon the " materiality " of inquiries contained in the application. For this reason many life-insurance policies contain, and according to the views of many authorities should contain, a " warranty clause " in which the truth of his statements is warranted by the applicant. Thus some life policies call attention, not merely once but several times, and usually in special print, to the fact that answers in the application are made a part of the contract and shall have the effect of warranties. By this practice the companies aim to give added force to the in- formation furnished in the application with a view to pro- tecting themselves as fully as possible against fraud and against the difficulty of proving the materiality of inquiries to the satisfaction of a jury. Such references are also common in the policies of many other types of insurance, and in probably no business is the emphasis on warranties so frequent as in insurance. Thus, the standard fire policy provides that " if an application, survey, plan, or description of property be referred to in this policy it shall be a part of this contract and a warranty by the insured." The marine- insurance contract also furnishes a striking illustration of numerous provisions and indorsements which are declared in the contract to be warranties. Definition of Warranties and Importance of the Same to Companies. This brings us to the distinction between "representations" and "warranties" and the reason for emphasizing the distinction. A statement by the insured, if construed merely as a representation, need be only " sub- stantially correct," and before a forfeiture of the contract can occur because of the incorrectness of the statement, the insurer must not only prove the statement false but must show that such falsehood was of material consequence. " Ma- teriality," the courts have usually decided, is measured by the following consideration : Was the inaccuracy or false- hood of such material impoitance as to have induced the company, had the information been correct, to have declined the risk or to have altered the rate? POLICY AND APPLICATION INTERPRETED 377 If, on the contrary, statements are construed as warranties, they must be " absolutely and literally true " and a forfeiture will result, unless policy provisions stipulate to the contrary, if merely the falsehood of the statement can be shown, ir- respective of the materiality of the same. In other words, if statements are construed as warranties the insurer is re- lieved of the burden, usually a difficult one in jury trials, of proving materiality, and is obliged simply to establish the incorrectness of the statement.' As is well stated in one case : " The purpose in requiring a warranty is to dispense with inquiry, and cast entirely upon the assured the obliga- tion that the facts shall be as represented. Compliance with this warranty is a condition precedent to any recovery upon the contract. It is, therefore, that the materiality of the thing warranted to the risk is of no consequence." Classification of Warranties and Manner of Stating the Same. Warranties may be either affirmative or promissory, while in certain forms of property insurance importance is also attached to "implied warranties," i.e. those which are understood to exist in every case although no reference may have been made thereto in the contract. Affirmative war- ranties refer to facts or situations which exist either before or at the time of the issuance of the contract; while those that are promissory refer to matters which should or should not be transacted during the time that the contract is in force. No special form of wording is necessary to make a state- ment a warranty. The courts have generally taken the po- sition that the presence or absence of the word "war- ranted" is not conclusive in this respect. Warranties, how- ever, must form a part of the contract, and where policies aim to state explicitly the various provisions upon which the validity of the contract depends, as is the case in life insurance, the courts have shown a reluctance to consider statements as warranties unless they are expressly denned as such. As summarized by Richards : " A statement in an extraneous paper merely referred to in the policy is not a 378 THE PKINCIPLES OF LIFE INSURANCE warranty ; but if the policy, and such is usually the case with the life policy, makes the application a part of the contract, and the basis of the undertaking, then the statements of fact or stipulations therein contained, whether relating to the past, present, or future, become warranties." 8 It may be added that the general rules applied in the construction of the in- surance contract also apply to the construction of warranties, and that in interpreting the same the courts lean towards the insured wherever latitude is possible because the meaning of the warranty is surrounded by doubt or ambiguity. State Statutes Relating to Warranties. Because of the hardship and injustice which the technical enforcement of the common law rule pertaining to warranties might some- times cause, and also largely because there was a time when certain insurance companies took undue advantage of war- ranties in their policies as a means of bringing about a tech- nical forfeiture of the contract, a considerable number of states have passed statutes which protect the insured against technical avoidance of the contract because of statements which he may have made, unless the same relate to a matter material to the risk or were made with fraudulent intent. In other words such statutes make warranties representa- tions. In some instances the statutes go so far as to provide that there shall be no forfeiture unless the violation of the policy condition occasioned the loss or resulted in materially increasing the risk. At a recent date seven states had statutes which, while differing in their wording, amounted in substance to the New York statute : " All statements purporting to be made by the insured shall in the absence of fraud be deemed repre- sentations and not warranties." Twenty-one states have passed statutes which aim to guard against technical for- feitures by providing that misrepresentations shall not nullify the contract unless made in matters material to the risk. These statutes usually read to the following effect: "No s RICHARDS, GEORGE, Treatise on the Law of Insurance, 139. POLICY AND APPLICATION INTERPKETED 379 written or oral misrepresentation, or warranty therein made, in the negotiation of a contract or policy of life insurance, or in the application therefor or proof of loss thereunder shall defeat or void the policy, or prevent its attaching, un- less the matter misrepresented increases the risk of loss." Statutory provisions, such as those referred to in the pre- ceding paragraph, have been declared constitutional and obligatory by both the United States Supreme Court, 9 and various state supreme courts, and therefore control all policies issued subsequently to the enactment of the law. They are supported by many writers on the ground that most policy- holders are ignorant of the true significance of warranties, and that many may thus incur a technical forfeiture of the contract through inadvertent misstatements in their applica- tions. The Incontestable Clause. The severity of warranties is also greatly alleviated by the general practice of the com- panies making their policies incontestable after one or two years following the date of issue, except for the non-payment fof premiums. So-called " incontestable clauses " usually read I to the following effect : " This policy shall be incontestable after one year from its date except for non-payment of pre- mium." 10 Such clauses represent a clear illustration of the modern tendency on the part of the companies to liber- alize their contracts, and much can be said in their favor. From the standpoint of the insured and the beneficiary such clauses remove the fear of law suits especially at a time namely, after the death of the insured when it may be 9 John Hancock Mutual Life Insurance Company v. Warren, 181 \ U. S. 73. 10 The time limit stated in the clause varies in different policies from one to five years, although one year is the limitation most frequently applied. According to the standard provisions required by the laws of New York, incontestability is authorized either from its date or after one or two years. Some clauses also specify other exceptions than non-payment of premiums as, for example, misstate- ment of age, fraud in procuring the contract, and prohibited occu- pations or residence. 380 THE PEINCIPLES OF LIFE INSUKANCE difficult for the beneficiary successfully to combat with com- petent testimony the company's charge of a violation of the contract. From the standpoint of the solicitor the exist- ence of the clause increases business by making the policy attractive to the public. Again, from the standpoint of pub- lic policy it is undesirable to have widows, children or other dependents protected by a contract which throughout the lifetime of the insured may be subject to forfeiture, pos- sibly for trivial violations, which forfeiture might remain unknown until the death of the insured, and thus leave the dependents without the protection which it is the essential purpose of life insurance to give. Moreover, if policies can be contested at the time of the insured's death, the issue must be determined in the courts, thus involving long delay in the settlement of the claim at the very time when the need for speedy payment is greatest. Considerations like these have, no doubt, been responsible for the requirement of in- contestable clauses in life-insurance policies by the statutes of no less than eleven states. In view of the aforementioned reasons the incontestable clause should be regarded as a conspicuous feature of the policy contract, and may be considered as similar to a short statute of limitation. By inserting this policy provision the company undertakes to make all necessary investigations con- cerning the good faith and all other circumstances sur- rounding the insured's application within the time limit stip- ulated in the clause. The company also definitely agrees not to resist the payment of the claim if there has been no violation of the contract during the first year (or whatever the time limit may be) following the issuance of the policy and if during that time the company has taken no action to rescind the contract. It is understood, however, that the clause does not waive any of the remedies or provisions which the contract provides must be complied with by the claimant following the death of the insured. The wording of the clause would seem to make the policy incontestable for any reason whatsoever, except for non-pay- POLICY AND APPLICATION INTEKPRETED 381 merit of the premium or such other particulars as may be stipulated in the policy. 11 In fact the courts have shown a decided tendency to hold uppermost in mind the interests of innocent beneficiaries, and to this end have quite generally .adopted the rule that the clause prevents the insurer from setting up a defense of fraud, suicide or death at the hands of justice. Lack of insurable interest, however, has been considered a necessary exception. Such an interest, as will be explained later, is necessary owing to considerations of public policy. Therefore, it has been held that the absence of such an interest will cause the policy to fall even though it contains an incontestable clause. 12 The Suicide Clause. Owing to the difficulty of defining clearly the term " suicide," insurance companies now protect themselves by including some such clause as the following in their contracts: "If within one year from the date, hereof the insured shall, whether sane or insane, die by his own 11 In this respect, as pointed out by Richards: "Two pertinent and distinct questions are presented for the determination of the courts in connection with this subject; first, what does the language of the clause fairly mean? second, if it is so worded as to include fraud, is the provision so far opposed to public policy as to be void to that extent? The answer to the first question is clear. Fraud when not among the exceptions is covered. In disposing of the second question, the courts have very generally concurred that the clause is not invalid though intended to cover fraud, and that the company is not excused from payment because of fraud in procuring the policy, or for breach of warranty, intentional or unintentional, provided it seeks no relief until after the expiration of the period of limitation specified in its contract." (Page 533.) Again he states: "The insurer makes whatever examination he chooses to make before closing his engagement and commands meth- ods of getting at the material facts with a measure of thoroughness and accuracy. Now and again he may be seriously deceived by an applicant; nevertheless it is more important that millions of honest families should purchase peace of mind and immunity from litiga- tion than that insurers should be given a longer and better oppor- tunity of detecting and taking advantage of occasional fraud which in their own interest they have expressly agreed to ignore." (Page 534.) 12 Clement v. Insurance Company, 101 Tenn. 22, 382 THE PRINCIPLES OF LIFE INSURANCE hand, the liability of the company under this policy shall bei limited to the amount of the reserve hereon." Such a limi- tation upon the company's liability the courts have generally construed as reasonable, and as Elliott concludes : " Under it the insurer is not liable, although the insured kills himself while in a condition which renders him wholly unconscious of the moral nature of the act." 13 Full support of this view has been given by the United States Supreme Court which decided in a leading case 14 that " for the purpose of this suit it is enough to say that the policy was rendered void, as the insured was conscious of the physical nature of his act and intended by it to cause his death although, at the time, he was incapable of judging between right and wrong and of understanding the moral consequences of what he was doing." Accidental self-destruction, however, cannot be regarded as coming within the scope of the modern suicide clause; in fact, cannot be considered as suicide at all. Moreover, in case of doubt as to whether the death occurred through suicide or accident, the presumption is always in favor of accident. The company also, when raising the defense of suicide, " whether sane or insane," must assume the burden of proving conclusively that the case is one of intentional self-destruction. Other Policy Provisions, Life-insurance contracts some- times contain other provisions which limit the liability of the company. Reference is had to prohibitions or restrictions, not already referred to in previous chapters, which relate to the insured's occupation after the issuance . of the policy, residence and travel, military and naval service in time of war, intemperance, death while violating law, or death at the hands of justice. Relative to these restrictions the tendency has been towards a liberalization of the contract. Public opinion has favored a policy which is not loaded down with unnecessary restrictions, and the aforementioned instances; is ELLIOTT, CHARLES B., Treatise on the Law of Insurance, 412. i* Bigelow v. Berkshire, etc., Insurance Company, 93 U. S. 284 POLICY AND APPLICATION INTERPRETED 383 are the exception and not the rule. It may also be accepted as a principle that whatever is not prohibited or restricted in the policy becomes an implied privilege to the insured, es- pecially where the policy contains an incontestable clause. 15 is In discussing the incontestable clause, Richards makes the fol- lowing significant comments : " If the general incontestable clause bars the insurance company from setting up in defense the act of suicide, even when committed by a sane man, it is difficult to dis- cover any sufficient reason for allowing the company to except from its application, the death of the insured by legal sentence and execu- tion for crime. The act of suicide, it may often be shown, is com- mitted with the express- purpose of hastening payment of the insurance money; whereas it rarely appears that the insured is actuated by any thought of insurance on his own life when per- suaded to commit crime. So far as innocent beneficiaries are con- cerned the reasons for allowing them to take their insurance money are no stronger in case of suicide than in the case of legal execution; and so far as the insurance company is concerned it shows no equity in its own favor in either case inasmuch as it has expressly con- tracted by the clause in question to raise no such defense. . . . " Where beneficiaries, as well as insurer, are in no wise respon- sible for hastening the date of maturity, it is not altogether clear, that in disregard of the express terms of the contract the insurer should be so unexpectedly favored, and the beneficiaries so heavily penalized. Premiums are often paid for many years, and at great sacrifice, a sacrifice felt, perhaps, by all the members of the house- hold. Before leaving the insurance moneys with the company and depriving innocent widows and children of their natural means of support, in violation of the terms of the contract, the courts must be convinced that the general welfare of the community will thereby be promoted. Accordingly it is not surprising that the drift of opinion in the state courts is in the direction of extending the operation of the incontestable clause to the fullest protection of innocent beneficiaries." RICHARDS, GEORGE, Treatise on the Law of Insurance, 536. CHAPTER XXIX INSURABLE INTEREST A contract of life insurance must, according to law, be sup- ported by an interest in the continuance of the life of the insured. Such an "insurable interest" may assume hun- dreds of forms and may have its origin, as we shall see, in a great variety of relationships. An exact definition of the term in a few words is therefore difficult, if not impossible. Mr. Justice Field briefly summarized the nature of the interest in the following words : 1 It is not easy to define with precision what will in all cases constitute an insurable interest so as to take the contract out of the class of wager policies. It may be stated generally, however, to be such an interest, arising from the relations of the party obtaining the insurance, either as creditor of or surety for the assured, or from the ties of blood or marriage to him, as will justify a reasonable expectation of advantage or benefit from the continuance of his life. It is not necessary that the expectation of advantage or benefit should be always capable of pecuniary estimation, for a parent has an insurable interest in the life of his child, and a child in the life of his parent, a husband in the life of his wife, and a wife in the life of her husband. The natural affection in cases of this kind is considered more powerful as operating more effica- ciously to protect the life of the insured than any other con- sideration. But in all cases there must be a reasonable ground, founded upon the relations of the parties to each other, either pecuniary or of blood or affinity, to expect some benefit or ad- vantage from the continuance of the life of the assured. Otherwise, the contract is a mere wager, by which the party taking the policy is directly interested in the early death of the i Warnock v. Davis, 104 U. S. 775. 384 INSUKABLE INTEREST 385 assured. Such policies have a tendency to create a desire for the event. They are, therefore, independently of any statute on the subject, condemned, as being against public policy. Insurable Interest of the Insured in His Own Life. It is a well accepted principle of law that every man possesses an insurable interest to an unlimited extent in his own life, and that he may make his insurance payable to any person he chooses to name as beneficiary. In this respect life in- surance affords a striking contrast to fire and other forms of property insurance. Fire-insurance policies, for example, are contracts of indemnity and the company's liability is limited to the value of the property at the time of the fire, i.e. the -face of the policy, owing to depreciation of the property or other causes, is not necessarily the sum that will be paid when a total loss of the property occurs. Life-insurance contracts, however, are not regarded purely as contracts of indemnity, and in cases where the insurance is taken out by the person whose life is insured, the courts have refused to establish any degree of relationship between the amount of insurance and the value of the life on which it is taken. The position of the courts in this matter is summarized by Eichards 2 as follows : Every man's life is presumed to be valuable to himself, there- fore, whenever the insured takes out a policy on his own life, whether payable to himself, his estate or other beneficiaries of his own selection, until it is affirmatively shown that he en- tered into the contract with the purpose of hastening his death, or evading the law, the usual love of life is held by the better authority to satisfy the legal demand for evidence of a suf- ficient insurable interest. Accordingly, every man is said to have an insurable interest in his own life and to any amount. But when the insurance is taken out by a person other than the life insured, the problems presented are not always so easy of solution and the rules relating to insurable interest become more or less arbitrary. It has been held, however, that, if the beneficiary has an insurable interest, the party taking out the insurance need 2 RICHARDS, GEORGE, Treatise on the Law of Insurance, 40-41. 386 THE PKINCIPLES OF LIFE INSUKANCE have none. And similarly it has been held that if only one of the beneficiaries has an insurable interest the policy will not be avoided. The doctrine of the necessity of an insurable interest has not been adopted for the benefit of the insurance company, but out of regard to the public welfare. Creditor's Insurable Interest in the Life of the Debtor. Turning now to a consideration of the subject from the standpoint of insurance taken out by persons on the lives of other persons, we unfortunately meet with a great variety of court decisions. This lack of harmony in the court law pre- sents itself in nearly all relationships which may arise out of commercial dealings or out of the ties of affection or kin- ship. With respect to creditor and debtor ie the rule is well settled that a creditor has an insurable interest in the life of his debtor which is said to survive a discharge in bank- ruptcy or general assignment for creditors. And the rule applies whether the creditor is assignee or insures his debt- or's life; and although the debt is voidable, or not enforce- able on account of the statute of limitations/' ! In this respect, however, the important question is the amount of in- surance, as compared with the amount of the debt, which the creditor shall be allowed to take on the life of the debtor. Manifestly, the creditor's insurable interest should not be limited to the face of 'the indebtedness, because under such circumstances the creditor, upon the death of the debtor, would be enabled to indemnify himself only to the extent of the debt, and would be unsecured as regards the premiums paid together with interest thereon. Many courts have there- fore held that creditors should be permitted to provide them- selves with insurance on the debtor's life to an amount equal to the debt and interest thereon, plus all premiums (with interest thereon) required to keep the policy alive. The Pennsylvania Court, for example (Wheel and v. Atwood, 192 Pa. St. 237), laid down the rule that the debtor's life may be insured by the creditor for an amount equal to the debt s RICHARDS, GEORGE, Treatise on the Law of Insurance, 45. INSURABLE INTEREST 387 plus all premiums payable during the life expectancy of the insured according to the Carlisle table, together with interest on the debt and premiums. Such attempts to define precisely the creditor's insurable interest, however, have not met with ithe favorable opinion of legal critics; but, instead, have been opposed on the grounds that "the validity of the contract should be determined according to the motives of the parties and the prospect a,s viewed at its date rather than after the death of the insured; and second, the total amount of pre- miums as thus viewed with interest thereon will always exceed the whole face of the policy leaving to the creditor nothing at all to apply upon the debt." 4 As contrasted with the aforementioned attempts to fix a definite test for the creditor's insurable interest, two other lines of decisions should be mentioned. One of these, adopted by the United States Supreme Court, places an indefinite re- striction upon the insurable interest of the creditor by pro- viding that the relationship between the amount of insurance and the amount of the debt must not be so disproportionate as to make the policy take on the appearance of a wagering contract as distinguished from its legitimate purpose, viz, se- jcurity for the indebtedness. In Cammack v. Lewis (15 Wall 643) the court, for example, declared a policy of $3,000 taken out by a creditor to secure a debt of $70 to be " a sheer wager- ing policy, without any claim to be considered as one meant ;to secure the debt." Mr. Justice Miller stated in his opinion that " to procure a policy for $3 3 000 to cover a debt of $70 is of itself a mere wager. The disproportion between the real interest of the creditor and the amount to be received by him deprives it of all pretense to be a bona fide effort to secure the debt, and the strength of this proposition is not diminished .by the fact that Cammack was to get only $2,000 out of $3,000; nor is it weakened by the fact that the policy was taken out in the name of Lewis and assigned by him to Cam- mack." But while making the relationship between the * RICHARDS, GEORGE, Treatise on the Law of Insurance, 46. 388 THE PRINCIPLES OF LIFE INSURANCE amount of insurance and the amount of the debt an impor- tant factor, to be considered off the merits of each case, the Supreme Court has never undertaken to define this relation- ship precisely. Opposed to the foregoing rule are those decisions which, while limiting the creditor in his interest in the recovery on a policy, permit him to secure as much insurance on the debtor's life as he may choose to take out. His right to re- cover, however, is limited to the amount of the debt and the premiums plus interest thereon, the balance, if any, passing to the debtor. This rule, sometimes referred to as the Texas rule, is well exemplified by Cheeves v. Anders (87 Tex. 287). Here the court declared that " the limit of interest of a creditor in a policy upon the life of his debtor is the amount of such debt and interest plus the amount expended to preserve the policy with interest thereon." The remainder of the proceeds of the policy, the court held, should go to the estate of the insured on the ground that " if the person named as benefici- ary, or the assignee of such policy, has no insurable interest in the life of the insured, he will hold the proceeds as the trustee for the benefit of those entitled by law to receive it." Insurable Interest Growing Out of Other Business Re- lations. Numerous business relations, other than that of creditor and debtor, justify the taking of insurance by one person on the life of another. Thus, a surety on a bond, though no default on the bond has occurred, has an insurable interest in the life *of the principal. Similarly, the holder of a property interest contingent upon another person reach- ing a certain age may protect himself against the loss of his contingent right through the death of that person before attaining the prescribed age. The courts have even refused to hold that those furnishing funds for corporate enterprises have no insurable interest in the lives of the managers and promoters of said corporations; and it is stated that certain stockholders in the United States have taken out insurance on the lives of prominent financiers who were instrumental in financing and promoting the corporations whose stock they INSURABLE INTEREST 389 held. Among other important instances of lawful insurable interest may be mentioned the following : a tenant in the life of a landlord who possesses only a life interest in the premises, a partner in the life of a copartner, one party to a joint ven- ture in the life of another party, and an employer in the life of an employee. 5 Insurable Interest of the Assignee. The assignment of a policy and the appointment of a beneficiary, it should be noted, have been held by the courts to be subject to contract or statutory restrictions. The important question for considera- tion under this heading, however, is : Can a policy taken out by a person on his own life, and valid at its inception, be sub- sequently assigned to one who has no insurable interest in the life of the insured? In answering this question the courts are by no means a unit. An examination of the federal de- cisions shows the position of the United States Supreme Court to be somewhat in doubt. On the one hand, some of the de- cisions would indicate the courts' disapproval of such a prac- tice, 6 and the same ruling prevails in Alabama, Kansas, Ken- tucky, North Carolina, Pennsylvania, Texas and Tennessee. In other instances the court held that " there is no doubt that a man may effect an insurance on his own life for the benefit of a relative or friend, or two or more persons on their joint lives, for the benefit of the survivor or survivors" (94 U. S. 457). And again: "A policy of life insurance, without re- 5 See Richards, page 48, for numerous court citations showing the many property or commercial relationships which may and which may not be made the subject of an insurable interest. 6 In Wamock v. Davis, 104 U. S. 775, the court states : " If there be any sound reason for holding a policy invalid when taken out by a party who has no interest in the life of the assured it is diffi- cult to see why that reason is not as cogent and operative against a party taking an assignment of a policy upon the life of a per- son in which he has no interest. The same ground which invali- dates the one should invalidate the other, so far, at least, as to restrict the right of the assignee to the sums actually advanced by him. In the conflict of decisions on this subject we are free to follow those which seem more fully in accord with the general policy of the law against speculative contracts upon human life." 390 THE PKINCIPLES OF LIFE INSURANCE strictive words, is assignable by the assured for a valuable con- sideration equally with any other chose in action when the assignment is not made to cover a mere speculative risk and thus evade the law against wager policies" (117 IT. S. 591). Eichards in his analysis of the various decisions finds the doctrine of the highest court to be this : " AVhere a man effects insurance upon his own life for the benefit of another and pays the premiums, an insurable interest will readily be inferred from almost any kinship or intimate relationship, and where even a stranger buys the policy in good faith, his payment of a consideration will be regarded as creating an insurable interest, at all events to that extent." 7 It may be added that many of the cases declaring an assignment without interest to be illegal involve a consideration of facts which indicate strongly that the transaction under consideration constituted an attempt to secure speculative insurance. The weight of authority seems to support the doctrine that a policy valid at its inception is a mere chose in action which may, for value or by way of gift, be assigned subsequently by the insured to anyone, irrespective of insurable interest of the assignee provided that the transaction is bona fide and not a device to conceal wagering, speculation in insurance, or at- tempts at evasion of the law. This doctrine, prevailing in most of the states, 8 has been extended in some instances to permit a beneficiary or creditor holding a policy to assign the same to one possessing no insurable interest, provided such assignment has not for its purpose the concealment of wager- ing or speculative insurance. Generally speaking, assignments of policies are not regarded by the courts as creating new con- tracts, but merely as continuing the old ones. The modern tendency in business seems to be in favor of making the transfer of life-insurance policies as free as possible, and if 7 Richards, p. 54. 8 Among the states in which this view has been upheld may be mentioned California, Colorado, Connecticut, Georgia, Illinois, In- diana, Maryland, Massachusetts, Mississippi, New York, Ohio, Rhode Island, Vermont, Wisconsin, and South Carolina. This ia also the ruling in England and Canada. INSUKABLE INTEREST 391 the transfer is effected with the consent of the parties, the courts are more and more inclined to regard objections on the ground of public policy as of little consequence. Insurable Interest Arising Out of Ties of Affection, Blood or Marriage. The courts have generally held that certain ties of near relationship create an insurable interest, even though the element of dependence is not present. Thus, according to the weight of authority, a parent has an in- surable interest in the life of a child even though the same be permanently disabled. The relationship of husband and wife is also conclusively presumed in nearly all cases to establish an insurable interest on behalf of either party in the other's life. As regards other relationships, however, the courts have generally taken the position that the interest must be based upon a reasonable expectation of deriving pecuniary benefit from the continuance of the insured's life. On this theory American courts have repeatedly held, for example, that a woman has an insurable interest in the life of her fiance, since that relationship gives to her a reasonable right to ex- pect pecuniary benefit. An excellent review of the numerous decisions referring to insurable interest arising out of ties of blood or affection is furnished by the Circuit Court of Appeals. 9 Following a review of the decisions bearing on the subject the court held: The sum of the decisions and of text-book discussions upon the subject of insurable interest may, we think, be fairly stated thus: No person has an insurable interest in the life of an- other unless he would in reasonable probability suffer a pe- cuniary loss, or fail to make a pecuniary gain, by the other's death; or (in some jurisdictions) unless, in the discharge of some undertaking, he has spent money, or is about to spend money, for the other's support or advantage. The extent of the insurable interest the amount for which a policy may be taken out, or for which recovery may be had is not now under consideration. What is often called " relationship in- Life Insurance Clearing Company v. O'Neill, 106 Fed. 800. 392 THE PEINCIPLES OF LIFE INSUBANCE surance" must be governed by this rule. It must rest upon the foundation of a pecuniary interest, although the interest may be contingent, and need not be capable of exact estimation in dollars and cents. Sentiment or affection is not sufficient of itself, although it may often be influential in persuading a court or jury to reach the conclusion that a beneficiary had a reasonable expectation of pecuniary advantage from the con- tinued life of the insured. In one relation only the relation of husband and wife is the actual existence of such a pe- cuniary interest unimportant; the reason being that a real pecuniary interest is found in so great a majority of cases that the courts conclusively presume it to exist in every case, what- ever the fact may be, and therefore will not inquire into the true state of a few exceptional instances. This, we think, is essentially what is meant by the declaration of courts and text- book writers that the mere relationship of husband and wife is sufficient to give an insurable interest. . . . In all other relationships there is no presumption of interest, and no insurable interest exists unless the reasonable likelihood of pecuniary loss or gain is present in actual fact. No doubt, judicial language is to be found supporting the view that the mere relationship of parent and child is sufficient to give an insurable interest. The Time and Continuity of Insurable Interest. Eecent cases affecting insurance on property exhibit a strong tend- ency to apply the rule that an insurable interest existing at some time during the risk and at the time of the loss is suf- ficient to validate the policy, and that it is unnecessary to have the interest exist at the time of the issuance of the contract. As regards life insurance the weight of authority is to the opposite effect, i.e. the interest must exist at the time . the contract is made, and a policy, valid at its inception, will not thereafter be voided if it should happen that the interest ceases before the maturity of the contract, unless the pro- visions of the policy are such as to bring about that result. Indeed, the courts have decided that a policy naming a mar- ried woman as beneficiary remains in force even though she obtains a divorce before the insured^ death. The principal cases which are exceptions to the aforementioned general rule INSURABLE INTEREST 393 refer chiefly to the insurable interest of creditors and as- signees. Here a certain group of cases hold that the assignee of a life-insurance policy, even though valid when issued, must nevertheless possess an insurable interest. The United States Supreme Court has also decided (144 U. S. 621) that "if the policy of insurance be taken out by a debtor on his own life naming a creditor as beneficiary, or with a subsequent as- signment to the creditor, the general doctrine is that on pay- ment of the debt the creditor loses all interest therein and the policy becomes one for the benefit of the insured and col- lectible by his executors or administrators." CHAPTER XXX THE LAW PERTAINING TO THE BENEFICIARY If a policy of life insurance is taken out by one person on the life of another in whom he has an insurable interest, such policy, as previously explained, may be regarded by him as his own property, free from any control whatsoever by the person whose life is insured. But this chapter is concerned primarily with a policy which the insured has taken out on his own life for the benefit of someone whom he has named as beneficiary therein. Very frequently, the insured sees fit to name gratuitously some beneficiary or beneficiaries, such as his wife, children or near relatives, and sometimes without their having knowledge of his act. This common practice of thus gratuitously designating a beneficiary raises many important legal questions. Under what conditions does the beneficiary's interest become a vested right which cannot be impaired by either the insured or his creditors? Under what conditions may the insured retain sufficient control over his policy to change the beneficiary at will? To what extent is a beneficiary's interest in a policy transmissible to his or her representatives? What is the effect of a cessation of the beneficiary's insurable interest in the life of the insured prior to the maturity of the contract? To what extent are the rights of a beneficiary in a bankrupt's policy subject to the claims of creditors? These are some of the important questions which, as regards essentials, it is the purpose of this chapter to answer. Vested Rights of the Beneficiary. Unless the policy re- serves to the insured the power to change the beneficiary at will, such beneficiary is held to have acquired a vested right in the policy immediately upon its issuance, although he or she 394 LAW PERTAINING TO THE BENEFICIARY 395 may not even have knowledge of its existence. This vested right is so complete that neither the insured nor his creditors can impair the same without the beneficiary's consent. This general principle of law is well stated by the Supreme Court of the United States in the following words : * We think it cannot be doubted that in the instance of con- tracts of insurance with a wife or children, or both, upon their insurable interest in the life of the husband or father, the latter, while they are living, can exercise no power of disposition over the same without their consent ; nor has he any interest therein of which he can avail himself, nor upon his death have his personal representatives or his creditors any interest in the proceeds of such contracts, which belong to the beneficiaries to whom they are payable. It is indeed the general rule that a policy, and the money to become due under it, belong, the mo- ment it is issued, to the person or persons named in it as bene- ficiary or beneficiaries, and that there is no power in the person procuring the insurance by any act of his, by deed or by will, to transfer to any other person the interest of the person named. It may be added, of course., that the beneficiary's vested right is a contingent one in so far that the payment of the proceeds depends upon the maturity of the contract and the observance by the insured of all warranties and policy pro- visions. The wisdom of the foregoing rule cannot be questioned. Many court decisions take the view that when a beneficiary has been gratuitously designated by the insured the policy partakes of the nature of a voluntary trust or gift to the payee, and that the probable intent of the donor should be enforced i Central Bank v. Hume, 128 U. S. 195. The principle of law- defined in this case has been disapproved by the courts of England and Wisconsin. The Wisconsin court, in a notable exception (estate of Breitung, 78 Wis. 33), held that "one who has procured a policy of insurance upon his own life for the benefit of another, and has paid the premiums thereon as they become due, may dis- pose of the insurance money by will to the exclusion of the bene- ficiary named in the policy, during the lifetime of such bene- ficiary." 396 THE PRINCIPLES OF LIFE INSURANCE so long as the beneficiary is not guilty of intentionally caus- ing the death of the insured. But even more fundamental is the plain duty of every person, if financially able to do so, to use life insurance as a means to protect wife and children and other dependents of the household against the want and discomfort that may result from premature death. In mak- ing such provision for his dependents, it is certainly probable that the insured intended to safeguard the interest of those named in his policy as beneficiaries against the claims of his possible future creditors. In fact, the United States Supreme Court, in the decision already referred to, also held that : " A married man may rightfully devote a moderate portion of his earnings to insure his life, and thus make reasonable provision for his family after his decease, without being thereby held to intend to delay, or defraud, his creditors, provided no such fraudulent intent is shown to exist or must be necessarily in- ferred from the surrounding circumstances." There is also much to support the view that the courts in adopting the rule above stated have been influenced by the numerous statutes which have been adopted for the protection of the interest of a married woman and her children in the proceeds of her husband's life insurance against the claims of his creditors. At a recent date thirty-five states had enacted laws to this effect ; 2 while thirty-one states had laws protecting the pro- ceeds of a policy taken out by a married woman on the life of her husband in favor of herself and children against the claims of her husband's creditors or representatives. 3 2 The New York statute, which is used as a specimen, provides that : " The money or other benefit, charity, relief or aid paid or to be paid, provided or rendered by any such corporation, asso- ciation or society shall not be liable to be seized, taken or appro- priated by any legal or equitable process, to pay any debt or lia- bility of a member or any debt or liability of the widow of a deceased member of such corporation designated as the beneficiary thereof, which was incurred before such money was paid to her or such benefit, charity, relief or aid was provided or rendered." s In this respect the law of New York is here quoted as a speci- I men. It provides that: "A married woman may, in her own j name, or in the name of a third person, with his consent, as her i LAW PERTAINING TO THE BENEFICIARY 397 Reserving the Right to Change the Beneficiary at Will Claims of Creditors Where the Beneficiary Has Been Thus Named. Life-insurance policies may contain a pro- vision reserving to the insured full power to change the bene- ficiary or beneficiaries at will while the policy is in force and subject to any previous assignment. When this right is re- served the policy remains the property of the insured, and the original beneficiary obtains no vested rights in the policy or its proceeds but possesses only a " mere expectancy " until after the maturity of the contract. Various methods may be used in designating the insured's right of revocation. Some companies provide in their policies words to the effect that "when the right of revocation has been reserved, or in case of the death of any beneficiary under either a revocable or irrevocable designation, the insured, if there be no existing assignment of the policy made as herein provided, may, while the policy is in force, designate a new trustee, cause the life of her husband to be insured for a definite period, or for the term of his natural life. Where a married woman survives such period or term she is entitled to receive the insurance money, payable by the terms of the policy, as her sepa- rate property, and free from any claim of a creditor or representa- tive of her husband, except that where the premium actually paid annually out of her husband's property exceeds five hundred dollars, that portion of the insurance money which is purchased by excess of premium above five hundred dollars, is primarily liable for the husband's debts. The policy may provide that the insur- ance, if the married woman dies before it becomes due and with- out disposing of it, shall be paid to her husband or to his, her or their children, or to be for the use of one or more of those per- sons; and it may designate one or more trustees for a child or children to receive and manage such money until such child or children attain full age. ' The married woman may dispose of such policy by will or written acknowledged assignment to take effect on her death, if she dies thereafter leaving no descendant surviving. After the will or the assignment takes effect, the legatee or assig- nee takes such policy absolutely. " A policy of insurance on the life of any person for the benefit of a married woman, is also assignable and may be surrendered to the company issuing the same, by her, or her legal representative, with the written consent of the assured." 398 THE PRINCIPLES OF LIFE INSURANCE beneficiary, with or without reserving the right of revocation, by riling written notice thereof at the home office of the com- pany accompanied by the policy for suitable indorsement thereon. Such change shall take effect when indorsed on the policy by the company and not before." Other policies state that the insured may at any time change the beneficiary or beneficiaries under the policy, and where this is done it is frequently stipulated that the insured may, however, declare the designation of any beneficiary to be irrevocable. In other instances the change of beneficiary clause may contain stipu- lations to the effect that if any beneficiary shall die before the insured, the interest of such beneficiary shall vest in the insured, or that the insured reserves the right, without the beneficiary's consent, to surrender the policy for its cash value or to borrow thereon. In contrast to the foregoing provisions, some companies pur- posely omit a change of beneficiary clause in their contracts, and ask the insured to state specifically in his application his position in regard to this privilege. These companies, while admitting that the right of revocation may in occasional instances prove of great practical use, call attention to the fact that " a policy containing the unconditional reservation of the right to change the beneficiary produces an instrument identical with the one in which the estate is made the bene- ficiary." They, therefore, hold that the danger connected with such an unconditional reservation, regarded by them as a questionable privilege, should always be called to the atten- tion of the applicant by the agent. Then, if the applicant still insists on having the privilege, the company will gladly grant the same; but under these circumstances it is felt that the insured asked for the privilege with a full understanding of what he was doing and what his request might mean to himself and family in the future. On the other hand, the advocates of a special beneficiary clause for every contract consider the practice to be supported by reasons of expediency and equity, and contend that the insured should, as a matter of right, have the privilege of doing as he wishes with his own. LAW PERTAINING TO THE BENEFICIAKY 399 Whatever the practice in designating the insured's right of revocation, it is highly important that the legal significance of the privilege to change the beneficiary at will should be clearly comprehended by the policyholder. The possibilities of future bankruptcy do not seriously occupy the thoughts of ;the average person, yet statistics reveal a surprisingly large number of business failures. Records show that during the past thirty years the number of actual business failures, as compiled by Bradstreet, averages annually 1 per cent, of the total number of businesses listed by this organization. As has been well stated : " The probability of business mor- tality is as great as that of adult human mortality at its average age. In fact, it is identical with the 1 per cent, shown by the American tables of mortality on selected lives at age 41." It is also noteworthy that in a year like 1907 about 19 per cent, of the total number of failures and over 55 per cent, of the failure liabilities were traceable to dis^- asters, failure of apparently solvent debtors and undue com- petition, i.e. causes which cannot be regarded as due to faults of those who failed. On the other hand, nearly 65 per cent, of the total number of failures in that year were due either to incompetency or to lack of capital. ; The foregoing considerations assume importance when the change of the beneficiary clause is viewed from the standpoint of claims of creditors. Judging from recent decisions it is probable that a clause reserving full power to the insured to change the beneficiary at will, or without the consent of the beneficiary to borrow thereon or surrender the policy for its cash value, subjects the policy to the claims of creditors and causes it, in case of the insured's bankruptcy, to pass by order of the court to his assignee. Reference is frequently made to the decision of the United States Circuit Court of Appeals on November 9, 1909. 3 This case dealt with a peti- tion to review an order of the District Court which denied the application of the trustee for authority to surrender an s/w re White, 174 Fed. 333. 400 THE PRINCIPLES OF LIFE INSURANCE ordinary policy of insurance on a bankrupt's life and collect the surrender value thereof. The policy provided for the pay- ment of $5,000 to the wife, if she survived her husband, int ten annual installments of $500 each, and in case of heri prior death the policy was payable to the husband's estate or to any beneficiary named by him. The policy also provided that the insured could at any time surrender the policy for paid-up insurance or other value. In his opinion Judge; Ward, after reviewing the terms of the policy, concluded in part: The District Judge was of opinion that the wife of the bank- rupt was the legal owner of the policy ; that it was her property j and, if the insured had the option of terminating her owner- ship, he had not exercised it. But we think the policy is the property of the husband, that the contract is made with him, and that the wife's interest depends on the contingency of hei surviving him. If the property in the policy were absolutely the wife's, the insurance would be payable upon her death tc her estate. Certainly the bankrupt has an interest in the pol- icy. If he survives his wife, the insurance will be payable, no1 to her estate, but to him, or to his estate, or to a beneficiary designated by him. This is a vested future interest. Besides this, though not obliged by the contract to do so, the company is willing, apparently, under the option given the insured tc surrender the policy for paid-up insurance or other value, tc pay the sum of $1,804.23 upon its surrender. The situation is exactly the same as if the policy contained a stipulation foi a cash surrender value. . . . These are clearly interests of th( bankrupt which go to the trustee under section 70 a (5) oJ the bankruptcy act, . . . subject, of course, to the privilege therein reserved to the bankrupt to keep the policy free fron the claims of his creditors participating in the distribution oJ his estate by paying its value, $1,804.23, to the trustees. . . . It was further contended that, irrespective of the foregoing considerations, the policy is exempt from the operation of thj National Bankruptcy Act by virtue of the law of New Yorl^ which was enacted for the protection of the interest of a mar- ried woman and her children in the husband's policy against LAW PERTAINING TO THE BENEFICIARY 401 the claims of his creditors. But with reference to this con- tention the court held that : It is quite plain that the policies referred to are such as are the absolute property of a married woman or her children, that is, which are payable to her, or her children, or her estate. They may be taken out by the husband, and the premiums up to $500 per annum paid by him. Still the policy must be one which the married woman may dispose of by will, or may, with the written consent of her husband, assign or surrender to the company. This requirement of the husband's assent is not be- cause he is the owner of the policy, but is to protect widows and orphans in respect to such insurance. If, as seems probable, the courts will generally interpret a transferable beneficiary clause as giving the trustee in bank- ruptcy the power to distribute the cash value of a policy among creditors, it follows that a policy taken out for family pro- tection, if containing such a clause, will have connected with it a hazard that the insured, in view of the future possibility of bankruptcy, should bear in mind and carefully consider. Numerous statutes, as we have seen, have purposely made it possible for men to make suitable provision for their families ^in case of premature death by creating an insurance fund that is immune from seizure by creditors. Yet the introduc- tion of a clause giving the insured a free hand to change the beneficiary, or to surrender the policy or use it for borrowing purposes, introduces an element of uncertainty in a contract that in most instances should be made absolutely secure for the benefit of those for whose protection it was expressly taken out and who have the right to expect that the insurance fund, which is their sole provision against want after the decease of the breadwinner, shall not have constantly hanging over it an element of uncertainty. Not to protect a policy against creditors may often result, as has been well said, " in accumu- lating trouble for a time when misfortune would be amply i abundant." Before leaving this subject, brief reference should be made to the beneficiary's interest under a fraternal or mutual benefit 402 THE PRINCIPLES OF LIFE INSUKANCE certificate. Here the right of revocation is usually reserved to the insured by the constitution or by-laws governing the members, and under such circumstances the interest of the beneficiary is not a vested one. But should the rules or cer- tificate of the order or society, or any statute, contain restric- tions as to the classes of beneficiaries that may be named, the holder of the certificate is obliged to observe the same. It has been held that under such conditions the properly named beneficiary can contest an appointment illegally made at a future time. In the absence, however, of any right of rev- ocation by statute or by the rules of the association, or in case of a definite agreement with the beneficiary originally named, the insured is precluded from substituting another appointment. In industrial policies, it should be stated, it is frequently the practice to include a provision permitting the company to choose the beneficiary under certain circumstances. Usu- ally the clause is given some such wording as the following: " The Company may pay the amount due under this policy to either the beneficiary named below or to the executor or ad- ministrator, husband or wife, or any relative by blood or con- nection by marriage of the insured, or to any other person appearing to said company to be equitably entitled to the same by reason of having incurred expense on behalf of the insured, or for his or her burial; and the production of a re- ceipt signed by either of said persons shall be conclusive evi- dence that all claims under this policy have been satisfied/ Such provisions have been repeatedly upheld by the courts as reasonable in this form of insurance. In Brennen v. Pruden- tial Insurance Company (170 Pa. 488) the court even held that "the company may in its discretion and acting in good faith with the person selected by it, settle for less than the amount of the policy, and the personal representative of the insured cannot recover from the company the difference be- tween the amount so paid and the amount of the policy/' Rights of Creditors to Life-Insurance Policies. The National Bankruptcy Act expressly permits a bankrupt, hav- LAW PERTAINING TO THE BENEFICIARY 403 ing a policy with a cash surrender value payable to himself, his estate or his legal representatives, to keep the policy free from the claims of creditors by paying such surrender value to the trustee within thirty days after the ascertainment of the amount. 4 Failure to do this, causes the policy to pass to the trustee as assets for the benefit of creditors. But if the policy has no surrender value, the courts have held that the trustee has no interest therein. In Morris v. Dobb, trustee (110 Ga. 606), where a husband took out a policy payable to his legal representatives and subsequently transferred the same to his wife four months prior to the filing of a petition in bank- ruptcy, the court held : " A policy of insurance on the life of a bankrupt which has no cash surrender value, and no yalue for any purpose except the contingency of its being valuable at the death of the bankrupt if the premiums are kept paid, does not vest in the trustee as assets of the estate." Moreover, the courts have held that a state statute protecting certain beneficiaries against the claims of creditors takes pre- cedence over the National Bankruptcy Act. Thus, in Holden v. Stratton (198 U. S. 202) the court ruled that: "Policies of insurance which are exempt under the law of the state * The U. S. Bankruptcy Act, Sec. 70, provides that: "Property which prior to the filing of the petition he could by any means have transferred, or which might have been levied upon and sold under judicial process against him, provided that when any bank- rupt shall have any insurance policy which has a cash surrender value, payable toNiimself, his estate or personal representatives, he may, within thirty days after the cash surrender value has been ascertained and stated to the trustee by the company issuing the same, pay or secure to the trustee the sums so ascertained and stated and continue to hold, own and carry such policy free from the claims of the creditors participating in the distribution of his estate under the bankruptcy proceedings; otherwise the policy shall pass to the trustee as assets." In Clark v. Equitable Life Assurance Society (143 Fed. 175) the court held that: "Policies of life insurance of a bankrupt having an actual value pass to his trustee, and the bankrupt is divested of all interest therein, unless he retains the same under the proviso of the Bankruptcy Act of July 1, 1898, see 541, Sec. 70 (a), by paying the cash surrender value." 404 THE PRINCIPLES OF LIFE INSURANCE of the bankrupt are exempt under Section 6 of the Bankruptcy Act of 1898, even though they are endowment policies pay- able to the assured during his lifetime and have cash sur- render values, and the provisions of Section 70 (a) of the Act do not apply to policies which are exempt under the state law. It has always been the policy of Congress, both in general legislation and in bankrupt acts to recognize and give effect to exemption laws of the states." Following the payment of the policy to the beneficiary, however, the pro- ceeds are subject to levy and attachment for such beneficiary's debts, just as any ordinary assets would be. Some courts have also emphasized the right and duty of an insolvent, in the absence of actual fraud, to make moderate provision for his wife and children by naming them as bene- ficiaries in a life-insurance policy. This is clearly indicated in the opinion rendered in Central Bank of Washington v. Hume (128 U. S. 195), where "a married man," it was declared, "may rightfully devote a moderate portion of his earnings to insure his life, and thus make reasonable provision for his family after his decease, without being thereby held to intend to hinder, delay or defraud his creditors, provided no such fraudulent intent is shown to exist, or must be necessarily in- ferred from the surrounding circumstances." But on this point the courts are by no means a unit. Some hold that the premiums paid by the insured following his insolvency are ob- tainable by his creditors ; while others have ruled that creditors may obtain the insurance money in the proportion that the pre- miums paid subsequent to the insolvency bear to the sum total of the premiums paid on the policy. Transmissibility of the Beneficiary's Interest. Where the beneficiary has been named absolutely and without any qualifying restriction, the important question arises : Are the rights of the beneficiary in the policy such as to pass to his or her representatives in case of death before the insured dies ? This question may be discussed conveniently from two stand- points: (1) when all the designated beneficiaries die before the insured, and (2) when some of them die before the insured LAW PERTAINING TO THE BENEFICIARY 405 but others outlive him. Assuming that the sole beneficiary designated in the policy dies before the insured, is the latter at liberty to make a new appointment? Frequently the diffi- culty is overcome by a clause in the policy, as is the case in the New York standard provision expressly providing to some such effect as this : " If no beneficiary shall survive the insured the policy shall be payable to the legal representatives of the insured." Beneficiary clauses also frequently contain stipulations to the effect that " if any beneficiary shall die before the insured, the interest of such beneficiary shall vest in the insured." In the absence of such provision, the courts have disagreed as to the powers which the insured may exer- cise in this respect. The majority of decisions permit him to make a new appointment and this ruling is regarded as the better one by legal writers on the subject. 5 It is contended that since the insured^ original intention as to the disposition of the proceeds of the policy has failed, the power to indicate a new beneficiary should revert back to him. His original in- tention to protect his wife and children, it is argued, can- not be construed as implying that he meant to waive all control over his own policy in case he should happen to become the sole survivor. To hold otherwise would seem inequitable and would likely prove ineffective since the insured could lapse his policy. Now assuming in the second case, that the policy simply names the " wife and children " or the " children " as benefici- aries, and that it contains no conditions governing the matter, how shall the proceeds of the policy be shared when some of the designated beneficiaries die before the insured dies while others survive him ? In other words, are those beneficiaries who out- 5 Among the states the courts of which have upheld this ruling may be mentioned the following: Alabama (87 Ala. 263), Ohio (50 Ohio St. 595), Missouri (35 Mo. App. 178), New Jersey (58 N. J. eq. 189), New York (28 N. Y. Hun. 119), Virginia (24 Grat. (Va.) 497), and Wisconsin (50 Wis. 603). Among the states in which the contrary ruling holds may be mentioned the following: Arkansas (71 Ark. 295), Indiana (86 Ind. 196) and Maryland (95 Md. 101). 406 THE PRINCIPLES OF LIFE INSURANCE live the insured entitled to the entire proceeds of the policy, or is the interest of the surviving beneficiaries still limited to the share which they originally held under the policy, while the respective interests of those beneficiaries who died before the insured's death pass to their representatives or assigns. Here again the courts are not in accord. Where the policy is pay- able to " the wife of the insured, if living, otherwise to their children," it is clear that the interest of the children is a contingent one, depending upon the life of the wife. But suppose that the husband survives the wife, shall the pro- ceeds of the policy pass only to those children who survived the mother, or shall all the children living at the time of the issuance of the contract participate in the distribution. Some courts hold sometimes called the New York rule that only the children surviving the mother come into possession of the entire policy. 6 Other courts, however, follow the rule sometimes called the Connecticut rule that all the children alive when the policy was issued acquire a vested right therein, and that the interest of those dying before their mother dies passes to their representatives. 7 The Designation of the Beneficiary. Judging from the unusually large number of court decisions which relate to this subject, it is apparent that the beneficiary often is designated carelessly in a life-insurance policy, and that because of such carelessness the real intention of the insured might upon his death be difficult to determine and might, therefore, possibly be defeated. It is the general rule of the courts, if at all possible, so to construe the language used in designating the beneficiary as to enforce the intentions of the parties thereto. But in doing this the courts cannot set aside the language expressly used if the same is not ambiguous. Numerous illustrations may be cited as indicating the ne- 6 Among cases upholding this rule may be mentioned: 140 Mich. 233, 68 N. H. 405, 133 N. Y. 408, 118* Ga. 657, 54 Ala. 688, 202 Pa. St. 141. 7 Among cases upholding this rule may be mentioned 42 Conn. 60, 89 Iowa 396, 100 Tenn. 297, 135 Mass. 468. LAW PERTAINING TO THE BENEFICIARY 407 cessity of care in describing the beneficiary. Thus, where the policy is payable to the insured's " children," the term in- cludes those by a former wife but not his wife's children by a former husband. A policy payable "to the wife and upon her death before the insured to ( their children/ " does not give an interest to a child by a marriage contracted by the insured after his first wife's death. Adopted children are included in the term " children/' and the term " dependents " is limited strictly to those actually dependent for support upon the insured. Again the term " relatives " has been held to " include those by marriage as well as by blood, but not an illegitimate child " ; while the term " heirs " refers to " those who take under the statute of descent and distribution." 8 Effect of Cessation of the Beneficiary's Insurable Inter- est in the Life of the Insured Prior to Maturity of the Contract. In the chapter on " Insurable Interest " it was stated as a general rule that a person has an insurable interest in his own life and may accordingly insure that life to any amount and name anyone as beneficiary under the policy, even though such beneficiary may not have an insurable interest at the time. The only general exception to this rule, we saw, consisted of those instances where the policy is a mere cover for fraud or speculative insurance and thus an evasion of the law against wagering. But assuming that the policy is taken out legally by one person on the life of another, or that a beneficiary has been appointed who has an insurable interest at the time, will a subsequent loss of that interest before the maturity of the contract adversely affect the vested rights of such beneficiary ? Here the prevailing rule holds that a policy valid at its inception because supported by an insurable in- terest will not, unless its provisions clearly stipulate the contrary, be affected thereafter by a loss of that interest on the part of the beneficiary. A married woman, for example, a ELLIOTT, CHARLES B., Treatise on the Law of Insurance (1903), 348-387. A detailed list of the numerous interpretations which American courts have given to the various terms that are com- monly used in designating beneficiaries in life-insurance policies. 408 THE PRINCIPLES OF LIFE INSTTBAKCE named as beneficiary in her husband's policy has been held to have the right to maintain the existence of the policy fol- lowing a divorce and be entitled to the proceeds upon the in- sured's death. Exceptions to this rule frequently exist as regards creditors, as noted in the preceding chapter; certifi- cates or rules of fraternal and mutual benefit societies, however, usually provide that the relation of husband and wife, or other family relationship under consideration, must exist at the time of the insurer's death. CHAPTER XXXI LAW PERTAINING TO ASSIGNMENT OF POLICIES There are few types of contracts which are so frequently assigned as insurance policies, and any discussion of the sub- ject must distinguish clearly the underlying difference between the assignment of life policies and the assignment of policies in fire and most other lines of property insurance. The fire- insurance policy, being strictly a personal contract, i.e. insur- ing the particular owner of the property rather than the prop- erty itself, can be assigned only with the consent of the com- pany, and the standard fire policy now in general use pro- vides that "the entire policy shall be null and void if without the consent of the company there be an assignment of the policy before a loss takes place." In case, therefore, of the transfer of insured property, the company may refuse its con- sent to the transfer of the policy to the new owner, and if such transfer of the policy has been undertaken without the com- pany's knowledge or consent, it will be relieved of all further liability. A life-insurance policy, however, being in the na- ture of a chose in action, has been held by the courts to be freely assignable for a valuable consideration in the absence of (1) restrictive provisions in the policy, or (2) attempts at concealment of fraud or mere speculative insurance. 1 1 ".It is desirable that the insured should have the opportunity of making free commercial use of his life insurance as available property, for it may often be convenient to secure money, by loan or otherwise, upon it. Unlike the case of a fire policy, as before shown, a life policy was considered assignable at common law. And, by the better opinion, a policy of life insurance may be as- signed or made payable to one who has no insurable interest, if the transaction is not a mere cover for a wager. The demands of business quite outweigh the remote possibility that some un- scrupulous assignee may succumb to the temptation of murdering 409 410 THE PEINCIPLES OF LIFE INSURANCE To hold otherwise might often diminish the value of a life policy to its owner as a means of securing credit or other benefits. Unlike a fire policy, the life-insurance contract in most instances provides for payment upon death, an event which is certain to occur sooner or later. For this reason the courts have held the life policy to resemble an ordinary chose in action, and have generally inclined to the view that sufficient reasons against its assignability cannot be given so long as there is no infringement of the vested rights of the beneficiary. But, as already stated, if the assignment is based upon an im- moral or illegal consideration, the courts will refuse to up- hold it; and cases are on record where even executors or administrators of the insured have been permitted to oppose the legality of an assignment on such grounds. After death has occurred, it may be added, the interest in the policy is held to be purely a chose in action subject to assignment by the beneficiary without regard to the " notice of assign- ment " or any other provisions of the policy. Policy Restrictions Relating to the Assignment of Poli- cies and the Legal Interpretation of the Same. Although assignable in the absence of restrictive policy provisions, it is the universal practice to-day of life-insurance companies to include an assignment clause of some kind in their policies. While much variation exists in the wording adopted by the companies, the provision usually reads to the effect that " no assignment of this policy shall be binding upon the company unless in writing and until filed at its home office. The com- pany assumes no responsibility as to the validity of any assign- ment." In many policies, however, the provision is more elaborate, some companies stipulating that in addition to the or shortening the life of the insured for the sake of hastening payment of the insurance money. Moreover, there would seem to be room for the operation of any such sinister designs regardless of whether the assignee has an insurable interest. A creditor, for example, may be quite as strongly tempted, as the donee of a gift, to realize a prompt payment of the insurance upon the life of the assignor." RICHARDS, GEORGE, Treatise on the Law of Insurance, 527-528. ASSIGNMENT OF POLICIES 411 filing of the assignment, or a duplicate thereof, the assign- ment must be approved in writing by certain officers of the company; that the original assignment and due proof of interest must be produced when the policy is presented for payment, and that all assignments shall be subject to any in- debtedness to the company at its home office. Where an assignment has thus been brought to the attention jof the company and has been consented to, it is held to constitute a new contract between the company and assignee. The assignee, however, simply obtains the rights of the original insured i.e. takes the position of the assignor and is pro- jected only to the extent that the assignor was protected un- toer the policy. In other words, the assignee takes only what the assignor can assign, and if the policy is void at the time of assignment because of acts of violation on the part of the assignor, the assignee is not in a position to recover. The assignee's position in this respect has been greatly im- proved through the general use of the incontestable clause, which, as we have seen, protects the policy against the acts of the insured after the lapse of a stipulated period. The principle, however, is worthy of emphasis in that it ap- plies before the incontestable feature goes into operation, and in so far that it has a most important bearing upon other forms of insurance. In fire insurance ordinary assignments of poli- cies are considered so dangerous, because of the possible in- validity of the contract at the time of assignment, that it is almost the universal practice for mortgagees either to insure ! their own interest as mortgagee or to require the mortgagor to have, a so-called " mortgage clause " indorsed on the policy protecting the premises offered as security for the loan, which provides that " this insurance, as to the interest of the mort- gagee (or trustee) only therein, shall not be invalidated by any act or neglect of the mortgagor or owner of the within described property, nor by any foreclosure or other proceed- ings or notice of sale relating to the property, nor by any change in the title or ownership of the property, nor by the occupation of the premises for purposes more hazardous than 412 THE PRINCIPLES OF LIFE INSURANCE are permitted by this policy, etc." In some jurisdictions the courts have even held that the indorsement of such a clause does not revive a policy already void at the time the indorse- ment is made, and for this reason it is the practice of cer- tain large lending institutions a number of life-insurance companies resort to the practice to require fire-insurance companies to consent by special agreement to protect them, as mortgagees, against all acts and neglect of the mortgagoi whether occurring prior or subsequent to the issuance of the mortgage clause. It should also be observed that the assignment provisions oi life-insurance policies to which reference was made do not prohibit an assignment without consent, but simply provide that the company need not recognize the assignment until ii has received written notice of the same, and that it assumes no responsibility as to its validity. Nor does the provision state that an assignment, not consented to by the company, will invalidate the policy. As is well stated in one case 5 where the court had under consideration an assignment simi- lar to those mentioned above : " The consent of the company to an assignment is not necessary. All that is required ig that the assignment be in writing on the policy, and a copy of it furnished to the company within thirty days. This pro- vision is not one which is intended to guard against increased risks, and does not go to, or infuse itself into, the essence of the contract. Its sole purpose is to protect the company against the danger of having to pay the policy twice, by re- quiring written evidence of any change of beneficiaries to be put in reliable form and promptly furnished to the com- pany. AH that could, at the very most, be claimed as the effect of non-compliance with this stipulation is that the company might disregard an attempted assignment and pay the money to the original beneficiary; in other words, such attempted assignment would be merely voidable at the optioD of the company." Elliott in reviewing the cases affecting 2 Hogue v. Minnesota Packing Provision Company, 59 Minn. 39, 6C N. W. 812. ASSIGNMENT OF POLICIES * 413 notice of assignment to the insurer concludes : " At the most, the failure to give the required notice invalidates an attempted assignment, but does not avoid the policy. A notice given within a reasonable time after an assignment is sufficient, al- though the insured may have died in the meantime/' 3 When the writing of the assignment is required it is un- necessary to use any particular wording, and the content of the assignment may assume any form that the parties thereto may agree upon, such for example as a special agree- ment between debtor and creditor as to the final disposition of any balance of the proceeds of the policy after full pay- ment of the actual indebtedness. "Where nothing to the contrary is stipulated in the agreement of assignment, the assignee of a policy held as collateral security for a debt of the assignor cannot dispose of the same by sale or surrender to the company for its cash value, without first giving the in- sured proper notice and a reasonable time for redemption. Moreover, actual delivery of the policy to the assignee is not necessary to make an assignment binding; in fact, the courts have held that the assignee's rights may be fully supported even in cases where neither the policy nor the assignment has been delivered to him. State Statutes Affecting Assignments by Beneficiaries. In the absence of restraining statutes, beneficiaries may assign their contingent interest in a life policy, although there are legal cases affirming the position that the holder of a certificate in a fraternal or mutual benefit society may not assign the same, unless the restriction is waived by the so- ciety, to persons who do not come within the group of per- mitted beneficiaries. Unless prohibited by statute, even the wife has been held to have the right to assign her interest in a policy in order to secure a debt of her husband. But, as noted in the preceding chapter, some thirty-five states have adopted laws which have for their purpose the protection of the interest of the wife and children of the insured by providing s ELLIOTT, CHABLES B., Treatise on the Law of Insurance, 406. 414 - THE PKINCIPLES OF LIFE INSURANCE that the proceeds of his life insurance made payable to them shall not be liable to seizure or appropriation for the satis- faction of the claims of creditors. In New York and Wis- consin the courts have construed such statutes as meaning that the wife is prohibited altogether from assigning her in- terest ; while in other states Arkansas., Kentucky, Maryland, and Missouri similar statutes were construed as not pre- cluding such an assignment. By subsequent enactment, how- ever, the New York law now provides that " a policy of insur- ance on the life of any person for the benefit of a married woman, is also assignable and may be surrendered to the com- pany issuing the same, by her, or her legal representative, with the written consent of the assured/' Assignment of the Policy by the Assignee A Policy of Life Insurance Is Not a Negotiable Instrument. Al- though an assignee cannot, in the absence of an agreement to the contrary, sell or surrender the policy without giving the insured a reasonable opportunity to redeem it, he may, under proper circumstances, reassign the policy to another. Thus, in Corcoran v. Mutual Life Insurance Company* it was held that where a policy was given as collateral security for the payment of a note, the holder has the right to assign the same to the indorsee of the note, who will then be en- titled to hold the policy as security for the v note. But a life-insurance policy is not to be regarded as a nego- tiable instrument, as is exemplified by the case of Brown v. Equitable Life Assurance Society. 5 Here the insured as- rsigned a policy as security for a debt, and the assignee sub- sequently assigned the same to a bank as security for an- other loan. The court held that despite the absoluteness of the form of assignment, " the bank took the policy subject to the equities existing in favor of the insured, unless the con- duct of the latter was such as to create an estoppel." Ac- cording to the facts of the case the insured had neglected to 4 183 Pa. 443, 39 Atl. 50, 1898. 575 Minn. 412, 1899. ASSIGNMENT OF POLICIES 415 [pay premiums for eleven years, and during that period had i made no effort to recover the policy. These circumstances, i together with the fact that the bank kept the policy from lapsing by paying the premiums itself, caused the court to hold that the insured was prevented from claiming any rights under the policy as against either the first assignee or the bank. CHAPTER XXXII THE LAW PERTAINING TO THE AGENT 1 Life insurance being written almost exclusively by cor- porations, in most instances transacting business in many states, the agent is a necessary factor in the successful prose- cution of the business. It is also apparent that if the agent is to perform properly the duties connected with the solicitation of business on behalf of his employer he must be given a certain amount of authority. To govern his relations with the company and the public, there was to begin with the gen- eral law of agency. But there has since developed a large body of statute and court law dealing with insurance agents in particular, and it is from this law that we are able to com- prehend the status of the life-insurance agent. It is a general rule of law that the position of agent carries with it authority to do and say those things and use those means which are appropriate to the proper fulfillment of the services which he is employed to render. Almost in- variably the company gives its agents a written commission defining their authority. But the absence of such written au- thority does not relieve the company of responsibility for the conduct of those who are in reality its agents, because to hold otherwise would enable the insurer at any time to avoid all responsibility for the misconduct or errors of its agents by simply sending them into the field without written authority. Agency is a fact depending on circumstances independent of any provisions that may exist in the policy or application, and i The law pertaining to agency in life insurance being in part the same as that relating to agency in fire insurance, about one- third of this chapter is a duplication of the chapter on " Agency " in the author's book, Property Insurance. 416 LAW OF AGENCY 417 in cases where the question has come up for decision the courts have outlined the evidence that may be considered as proof establishing the fact and character of the agency. This evidence may consist of an express contract between the com- pany and agent, as already stated, or a recognition by the company that a certain person is its agent. Again, the fact and character of the agency may be shown by the possession |>f certain papers or by other evidence from which agency imay be legally inferred. It is important, however, to note that the insured must not presume the existence of the agency relationship, but must satisfy himself of it and the extent of its character by some tangible evidence. State Statutes Regulating Agents. Practically all the states have seen fit to enact laws which define the meaning of the term " agent," regulate the appointment and licensing of agents, and prohibit on their part various kinds of miscon- duct. The statute law relating to these three subjects may briefly be summarized as follows : Definition of the term " agent" It was at one time the practice of certain companies to employ agents without written agreements and to provide in their contracts or ap- plication forms that " as regards all matters pertaining to the application, the person soliciting the insurance is expressly agreed to be the agent of the insured." Such a practice manifestly afforded abundant opportunity to the company io resist many claims by simply considering the solicitor the agent of the insured, thus placing all responsibility for the agent's misconduct or error upon the insured. To preclude such treatment to policyholders the several states soon found it necessary to enact statutes which defined the term " agent " with particular reference to the insurance business. Such statutes are held by the courts to control the situation, and thus overcome the evils formerly connected with stipulations in the policy or application which declared the solicitor to be the agent of the insured as regards all matters relating to the application for a policy. A few states even provide by statute that notice to the agent as to the health, habits, or occupa- 418 THE PRINCIPLES OF LIFE INSURANCE tion of the insured shall be deemed notice to the company. In the great majority of states a solicitor of life insurance is expressly declared by statute to be the agent of the insur- ance company and not of the insured. The law of Pennsyl- vania, which will serve as an example, provides that " an agent is a person, firm or corporation authorized in writing by a company to solicit or countersign or issue policies of insurance on its behalf." A considerable number of the states have formulated the law to the effect that any person solicit- ing insurance, or performing any act in relation thereto shall be deemed the agent of the company, anything in the policy to the contrary notwithstanding. . Attention should be called to the distinction, although of much less importance in life insurance than in fire and other forms of property insurance, which the laws of many states make between insurance agents and brokers. As distinguished from an agent a broker is usually denned " to be a person, not an officer or agent of the company interested, who, for com- pensation, acts or aids in any manner in obtaining insurance for a person other than himself." There has always been much disagreement between the court decisions in the dif- ferent states as to the legal position which the insurance broker bears to the insured. In some of the states the courts declare him to be the agent of the party paying him for his services, but this rule necessarily involves uncertainty unless the courts fix the ownership of the fund from which the broker is compensated. Other state courts have declared the broker to be the agent of the insurer as regards the payment of the premium and the delivery of the policy, but to be the agent of the insured in all other matters relating to the insurance. For the greater protection of the insured various states have also seen fit to pass laws which make the broker the agent of the company for certain purposes and the agent of the insured for others. In the great majority of states, however, an in- surance broker is regarded as the agent of the insured in all matters. Where the broker is thus declared not to be an agent of the company, it is important for the insured to bear LAW OF AGENCY 419 in mind that the broker is his agent, and that consequently the act or knowledge of the broker is his act or knowledge. This is especially true as regards the payment of the pre- mium to a broker who may neglect to remit the same within the proper time, although the courts have shown a disposition to protect the insured in this matter where it appears that an arrangement existed whereby the broker made periodical set- tlement with the company for premiums collected. Regulation of the appointment and licensing of agents. Most of the states have not only made solicitors of life insurance specifically the agents of the company, but also carefully regulate their appointment and licensing. While numerous differences of detail present themselves in the stat- utes of the several states, the law of Pennsylvania is probably as nearly typical as that of any other state and will be used for illustrative purposes. Thus, according to the law of this state, all companies to which certificates of authority are issued must certify to the insurance commissioner from time to time the names of all agents appointed by them to solicit risks in the state, and such agents may be either individuals, copartnerships, or corporations. Before transacting any busi- ness each agent must obtain from the commissioner a certificate showing that the company has complied with all the laws of the state and that the agent has been duly appointed its agent. In case the agency is a copartnership or corporation, every member, officer and director is required to have an individual license. Certificates to agents are issued only upon writ- ten application, approved and countersigned by the company, which must be made upon a form prescribed by the commis- sioner, and which must furnish the information he desires. The commissioner is empowered by the law /'to refuse to issue a certificate to any agent, or to renew the same ; or he may suspend or revoke any certificate when it shall appear to his satisfaction that the applicant for a certificate, or the agent holding a certificate, has, by misconduct or by misappropriation of collected premiums, or by misrepresentation, or incomplete or misleading comparison of policies, oral, written or other- 420 THE PRINCIPLES OF LIFE INSURANCE wise, for the purpose of inducing or tending to induce a policy- holder in any company to lapse, forfeit or surrender his in- surance therein, and to take out a policy of insurance in another company insuring against similar risks, or gtherwise, proved to be unfit to hold such certificate." It may be added that the law provides not only for heavy fines in case the aforementioned regulations are violated, but further declares that the agent " shall be personally liable on all contracts of insurance unlawfully made by or through him for or in behalf of any company not authorized to do business in the state." Prohibition of various kinds of misconduct. In ad- dition to the foregoing regulations most of the states have seen fit to regulate specifically the conduct of agents in at least five other important matters. Briefly stated the laws re- ferred to in this connection are directed against and de- signed to punish the following acts on the part of an agent : 1. Rebating any portion of the premium payable on a policy or of the commission thereon, or giving any other valu- able consideration, either directly or indirectly, as an induce- ment to insurance. In numerous states the statutes also pro- hibit agents from personally or otherwise offering or selling any stocks, bonds or other securities of any insurance company as an inducement to insurance or in connection therewith. 2. Fraudulent conversion or wrongful use of premiums col- lected. 3. Making any misrepresentation or false statement for the purpose of securing a policy from a company upon the life of any person. 4. Representing or advertising himself as the agent of an unauthorized or fictitious company. 5. Issuing, circulating or using any written or oral state- ment or circular misrepresenting the terms of any policy issued or to be issued by his company, or making any esti- mate, with intent to deceive, of the future dividends payable under a policy. Incomplete comparisons with a view to sell- ing a policy, or to inducing a policyholder in any company to lapse or surrender his insurance and to take out a pol- LAW OF AGENCY 421 icy in another company, are also frequently prohibited by statute. Policy Provisions Pertaining to Agency. It frequently happens that life-insurance companies insert a provision in their policies or application forms prohibiting their agents from in any way altering the contract. Industrial policies, as has already been noted, usually contain a provision to some such effect as : " No modification, change or alteration hereof or indorsement 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 any 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 ap- plication for this policy." Ordinary life policies in the case of some companies likewise stipulate, for example, that " no agent of the company has any authority to waive forfeitures or to make, alter or discharge contracts/' The reasonableness of stipulations like the above must be conceded when one takes into account the fact that most large life-insurance companies are represented by hundreds and sometimes thousands of agents and that in the desire to obtain business many are often tempted to make promises not cov- ered by the policy, or to overlook or conceal representations or information which, had the same been known to the company, would have caused it to refuse the issue of the policy. It therefore seems reasonable that the companies should seek to protect themselves against such contingencies by stating ex- pressly in the contract itself that the agent is not authorized to modify or alter the policy in any particular. It may be added that a similar clause is found in fire and various other kinds of insurance policies. Despite the apparent reasonableness of such policy provi- sions, however, the various court decisions are by no means in 422 THE PRINCIPLES OF LIFE INSURANCE harmony as to the legal force of the same. 2 Most of the de- cisions deal with the subject of oral waiver in its relation to fire policies. Here most of the state courts have refused to uphold such policy provisions, and have taken the position that where facts constituting a forfeiture are known to the agent at the time of the issue of the policy the company may not consider the policy forfeited. Various reasons have been of- fered by the courts for taking this view. One court regards the doctrine "as peculiar to the law of insurance and as founded on the laudable design of preventing the perpetration of a fraud through obtaining a premium by the issuance of a policy known to be void ab initio" Other courts refuse to uphold the provision " in the interest of fair dealing," or on the ground that " if the principal has inherent, inalienable power to waive either orally or in writing so has the agent." But it should be noted that in the famous Northern Assurance Company case, 3 characterized by Mr. Richards as " a decision of perhaps greater practical moment than any other rendered in the law of insurance within half a century," the United States Supreme Court refused to uphold the aforementioned doctrine of oral waiver and repudiated it as fundamentally unsound. Despite this decision, however, many state courts have continued to render opinions to the opposite effect. In life insurance the state court decisions relating to oral waiver on the part of the agent show the same lack of har- mony that we have noted in connection with fire insurance. Thus the Court of California, 4 for example, approved and followed the Northern Assurance Company case, and held that where the agent knew the applicant for insurance had had a stroke of paralysis, and still permitted the policy to be issued 2 For a detailed discussion of the legal effect of such provisions see George Richards' A Treatise on the Law of Insurance, 193-194, 206-214, 525-526. 3 Northern Assurance Company v. Grand View Building Associa- tion, 183 U. S. 308. 4 Iverson v. Metropolitan Life Insurance Company, 91 Pac. 609. For a discussion of this and other cases see Richards' Treatise on the Law of Insurance, 525. LAW OF AGENCY 423 without the company having knowledge of the fact, his knowl- edge could not be regarded as a waiver of the forfeiture since the application contained a stipulation to the effect that the determination of whether the policy should be issued rested entirely with the officers of the company. On the other hand there are cases where the courts, with the California and other similar cases before them, have rendered contrary decisions. Moreover, as previously stated, some states seek to neutralize policy provisions like those discussed under this heading by enacting laws which make notice to the agent notice to the company as regards the insured's health, habits and occupa- tion. Powers of the Agent. A general agent's powers are co- extensive with those of his principal within the limit of the particular business or territory in which such general agent operates; while a special agent's powers extend to all acts necessary for the accomplishment of the particular transaction which he is engaged to perform. If acting within their ap- parent powers, agents make the company liable for their wrongful or fraudulent acts, omissions, and misrepresenta- tions. Provided the policy or application contains no restric- tions upon the agent's authority to waive forfeitures and even here we have noted disagreement in the court decisions the acts and knowledge of the agent in relation to anything pertaining to the application or policy are generally held by the courts to be the acts and knowledge of the company, thus estopping it from taking advantage of any forfeiture occa- sioned by the agent's errors or fraudulent acts. While there is not unanimity in the decisions, the weight of authority is to the effect that, in the absence of restric- tions, the company is liable not only for the acts of its agents, but also for the acts and knowledge of the sub-agents and employees to whom the agent has delegated authority. In in- surance it is a common practice, and is frequently found necessary, for agents to employ others to assist them in their work, and having delegated authority to them, the courts have regarded it as "just and reasonable that insur- 424 THE PKINCIPLES OF LIFE INSURANCE ance companies should be held responsible not only for acts of their agents, but also for the acts of the agents employed within the scope of their agents' authority." While it may be argued that the company has not authorized its agents to delegate their authority to others, and that it would there- fore be an unreasonable extension of the company's liability, it must be remembered that agents are employed by the com- panies in accordance with the usages and necessities of the busi- ness. Agent's Liability to His Principal for Injury Occa- sioned by Misconduct. The relation of the agent to his employer is such that he must never further his own personal interests by disobeying or exceeding his instructions. Any misconduct of the agent makes him personally liable to his principal for the damage occasioned. Among the legal text- books announcing this principle we may quote from Story on Agency, Section 217 : " Whenever an agent violates his duties or obligations to his principal, whether it be by exceeding his authority or by mere negligence or omission in the proper functions of his agency or in any other manner, and any loss or damage thereby falls on the principal, he is respon- sible therefor, and bound to make full indemnity." Legal Effect of Agents' Opinions on the Meaning of Provisions in the Contract. In the course of their daily business agents are frequently asked to express opinions on the meaning of policy provisions, and it is of the utmost im- portance that definite relations should exist between the com- pany and. its agents as regards the expression of such opin- ions. What, then, is the legal effect of the agent's opinion? The general rule is that no legal effect can be given to such opinions in case, for example, they result in misleading the insured as to the meaning of any policy provision. This view is based on the theory that an agent's opinion as to the mean- ing of any section of the contract does not create new or change old obligations. APPENDICES APPENDIX I HOW THE LIFE-INSURANCE SALESMAN SHOULD VIEW HIS PROFESSION i An address delivered by the Author before the Annual Meeting of the Baltimore Life Underwriters Association on February 20, 1915, and before the New York Life Underwriters Association on February 24, 1915. Life-insurance " salesmanship " and " profession " are en- tirely compatible terms; in fact, they should be synonymous. The time is rapidly drawing near when the cardinal idea un- derlying every business and vocation shall be service to the customer or client. On every hand among physicians, law- yers, teachers, bankers, investment houses, credit men, ex- porters, brokers and many other groups there is noticeable a distinct tendency to organize the component members within the group into associations with a view to standardizing the calling and elevating its ethical and utility phases. This is as it should be and constitutes true progress. It is therefore with pleasure that I have been following the concerted ef- forts of life-insurance salesmen to take stock of the standing of their group in the community and to combat the tempta- tions and meet the problems which are so peculiar to their calling. During the past year I have had my attention called to at least a score of able addresses on this subject delivered by leaders of your vocation. Throughout all I note the same general line of thought the advocacy of a high standard of honor and service. Many speak with a frankness that is per- fectly amazing. All refer to the " professional aspects " of the business. All want it to have the status of a profession and not that of a mere occupation as regards both the methods pursued and the quality of service rendered. Practically all, too, assume that in this way alone can the calling command 1 This address is based upon the subject master discussed in the S receding chapters, and is reprinted to illustrate the way in which fe-insurance salesmen should pursue their profession. 42.7 428 THE PKINCIPLES OF LIFE INSURANCE that general respect and confidence which it should rightly have. If I may now assume that the consensus of opinion is favor- able to placing life insurance on the plane of a profession, it is important to note that you alone have it within your power to make it so. All depends upon the attitude which you assume with reference not merely to the sale of a policy, but to the whole broad question of life insurance in its relation to the community. Now what shall that attitude be? In an- swering that question we shall be assisted by recounting the several concepts that underlie a professional career and by then applying them to your vocation. Briefly stated, four ideas, in my opinion, should be present in any definition of the term profession. These are: 1. That the vocation should be so essentially useful to so- ciety and so noble in its purpose as to inspire sufficient love and enthusiasm on the part of the practitioner to make it his life's work. One cannot regard highly the services of a pro- fessional man who looks upon his vocation as a side issue and who is not willing to devote to its practice his entire time and his best thought and energy. 2. That the vocation involves a science and in its practice an expert knowledge of that science. 3. That in applying this expert* knowledge the practitioner should abandon the strictly selfish commercial view and ever keep in mind the advantage of the client. Conscientious and disinterested service proper advice and guidance is the very essence of professional conduct, and in the long run the best policy. 4. That the individual practitioner should possess a spirit of loyalty to his fellow practitioners, of helpfulness to the common cause that they all profess, and should not allow any unprofessional acts to bring shame upon the entire profession. Unfortunately the public has a habit of jumping to general conclusions, and too frequently the selfish unprofessional con- duct of a few leads to a distorted and unfair view of an entire group. The Golden, Rule is applicable in this respect quite as much as in individual transactions. An application of these four ideas to your calling can leave no doubt that the terms " life-insurance salesmanship " and " profession " \re entirely compatible. In the first place, do life-insurance salesmen follow an inherently useful and noble calling, and are they absolutely necessary? Most decidedly. LIFE-INSUKANCE SALESMANSHIP 429 ; yes. Few institutions, indeed, so vitally affect the average ; family, the very basis of our whole social structure, as life in- surance. In fact, so intimate is this relationship that I am J accustomed to refer to v life insurance as a sacred duty, and i as the only absolutely safe measure to adopt as a means of > protecting loved ones against the want and misery that may be ': occasioned by premature death; likewise to refer to the de- liberate failure to provide such protection when necessary as a crime, as an act of a gambler, and a swindle upon a de- pendent household. Life insurance should constitute to-day a substantial item in every family budget, just like food, cloth- ing, rent and fuel. It is the only sure means of eliminating one of life's greatest gambles. It alone enables a breadwinner to capitalize his value as such for the benefit of those who de- pend upon that bread. It should do more than any other in- stitution to eliminate the curse of worry. Not only is it a powerful agency for inculcating thrift, but even for the person who can save it furnishes the only certain method of hedg- ing against the possibility of the saving period being cut short. Moreover, life insurance may be put to almost innumerable business uses, and in this connection let us remember that family welfare and business success are nearly always closely interrelated. As I stated in my address before the twenty-fifth annual convention of the National Association of Life Under- writers: "You have the right to feel that you are identified with one of the noblest professions in existence, ranking with that of the ministry, law, medicine and teaching. . . . Where the doctor fails to save the head of the family and where the pastor can only console, the agent may feel the supreme sat- isfaction of having been responsible for effecting a contract the proceeds of which, partially at least, continue the earn- ing capacity of the deceased and protect the dependents from want. The agent who, as the result of a life's work, has sold, let us say, three or four million dollars' worth of life insur- ance yes, any agent whenever selling a policy has the right to feel that he has performed in a practical way a very noble service to his fellow men in staving off worry and want." But these facts, you will say, are commonplace truths. Yet, granting that they are known, they are, as you all can testify, reluctantly practiced even by those who understand. One thing is certain : life insurance can be widely disseminated only through salesmen. This is demonstrated by the results attained by every governmental scheme of insurance which 430 THE PRINCIPLES OF LIFE INSURANCE is purely voluntary and permissive in character. On numer- ous occasions, for example, England has enacted laws provid- ing that the post office savings banks might be used as a medium through which the Government might sell annuities and insurance contracts. Purposely, however, these laws were not compulsory and depended upon the voluntary action of the public. What was the result? During the seventeen years of the operation of the act of 1864 only 6,524 life-insurance con- tracts and only 11,646 annuities were sold. The act of 1882 re- sulted in a similar showing. At the end of the twenty-fifth year of its operation the total number of annuity contracts in force aggregated only 2,930 ($297,307) ; the total insurance contracts only 13,262 ($3,727,000) ; while the average number of annui- ties written per year amounted to only 2,026 and of life-insur- ance contracts to only 677. Now let us turn to the second concept. Does life-insurance salesmanship involve a science and in its practice an expert knowledge of that science? The answer, again, must certainly be : " Yes." There is probably no other business subject which because of its complexity is so academic in character and pre- sents so many varied phases in its practical application. There is only one right plan of life insurance, viz, that based on sound mathematical theory. A thorough grounding in that theory is necessary to an understanding of the scientific fea- tures and practical applications of the business that underlie all of the many types of contracts sold. A knowledge of the science of the business alone makes possible the giving of correct and unevasive answers to the numerous questions that are asked of agents and the avoidance on their part of mean- ingless or unjust comparisons between companies and types of policies. Much of the loose talk which so many salesmen in- dulge in to-day when advocating their contracts is traceable to the lack of a clear understanding of the fundamental principles underlying rate-making, the operation of and necessity~for a re- serve, the nature and proper interpretation of the sources of the surplus and of similar scientific features of the institu- tion of life insurance. Life-insurance contracts also present many legal phases concerning which agents should be equipped to give proper advice. They should be in a position, too, to know and appreciate the numerous family and business uses of life-insurance protection. The latter, especially, affords a boundless field for study and thought, because there are few business men, indeed, who do not at some time face a busi- LIFE-INSURANCE SALESMANSHIP 431 ness situation the solution of which would be made simpler and less hazardous through the medium of some kind of life- insurance contract. A knowledge of the foregoing factors is necessary to the salesman if he is to be an expert in his sub- ject and if he is to appreciate fully his obligations to his client. But, as I recently stated : " It is not expected that agents should spend their valuable time in always telling all that they know. The application of knowledge need not nec- essarily involve long explanations, except when requested, and, like the physician, the agent may diagnose his case and con- scientiously perform his service without explaining his every act in detail." Now a few thoughts with reference to the third concept, viz, that the man who practices a profession should abandon the strictly selfish commercial view and ever keep in mind the greatest good of the client. This is the very essence of pro- fessional conduct, since the client, as payer, acknowledges his ignorance and dependence when he consults the practitioner, who, as payee, professes, impliedly or otherwise, his expertness to serve. Let it be remembered that it is not the company that pays the commission and renewals, but the policyholder ; furthermore, that such payments should not be predicated upon the consideration of mere friendship. Service to the policy- holder alone justifies the commission and renewals, and the dignity of the profession requires that they should be earned and not taken as a gratuitous favor from friend to friend. Life-insurance salesmanship to be compatible with the term " profession " involves more than the mere effecting of a sale. It should always involve a willingness to understand the in- sured's needs for life-insurance protection and to guide and assist him in selecting that type of contract and that form of settlement which will most advantageously protect him and his beneficiary. When about to complete the sale of a contract, it might be well to pause just a moment and ponder on this thought : Have I effected a transaction which I conscien- tiously believe to be the best, in view of the circumstances, that I can make for the insured and his beneficiary, and has my recommendation been wholly uninfluenced by the desire to increase my own compensation? A disregard of this serious view of your vocation may be likened to that of the lawyer who aims to enlarge his fee by unnecessarily counseling a long drawn-out procedure; to that of the physician who un- duly prolongs the period of attendance, or to that of the 432 THE PRINCIPLES OF LIFE INSURANCE teacher whose instruction is grossly imperfect or behind the times. It is the absence of this high motive which soon causes a representative of any noble vocation to look upon it as a " game," and it is sickening to hear so many reveal their at- titude by casually referring to the " game " of the business in which they are engaged. Such language and such thoughts should be ostracized in the field of life insurance. Numerous ways of serving the insured have, no doubt, sug- gested themselves to you during the years of your experience. So much has been said and written recently about "fitting" the form of policy whether term, whole-life, limited-pay- ment, endowment, etc. that I shall not emphasize this phase of the subject. But, besides familiarizing himself with the cir- cumstances surrounding the insured and assisting him to se- lect the right type of policy, there are, in my opinion, two matters which the agent should bear in mind at the time of effecting the sale. These two things are not generally known and appreciated by the public, and advice in regard to them is, therefore, desirable. The primary purpose of life insurance is the protection of the family, and where a wife, children or other dependents are named as beneficiaries, it is highly important that the real purpose of the policy, viz, their pro- tection, shall be realized. To this end the agent should be sure, in my opinion, to do two things: 1. He should bring clearly to the attention of the insured the importance of properly safeguarding the proceeds of the policy upon its maturity. He should explain the advantages of the ordinary and continuous installment policies and should contrast these with other forms of settlement, and with other methods of investment as regards safety, economy and con- venience. The longer I study life insurance the more firmly do I believe in the advantages and efficiency of income poli- cies. It is stated on good authority that about 60 per cent, of the insurance funds left to beneficiaries is lost through bad investment or dissipation within six years following the death of the insured. This experience is also true of other funds left to the beneficiary. On every hand we can point to exam- ples illustrating how easily and frequently the competency which a husband or father has provided through saving or in- surance is lost or foolishly spent by the heir or beneficiary. Modern income policies, especially where the circumstances jus- tify the use of the continuous income feature, are a guarantee against such a calamitous contingency. To bring this matter i LIFE-INSURANCE SALESMANSHIP 433 convincingly to the attention of each applicant for insurance is a real service. 2. The agent, in my opinion, should, for the sake of the fam- ily, give to the policyholder a clear understanding of the legal significance of the privilege reserved in the policy of changing the beneficiary at will. The right of revocation is treated dif- ferently in the contracts of different companies. Many con- tain a printed provision reserving to the insured the right of revocation at will, usually on the ground that such a prac- tice is supported by reasons of expediency and equity, in that the insured should, as a matter of right, have the privilege of controlling his policy. The primary purpose of life insur- ance, however, is to protect the members of the family named as beneficiaries, and the change of beneficiary clause should, therefore, be viewed from the standpoint of the claims of f creditors. Judging from recent court decisions, it is probable that a clause reserving full power to the insured to change the beneficiary at will subjects the policy to the claims of cred- itors and causes it, in case of the insured's bankruptcy, to pass by order of the court to his assignees. Reference is fre- quently made to the decision of the United States Circuit Court of Appeals on Nov. 9, 1909. (In re White, 174 Fed. i 333.) In this case the court even held that a policy which \ is not the absolute property of a married woman or her chil- dren is not exempt from the operation of the National Bank- I ruptcy Act by virtue of the law of New York, which was en- j acted for the protection of the interest of a married woman ; and her children in the husband's policy against the claims of 'his creditors. In view of this tendency to interpret a transferable bene- ficiary clause as giving the trustee in bankruptcy the power to distribute the cash value of a policy among creditors, it fol- lows that a policy taken out for family protection, if contain- ing such a clause, will have connected with it a hazard that the insured, in view of the future possibility of bankruptcy, should bear in mind and carefully consider. The introduc- tion of a clause giving the insured a free hand to change the beneficiary, or to surrender the policy or use it for borrowing purposes, introduces an element of uncertainty in a contract that in most instances should be made absolutely secure for the benefit of those for whose protection it was expressly taken out and who have the right to expect that the insurance fund, which is their sole provision against want after the decease 434 THE PRINCIPLES OF LIFE INSURANCE of the breadwinner, shall not have constantly hanging over it an element of uncertainty.- Not to protect' a policy against creditors may often result, as has been well said, " in accu- mulating trouble for a time when misfortune would be amply abundant." The possibilities of future bankruptcy do not seriously occupy the thoughts of the average person, yet sta- tistics reveal a surprisingly large number of business failures. Computations show that during the past thirty years the num- ber of actual business failures as compiled by Bradstreet, averages annually 1 per cent, of the total number of businesses listed by this organization. As has been well said, " The prob- ability of business mortality is as great as that of adult hu- man mortality at its average age. In fact, it is identical with the 1 per cent, shown by the American tables of mor- tality on selected lives at age 41." It is also noteworthy that in a year like 1907 about 19 per cent, of the total number of failures and over 55 per cent, of the failure liabilities were traceable to disasters, failure of apparently solvent debtors, and undue competition, i.e., causes which cannot be regarded as due to faults of those who fail. On the other hand, nearly 65 per cent, of the total number of failures in that year were either due to incompetency or lack of capital. If the foregoing contentions are correct, I am inclined to favor the attitude of those companies which purposely omit a change of beneficiary clause in their contracts, and which require the insured to specifically state his wishes in regard to this privilege. While the right of revocation and the re- fusal to give the beneficiary a vested interest in the policy may in occasional instances prove very useful, I feel that the applicant's attention should be called by the agent to the fact, as one company has recently stated, that " a policy contain- ing the unconditional reservation of the right to change the beneficiary produces an instrument identical with the one in which the estate is made the beneficiary." Then, if the ap- plicant still insists on having the privilege, it should be freely granted. But under those circumstances the insured asked for the privilege with an understanding of what he was doing and what his request might mean to himself and family in the future. In addition to the foregoing factors permit me to offer one more suggestion relative to the agent's service to his client. Is this service completed when the policy is sold and issued, or should the agent, if the circumstances permit, consider that LIFE-INSUKANCE SALESMANSHIP 435 his advisory relation to the insured and the beneficiary still continues According to my way of thinking, the latter is desirable, and most consistent with the dignity of the profes- sion, and in the long run, with the welfare of the agent him- self. Here, again, your experience has, no doubt, suggested numerous ways of serving the insured. But having in mind again the primary purpose of life insurance as a protection to the family, I would like to call attention to two forms of service. After life insurance has been acquired it is essen- tial that its protection should be conserved. As you know, this protection may be lost (1) before the maturity of the contract, and (2) after such maturity. My two suggestions .apply, 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-INSUKANCE 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 too narrow a groove. Kather 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 Eights 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 Section, 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 the 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 this 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 saicl 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 a. 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 Ithe 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. Upon 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. lie. 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 the 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. 11 e. 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 Ha, 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 LOAN AND SUEEENDEE 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 YEAR LOAN OR CASH VALUE PAID-UP INSURANCE EXTENDED TERM INSURANCE YEARS 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 7 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 OB CASH VALUE PAID-UP INSUBANCE EXTENDED TEBM INSUBANCE 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 fight 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-raid 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. CONTINUOUS INSTALLMENT TABLE AGE OF BENE- FICIARY NUMBER 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 TIFE INSURANCE AGE OF BENE- FICIARY NUMBER OF INSTALLMENTS STIPULATED 10 15 20 25 27 46.56 45.37 44.11 42.86 28 46.92 45.69 44.40 43.12 29 47.28 46.03 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 67.66 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 NUMBER 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 91.36 75.65 Age 71 72 92.69 76.14 and over 73 93.96 76.57 same 74 95.17 76.94 as 70. 75 96.30 77.24 76 97.35 Age 76 77 98.32 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 PKINCIPLES 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 II. 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 II 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?) c. 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? 452 THE PKINCIPLES OF LIFE INSURANCE 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. E. Which parent do you most resemble physically? 6. A. If you use wine, spirits, malt liquors or other alcoholic beverages, state kind used and how much in any one day at the most. B. How frequently do you use the amount stated? c. If you use any of them daily, weekly or monthly, state 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 ? G. 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? H ^ OQ 03 h 7. i B> 4 w3 - 111!} SQ S I s| iz;"-! J SH sis 2^3 ^ ga BO o fe g" e PH N^" M gsa <1 CO -< CO S? q cu 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 Kheuma- 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 Yarioloid? 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 INDUSTKIAL 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 35 Years Name of Insured John Doe Name of Beneficiary Jane Doe Relationship to Insured Wife Full Policy Amount 840. 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 PKINCIPLES 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. Reinstatement. 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 ISSUE END OF 3 YEARS END OF 4 YEARS END OF 5 YEARS END OF 6 YEARS END OF 7 YEARS END OF YEARS Yrs Wks Yrs Wks Yrs Wks Yrs Wks Yrs Wks Yrs Wks 26 27 28 29 30 31 32 33 34 35 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 4 4 4 4 4 4 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 ISSUE END OF 9 YEARS 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 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 PRINCIPLES OF LIFE INSURANCE AGE AT ISSUE END OF 9 YEARS END OF 10 YEARS ' END OF 11 YEARS END OF 12 YEARS END OF 13 YEARS END OK 14 YEARS Yrs Wks Yrs Wks Yrs Wks Yrs Wks Yrs Wks Yrs Wks 30 31 32 33 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 AGE 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 YEAKS Yrs Wks Yrs Wks Yrs Wks Yrs Wks Yrs Wks Yr fc Wks 26 27 28 29 30 31 32 33 34 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 13 13 13 13 12 12 12 12 12 11 84 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 $ Ji 15 15 15 15 17 17 17 17 $20 20 19 19 19 19 $22 22 22 22 22 21 SPECIMEN INDUSTRIAL POLICY 459 AGE AT ISSUE END OF 5 YEARS END or 6 YEARS END OF 7 YEARS END OF 8 YEARS END OF 9 YEARS END OF 10 YEARS END OF 11 YEARS END or 12 YBABS 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 YEARS END OF 14 YEARS END OF 15 YEARS END OF 16 YEARS END OF 17 YEARS END OF 18 YEARS END OF 19 YEARS END OF 20 YEARS 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 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 38 381 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 weeklj* 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 END OF END OF END OF END OF END OF END OF END OF AT 5 6 7 8 9 10 11 12 ISSUE YEARS YEARS YEARS YEARS YEARS YEARS YFARS YEARS 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 END OF END OF END OF END OF END OF END OF END or END OF AT 13 14 15 16 17 18 19 20 ISSUE YEARS YEARS YEARS YEARS YEARS YEARS YEARS 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 35.27 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 /L5.98 17.30 18.65 20.02 21.41 34 12.32 13.59 14.87 16.18 17.51 18.86 20.22 21.61 35 12.50 13.77 15.05 16.36 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 the 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 ANNUT CONTRACT THE LIFE INSURANCE COMPANY Single Premium $10,000 Age 60 Number Annuity : $863.70/100 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 made 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 CONTKACT 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 COUNCIL! t SEAL. / I 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 Order 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 said 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 i , , 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, \ Of EIY, / or , 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 my 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 questions, 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 iSubordinate 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 FEATEENAL 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 Kegent, 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, or 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 PRINCIPLES OF LIFE INSURANCE Recommended by . Applicant will write his name IN FULL. (Recommenders 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 r day of , 19. Number on Roll Book . , Secretary. QUESTIONS TO BE ASKED BY THE COLLECTOR ON THE NIGHT OF INITIATION. Ques. l s the date of your birth correctly stated above? not, please correct it. Ques. Have you changed your occupation since date 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 asse 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, 374-375 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 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, 29 471 472 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, 397-404 clauses relating to, 397-398 designation of, 406^07 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, 3'0-31 Capitalization of the value of a humac 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 payment 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, 88 474 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, *5 1-52, 87-88 premium charged for, 89-90 saving period hedged by, 94-97 sinking funds accumulated by means of, 39-40 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 i 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, 88-89, 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, 31-34 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 by, 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 Lamited-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 -130 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, 18-19 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, 39-40 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, 25g- 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 TL, 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- surance taxation, 366 (7) UNIVERSITY OF CALIFORNIA LIBRARY BERKELEY Return to desk from which borrowed. This book is DUE on the last date stamped below. 9>M> r ' JUL 14 i- . 5Nlay53RE TLU JAN - 5 1959 1961 01 JAN 9 SEP 1 ~ 1966 5 RECEIVED AUG18'66-9AM LOAN DEPT. LD 21-100m-9,'48(B399sl6)476 YC UNIVERSITY OF CALIFORNIA LIBRARY