oKtics onb Systems of 'fife Insurance. POLITICS AND HYSTEKIES LIFE INSURANCE BY ELIZUE WEIGHT. BOSTON: LEE AND SHEPARD, PUBLISHERS. NttW YORK: LEE, SHEPARD AND DILLINGHAM. 1873. Wi Entered according to Act of Congress, in the year 1873, By ELIZUR WRIGHT, In the office of the Librarian of Congress, in "Washington, D. C. WRIGHT & POTTER, Printers, 19 Province St., Boston, CONTENTS. Chapter I. Page Magnitude of the business. Mutual autocracy. Terrific de- cadence and its cause. Insurance and accumulation. " Cooperative " pure insurance impracticable. Natural Premium, How the commuted or artificial premium in- volves a combination of accumulation with insurance. Source of the mystery. Blunder of making the penalty for the non-payment of contracted premiums an increasing one. The endowment swindle. Self-insurance defined. " Insurance value." Difference of American and British Life Insurance, . . . ... . . . 1-16 Chapter II. MASSACHUSETTS NON-FORFEITURE LAW. How it grew out of the want of equity between the treatment of policy-holders paying all cash and those paying part in notes. Incorrect- ness of its " surrender charge." Reversionary dividends, or paid-up additions forfeited by non-payment of premium on original policy. Attempt to amend the law, how defeated. Minority Report on Cash Surrender Value Bill. Sale of old life policies in London. Swindle on an actual endow- ment policy. Bill as it passed the House and was defeated in the Senate. Discussion of " msurablc interest." Rea- sons why insurance should cease at 75. Relative issue of life, term and endowment insurance policies from 1858 to 1864. Protest of the president of a life-insurance company against illustrating the business as a series of bets. That ' president taken at his word, 17-67 Chapter III. SUB RENDER CHARGE. George W. Miller's Convention of state Superintendents. Prof. Bartlett's paper which defeated the Surrender Value Bill. Comments of the " National Insur- ance Convention " thereon. Reply by the writer. A co- nundrum on Life Insurance, . , . : ; ; . M49129 vi Contents. Page Chapter IV. SAVINGS-BANK LIFE INSURANCE. What is implied by a fixed rule of reserve. Importance of the distinction between in- surance and self-insurance being known to the policy- holder. The savings-bank feature of life insurance recog- nized by Judge Phillips. Can a minimum surrender value be stipulated ? Rationale of maximum surrender charge. How TO ADJUST THE PREMIUMS. Advantages of the sav- ings-bank system. Value of Life Insurance. Explanation of the pre-calculated analytical tables, with samples. The problem they solve. Its importance to stock as well as mutual companies, . 93-140 Chapter V. REDUCTION OF RATES. Reply to Mr. White. The author's confessions. The atonement he offers. Attempt to illus- trate the subject by a miniature hypothetical law of mor- ' tality, with interest at zero. The equitable thing contrasted with the ancient blunder. The equitable reduction of rates in the savings-bank system contrasted with Mr. Winston's proposed reduction, 140-151 Chapter TI. BLACK AND WHITE MAIL. Power of advertising over the press. White mail more injurious than black. The press in the New York premium war of December, 1872. How both sides fought shy of the truth. How the policy-hold- ers' money went for an innunicrable multitude of useless lines at a cent a line. What really did the business. The hydraulic pressure of money. A PRIZE OF ONE THOUSAND DOLLARS. What will certainly come of it in 1874, . . 151-162 Chapter Til. A WORD TO THE INSURANCE AGENTS OF THE UNITED STATES. From which the public also can see how they are paid and how thy ought to be, 162-169 Chapter VIII. A RECAPITULATION. Insurable Interest. Natural Premium. Artificial or level Premium. Self-insurance. Insurance Contents. vii Page Value. Surrender Charge. Assessment of Expenses. Loading of Premiums. True method of keeping the books of a life-insurance company. Surrender Value. Dividends on the " contribution plan." The true remedy of the pres- ent errors, 169-185 4@=- The reader whose arithmetic is a little rusty had perhaps het- ter read this eighth chapter first. Chapter IX. PREMIUM NOTES, LIENS, DIVIDENDS AND TONTINE POLICIES. The uses and abuses of notes and " lien." Excessive pre- mium the only capital of a mutual company. Hence when expenses are moderate surplus is inevitable whenever the death-claims are not excessive. Modes of dividing. Homans and Fackler the authors of the contribution plan. Approved by Professor Bartlett of West Point. What happened in January, 1870, in distributing the surplus of the Mutual Life on the contribution plan. Great blunder after great expense for science ; and who made it. What was the cause of all this. Evasion of law by tontine poli- cies. If they are to continue all laws -against gambling should be repealed, 185-201 Chapter X. THE MONEY QUESTION IN RELATION TO LIFE INSURANCE, . 201-216 Appendix. ACTUARIES' RATE OF MORTALITY. The author's acknowledg- ments. Papers by Mr. EMORY MCCLINTOCK, actuary of the North-western Mutual Life Ins. Co. of Milwaukee, . 216-238 THE POLITICS AND MYSTERIES OF LIFE INSURANCE, Chapter I. In the United States more than half a million of persons, chiefly men, have their lives insured for the benefit of those who will survive them, or, in many cases, for their own benefit, if they survive a designated age. The business is done entirely by corporations, more or less "mutual" in their con- stitution or charter, more or less regulated in their conduct by State laws, and more or less preyed upon by State officials. These corporations, few of which are over thirty years old, differ exceedingly as to the extent and amount of their business, and the magnitude of their resources ; their number of policies ranging from less than one thousand to more than seventy thousand, and their assets, exclusive of future premiums, from less than $100,000 to more than $50,000,000. We haye in fact the anomaly of a company, having an an- 2 Politics and Mysteries of nual revenue of $15,000,000, with about $60,000,000 in hand, which though constitutionally "mutual" and theoretically perfectly democratic, is, de facto, autocratic, the chief officer holding proxies enough to secure his own reelection, in spite of any opposi- tion short of the miraculous. An autocracy may be the best government in the world or it may not be, according to the character of the autocrat. The prejudices of o,ur country are certainly not in its : fayor. .In' the politics of life insurance, whenever takes. place, the individual constitu- ember,'' finds that if he would retreat from a position where he is a political ci- pher, he must make a sacrifice of money in some sort of proportion to the time he has occupied it. He perceives, rather to his dismay, that he went in without stipulating with due caution the terms on which he could get out, in case he should become dissatisfied. If he had exercised that prudence, the autocracy of the corporation would have been under heavy bonds for its good behavior, instead of holding the members under heavier and heavier bonds, to acquiesce in whatever it should please to do. That the life-insurance policy, in its usual form, is not a bargain which both parties enter into with their eyes open to all its contingencies, is sufficiently obvious, from the rapid rate at which policies are can- celled, with more or less loss to the individual, and Life Insurance. 3 sometimes with a loss, though generally with a gain, to the company. The rate of cancellation has so much increased of late, that in many companies hardly half of those who enter having bargained to pay from ten to fifty annual premiums, should they live long enough, ever pay the second. A recent State Eeport, shows 150,000 policies terminated in a single year, and only about 139,000 new ones entered. The fact that under the ordinary form of policy, the longer one stays in the company, the more it costs him to get out, must have something to do in accounting for this immense outward scram- ble. It cannot be that all these people have backed out because they have ceased to need insurance, or have found themselves mistaken in supposing that they needed it. The supposition is more reason- able that they have discovered the bargain was not quite fit to be made, and that inasmuch as there is a .considerable probability that the necessity for insurance will not continue through the term of the policy, it is better to cancel it while the cost is at its minimum. They may also have discovered that there is far more mystery than democracy in life insurance, no matter how purely mutual the plan. They may have discovered that a life policy under certain legal provisions, designed to protect the in- terest of the beneficiary, is equivalent to a man's making a will which he cannot himself annul. Few 4 Politics and Mysteries of men with their eyes open, would do this, even if the law allowed it. The object of this volume is to show that all the real benefits of life insurance can be obtained under a policy which can be perfectly understood by both parties, without obliging the individual to submit to any wrong at the hands of an autocratic or pseudo corporation, a policy which provides fairly and equitably for the contingencies of the party's ceasing to need insurance, or being unable to pay for it, as well as that of his death. There are two ways of providing for a surviving family: 1. Insurance, pure and simple ; 2. Accu- mulation. The former is immediate. It creates an estate instantaneously so far as the interest therein of heirs is concerned. The latter is slow, entirely too slow for the particular exigency, though it has the advantage that it will benefit the party himself in time. Yet it is what every man attempts, or ought to, whether he insures or not. Of insurance, pure and simple, when you cease to pay and still live, there is nothing left. It would be a some- what improvident citizen who should insure his life as long as it continued to be productive, and sur- viving that period, should have to resort to the poorhouse for his own support. For the purpose of insurance, life is divided into units of time, each measuring a year, during which the risk is assumed not to change, but from any one Life Insurance. 5 year of age to that which succeeds it the risk in creases according to an assumed scale, which is founded on the mortality observed of a large num- ber of lives of the same ages under similar circum- stances. Insurance, pure and simple, is when the risk of each year, no more and no less, is paid for at the beginning, in the course of, or at the end of the year. The perfection of it in theory is what is called "cooperative insurance," where, for example, a thousand persons agree to pay $1 each to the fam- ily of each deceased member. If the agreement is carried out, the first that dies, in consideration of his own obligation to pay, having actually paid nothing, leaves his family $999, drawn from other members. The second leaves $998. And so on. If the lives were all of the same age, and unexcep- tionable in health, an equal payment would be fair, and the number of them within a year could be so nearly predicted as to make it practicable to pro- vide for the death-claims by paying in advance, that is, by premiums equivalent to the risk of the year. If such premiums only were paid, there would, if the calculation proved correct, be nothing left at the end of any year ; and every year, as the vitality of the party decreased, the premium for the year would increase. This premium for a given sum insured, increasing every year according to the increased chance of the party dying in that year, it is convenient to call the natural premium. Insur- 6 Politics and Mysteries of ance, pure and simple, would be by the payment, annually, of these natural premiums. But in reality it does not exist, for reasons that are too obvious to need statement. The " cooperative plan," so far as it illustrates pure insurance, may be set down as impracticable. What does exist, is a plan which combines in the same policy a series of pure and simple yearly in- surances , with a plan of accumulation by annual deposits. And these two processes are so undis- tinguishably blended in the policy, as to be a per- fect mystery to the insured, if not to the officers of the company itself. The insured generally agrees to pay an equal annual premium, either during the whole term of the policy, or a considerable part of it. He knows pretty well that this is larger than the "natural premium," or what it will cost to in- sure the amount of his policy the first year. But he is not told in the policy how much of it is for the first year's risk, and how much for accumula- tion. All the information he can get is, that inas- much as his policy covers many years, including those future ones in which it will cost more than the whole of his premium to insure the amount of his policy for one year, the company must have something to accumulate to supply the deficiency. He is thus persuaded to leave this matter of the accumulation entirely to the company, and is proba- bly enticed into an agreement that in case he fails Life Insurance. 7 to pay any premium when due, he shall forfeit the entire accumulation in the company's hands, or when he wishes to surrender, shall have only what he does not value, a small " paid-up " policy. Now what is quite plain is, that the policy which combines insurance with accumulation is the right practical thing, if under the right conditions, inas- much as every person who needs insurance, also needs to accumulate, so that if he survives the proper period of insurance, he shall have the enjoy- ment of a more or less considerable accumulation, and because insurance pure and simple is really impracticable, for the want of a sufficient security for the persistence of the natural premiums. The permanence of the company depends not only upon the premiums being adequate to the risks assumed, but upon the policy-holder's being suffi- ciently bound to continue, so that the company may have a broad enough basis to realize death-claims nearly according to the assumed law of mortality. Precisely what the penalty of a non-performance of the contract on the part of the policy-holder should be, may be a matter of some doubt or difference of opinion. But that, if possible, it should be greater at the end of the first year than ever after, is simply a matter of demonstration. Here is a blunder more than a hundred years old. The penalty has been a constantly increasing one ! It makes a perfect farce of the accumulative feature 8 Politics and Mysteries of of the policy. It, in fact, enlarges a salutary pen- alty into a system of betting or gambling on per- sistence, totally unnecessary and foreign to the aim of the business. It has been the lot of the writer to be connected practically with life insurance for many years, either as an agent, a state commissioner of insurance, or an actuary. In the latter capacity he has had fre- quent occasion to ascertain, by various standards, the proper reserve which a company should have, to make distribution of surplus, and to give an opinion on the value of one company's business to be transferred to another. Commencing with a profound conviction of the usefulness of a policy to himself, and no knowledge of the principles of the business whatever, he assumed that science had done for it about all that it could, and for a long time took it for granted that what it had not done could not be worth doing. But old blunders will always show themselves when run into new fields. One, which, though very mischievous when con- fined to the ordinary whole-life policy a policy which itself commits another blunder of covering years of life that are really uninsurable , might have been tolerated or escaped observation a century longer, forced itself upon his attention when the American appetite for independence and self-insur- ance had multiplied endowment policies, of not very long terms. This sort of policy, which is the very Life' Insurance. 9 perfection of life insurance, the very thing for a high-spirited yonng man to take, by applying to it the old blunder that always adhered to the life pol- icy of putting expenses and commissions as a per- centage on the premium, was converted into a swin- dle. It was a swindle not easily detected, im- mensely profitable to the agent, but intensely unsat- isfactory to the policy-holder after being found out. The headlong rush into endowment policies, which began about fifteen years ago, without correct- ing the British error in loading the premiums and assessing expenses, and without distinguishing be- tween the insurance and self-insurance of a policy, is what has brought life insurance in this country to its present grief. This volume is designed to call public attention to the subject in such a way that our companies, which, in spite of all their errors, are generally in a sound condition, shall be obliged in their future business to give endowment policies that are fit to be made. When this is done, there will be small demand for any other kind. The first thing to be done is to achieve a distinct definition of the terms we shall have occasion to use. SELF-INSURANCE . This element of a life-insurance policy always exists whenever more than the natural premium for a single year, with the working expenses thereof, is paid. It is the same as the reserve on the policy, i* io Politics and Mysteries of at the end of the year, and is commonly called the value of the policy. The propriety and significance of the term " self-insurance " will be best under- stood by an example. Assuming interest at 4 per cent., and the Amer- ican Table of Mortality (that prepared by Mr. Sheppard Homans, on the experience of the Mutual Life Ins. Co. of New York), the annual premium for a whole-life policy of $1,000, at the age 40, apart from the addition or "loading" for expenses, is $22.36. This is the mathematical equivalent, under the assumptions, to the series of net natural increasing premiums, beginning with $9.42. But if $22.36 is paid instead of the $9.42, it is impor- tant to remark that the risk to be borne by the com- pany on the policy is diminished. It is supposed, for the sake of simplicity, that the death-claim, if it occurs, is settled at the end of the year, till which time the provision for it paid or in hand, at the beginning of the year, is on interest at 4 per cent. If only the natural premium of $9.42 has been paid, amounting to $9.79, at the end of the year, and the party dies, the other members, that is, the company, has to pay $1,000 $9.79=$990.21. If $22.36 has been paid, amounting to $23.25 at the end of the year, then the company has to pay but $1,000 $23.25=n$976.75. Hence the risks in the two cases are in the ratio of 990.21 to 976.25, and if the former is called an insurance of $1,000, then the latter is Life Insurance. n Q 7 fc. 7 f\ an insurance of only qnTrrX 1000=986.41. And the difference, 1000 986.41 = 13.59, is not in- sured by the company. But since the heir receives it as part of the death-claim, it is reasonable to say that the party insured himself to that extent. Thus, on account of the increase of the artificial net premium over the natural one of the year, for the amount insured, the business of the year necessarily resolves itself into two generically dis- tinct transactions. First, the party buys of the company an insurance of $986.41, for which he pays the natural net premium of *n x9.42= 9.29. Consequently the balance of his premium, 22.36 9.29=13.07, is a mere savings bank de- posit, which, increased at 4 per cent., makes up $1,000, by self-insurance or accumulation. If the death does not occur, then the $13.59 must remain in the company's hands, by mathematical necessity, as well as legislative enactment, to dimin- ish future risks, which is the same thing as to pro- vide against future deficiencies of the level premium. It is, in fact, a trust fund, accepted on the condition that it shall count on the death claim, if it occurs, and remain on hand to diminish the future risks, if it does not. It is not available for a claim on any other policy. The effect of paying the $22.36 the second y^ar, 12 Politics and Mysteries of is, that the company will have $35.95, which, at the end of the year will amount to $37.39, instead of the $10.01 which it would have had if only the natural premium for $1,000 had been paid. Hence the risks this second year are in the ratio of 989.99 to 962.61. Consequently, the insurance done by 962 61 the company is Q o 7 ' QQ X 1000972.34, andthebal- /o i *y y ance, $27.66, is the 'self-insurance, reserve, or "value of the policy," at the end of the second year.* It would be better, always, to call this the self- insurancQ value of the policy, to distinguish it from another very important and different thing, which is properly the insurance value of the policy, that is, the sum which, paid in advance, under the assumptions, would exactly pay for all the insur- ance which the company is to do under the policy, as distinguished from that which the party is to do himself. It will readily be perceived that the ratio in which the two processes of insurance and self-insurance or accumulation, enter into the business of each year can be as easily and accurately precalculated as anything else relating to the business, so that there is no excuse for keeping mixed up in mys- tery two things that are essentially different, and * The results would be slightly different by the Actuaries' Mortality, for which see Appendix. Life Insurance. 13 both perfectly simple and intelligible by themselves. And since the working expenses of a life-insurance company are much larger than those of a savings bank having the same amount of funds on hand, it is quite obvious that while the various premiums paid are divided between insurance and self-in- surance in exceedingly different ratios, only the wildest wreck of equity can result from assessing the expenses upon the premiums paid. Much less would come from assessing them on the amount of the policy, but that would only about half correct the blunder in the average case. There can be no reasonable correction till the insurance is carefully distinguished from the self-insurance on every pol- icy, and the significance of the " insurance value " of every policy is recognized, in short, till the insurance is treated on insurance principles, and the accumulation on savings bank principles. The peculiarity by which American is distin- guished from British life insurance, is the more distinct and pronounced recognition on this side of the water of the reserve on each and every policy as a trust fund, applicable only to the claim on that particular policy. Or what is the same thing, the recognition of the aggregate net value of all the out- standing policies as a matured liability to the living policy-holders. To this the American companies are more or less bound by State law, while the British are left entirely to be a law to themselves. 14 Politics and Mysteries of The practical difference is one of life and death, as a general fact. An American company may die, but unless it criminally evades the law, it will die solvent, a much milder calamity than that which overtakes about nine-tenths of the British offices. This means that it will be able to return to the policy-holders the trust fund, or accumulation. It will only be unable to continue its insurances. Even this mild calamity which is now impending, more or less, over all our offices, might be averted by heroically correcting the blunder of mixing things which are not homogeneous. Were the business of life insurance in this coun- try practically in the hands of scientific men, the practical errors would soon be corrected. What little science has been turned in this direction is all right, but it is very little regarded. The man who controls the biggest pile of policy-holders' money, regards scientific men not as guides but tools. If one does not suit him, he tries another. A$ to the men who control the smaller piles, they look to the bell-wether, and not to the stars, for their courses. The only hope of improvement is in the growing intelligence of the people themselves. It is only by the cultivation of thought, truth, and justice among mankind, that useful institutions can be kept from decay. There was included in life insurance at the start, too much falsehood, not by evil intention, but want of thought. It was im- Life Insurance. 15 mensely increased on this side of the water, when we made our policies, as we had good reason to do, more accumulative, and this was for want of thought. But a falsehood which creeps in unwit- tingly may be adopted by men of mercenary mo- tives, and used wittingly, with high pretensions, for a mean purpose. This has been done. Its tendency is but too plain. Let us suppose an institution, in- tended to promote a universal regard for truth, should use a lie to frighten people from lying; plainly, whatever might be its temporary success, it could not be permanent. Organized falsehood, no matter how good its motive, grows into certain failure. Power without justice, proves its own executioner. Truth is, after all, the vital force of society, transmuting itself into the forms of jus- tice, order and happiness. Falsehood, father and mother of ignorance, is the principle of social dis- ease and death. Nothing which is good for society courts concealment. Life insurance will be good for society, when the policy conceals nothing, but speaks so plainly on every point, as to leave the agent no opportunity to lie, if so disposed, nor the policy-holder any claim to be dissatisfied, unless it is with himself. The writer has discussed this subject in vari- ous journals, as different points and aspects of it have arisen during the last three years, and published a set of precalculated working tables, 1 6 Politics and Mysteries of with an introductory explanation, designed to give information to the ordinary, as well as the scientific reader. It appears to him that the happiest of these attempts to popularize a very dry though im- portant subject, will be more useful to the reader who wishes to get at the marrow and merits of it, than any set treatise. He has, therefore, arranged in the following pages, a selection from them. The algebra, which is more or less sparsely scattered through them, may be skipped without losing the pith of the matter. It is not to be supposed that the ordinary reader will in all cases become con- vinced that the solution of the difficulty here pro- posed, is the correct one, or the best that can be. He will wish to hear the other side, but he will not fail to notice this, that a liberal prize is of- fered to any one, who within a year will produce a justification of the practices of the life insurance companies, by me stigmatized as errors and blun- ders. The companies that persist in these errors and blunders, have a pretty strong inducement to add to this prize, should there be need of it. Therefore, if the attacks I have herein made on the received and long practised mode of doing the busi- ness, are not fully answered and repelled before a year comes round, from the date of that offer, the public will certainly know that it is because science and money can't do it. Life Insurance. 17 Chapter II. MASSACHUSETTS NON-FORFEITURE LAW. The writer had not been long in the office of In- surance Commissioner in Massachusetts, before he was struck with the fact that the penalty of forfeit- ure in different companies, and often for different members of the same, was very different. Many companies took half the premium in the note of the party insured. In case of forfeiture this note was never collected, so that the company, to which the note was precisely the same as cash, in fact paid a cash surrender value, equal to the amount of out- standing premium notes, while to the party who had paid the whole premium in cash, it would pay no surrender value at all, either in cash or further in- surance, in case of non-payment of premium when due ! This glaring violation of equity was urged upon the attention of the legislature, till the result was the Act of 1861, regulating the forfeiture of policies. For the want of any knowledge or recog- nition at that period, of "insurance value," as the proper basis of " surrender charge," the Act adopted the received absurd rule of making it a percentage of the reserve, limiting it to one-fifth, except so far as the reserve consisted in notes, which were left as cash surrender value, without charge. For this, and other reasons, that Act is very crude, and in- adequate to its purpose. It fails sufficiently to pro- i8 Politics and Mysteries of tect policies of large cash accumulation, and equally fails to interpose a reasonable or sufficient barrier against early lapse. In this respect it has the very fault of the premium-note system. It exacts too much of the company in the early stage of a long policy, and too little in all other cases. All that can be said for it is, that the Commissioner and the legislature met a strong demand for regulation in the best way they then knew how. The strength of the case will appear from the following extract from the Fourth Annual Eeport of the Massachu- setts Insurance Commission, 1859 : Public opinion has been too unenlightened to oblige the directors of these institutions to follow any particular rule for avoiding over-accumulation, and, left to themselves entirely, they seem in numerous cases to have attempted to take two courses at once on the one hand endeavoring to attract business by declaring large dividends, and on the other to provide for safety by not paying them for a long time if at all. Not to speak of other faults, this plan has the double disadvantage of not being either decided in its tendency or intelligible to the public. There are two general plans adopted for avoiding over- accumulation. One is to diminish the assets, and the other to increase the liabilities. The former, when the surplus is fairly divided among those who have contributed to produce it, is a very plain and satisfactory process, as well as perfectly safe, if not carried beyond the right mark. The latter, which seems to have grown out of the desire to divide and hold on at the same time, a feeling nearly as old as life insurance itself, is not so plain and is attended with some difficulties. Life Insurance. 19 According to this plan, when a mutual company finds itself in possession of much more than enough to reinsure its risks, or in other words, to meet its matured liability on them, it in- creases that liability at once by persuading or compelling its members to insure more, the additional sum insured being that of which each member's share in the dividend is the single premium, at his present age. So far as the members are concerned, if they do not want the ready money and do want the additional insurance, this would be all very well, provided the company gave an independent policy, but it attaches the addition to the policy already in force which is conditioned on the punctual payment of its annual premium. If that premium should be paid punctually for twenty years, and one payment be then omitted, not only the policy would be forfeited, but the additional insurance, though fully paid for by what was the same as cash, and now increased in value, would go to nothingness with it. The absurdity of having the forfeiture of an annual-premium insurance work the forfeiture of one on which the premium has all been paid down, is too flagrant to need dwelling on, yet it is the practice in several of the companies doing business in this State. The excuse offered for this palpable injustice is, that every insuree is made aware, before taking his policy, that such is the condition of forfeiture, both of it and all the additions that may be made to it. If a person in such circumstances, commencing a life-long experiment, does not misunderstand the conditions of the policy, he may misunderstand his own strength, and may be very unwise in piling up penalties to be visited years hence on his want of punctuality. Why should the company invite him to do it ? In regard to the forfeiture of the original policy itself by non-payment of premium, we shall have more to say by and by, but in regard to new single premium insurance, or reversionary dividend, whether liable to forfeiture or not, if imperative upon the company, at the option of the insured, it involves the absurdity of insuring 2o Politics and Mysteries of without selection. The worst lives only will choose rever- sions, and this must tend to injure the company. Only where it is compulsory on all the members to accept reversionary dividends, will the average vitality of the members be secured for this class of insurance, and even in that case, if, as is sometimes supposed, the beneficial effect of selection wears out, it must be worse for the company than to return the surplus. It is true that by this sort of addition to the policy, while the liability to forfeiture is not much diminished, the company will gain much more if it takes place. Ought that to be a motive with an institution which claims to be rather philanthropic than mercenary ? The companies that have resorted to this plan of avoiding surplus or preserving the proper relation of assets to liabili- ties, and the sums they have added to the amount insured by annual premium, are as follows : State Mutual, Worcester, ..... $84,180 86 National, Vermont, 16,144 24 Manhattan, New York, 137,515 00 Mutual Life, New York, 3,111,354 69 Total, $3,349,194 79 Here is an aggregate of more than three millions of dol- lars of insurance for which the companies have been paid in full, every dollar of which is liable to be forfeited by the non- payment of premium on other insurance ! The present value of this insurance has been carefully calculated by us, but has not been kept distinct from that of the policies to which it is attached. It probably exceeds one million of dollars. Ex- cept in the case of the Mutual Life Insurance Company of New York, it is all attached to whole-life policies. The re- versionary dividends of the Mutual Life, to the sum of f 13,- 853.67, are attached to endowment policies, and are payable Life Insurance. 21 with the policy. To the sum of f 41,657 .07, they are attached to term policies, and though cast as reversionary, or at single premium for the whole life, are payable at death only in case the death takes place within the term for which the life is insured in the policy. To illustrate : suppose the holder of a seven-year policy, which has two years yet to run, is entitled to $84.85, as his share of cash surplus. The company, in- stead of paying it to him in cash, adds f 200 to his policy, his age now being 40, and $200 being the amount which a single premium of $84.85 will insure, payable whenever death occurs. But he must forfeit this paid-up policy of $200 by not dying within two years ! This may be no fault of his, for perhaps he cannot help living. It may be considered a trifling or impertinent question, but why should not the com- pany either pay the $200 whenever the death occurs, having received the full value for that insurance, or else give him the value of $84.85 in insurance for the remaining portion of his term ? This would require, for a single temporary premium similarly loaded with their life premium, an addition to the policy of $3,872.84. It is very true, and only fair to say, that this company's practice is somewhat better than its principle, for if at the close of the term policy the holder takes out a new policy for the whole life which we suppose he may do if his health is sufficiently good the company will add to it the reversionary dividend attached to the former policy. We have been the more particular to call attention to the extreme case of these reversionary dividends, in the hope of attracting more attention to the general question of the for- feiture of life policies by failure to pay the periodical premium at the time specified in the policy. As we have already shown, a mutual life insurance company partakes of the nature of a savings bank. Money is deposited to be returned certainly, but at an uncertain time. Therefore, taking one policy with another, there must be a long process of accumu- lation, and the annual premium on a life policy, taken at any 22 Politics and Mysteries of age, must be much larger than is exhausted in paying for the insurance of any one of its earlier years. Hence at the close of any year, when the premium of the next year is clue and not paid, there is always in the hands of the company a balance which it has not earned. If the insured pays his premium before the last minute of grace expires, the balance continues to be his, and his insurance is kept good ; but if he does not, his balance goes to the company, by the conditions of the policy and the law of the land. He may have paid his premiums regularly for ten years and have several hundreds of dollars in the general fund, and yet because one hundred is not paid to-day, he may lose it all, and what is worse, if he dies, his widow may receive neither the amount insured nor the value of his policy. It would hardly be deemed fair to have one's note protested in a bank where he had funds deposited to several times the amount for the express purpose of paying it. Turning from the literal conditions of the policy to the reason and equity of it, we shall see that the analogy is sound, and that a policy ought not to become void for non-payment of premium till the sum already paid has been exhausted in temporary insurance, or in other words, till the policy has no longer any value, and nothing should be forfeited but the right to reinstate it. It would be penalty enough if penalty is necessary to secure punctuality to have it placed at the option of the company whether the policy should be restored to its character of a whole-life policy by the payment of the back premium and interest, after having sunk to that of a temporary policy by an omission of payment. We do not think it would be a law impairing the just obligation of contracts,* but quite the contrary, which should enact that hereafter any policy issued by any company char- * The Act finally passed applies only to policies issued after its date. Some, if not all the Massachusetts companies have voluntarily applied it to prior policies. Life Insurance. 23 tered by authority of this Commonwealth, after lapse for non- payment of premium, should nevertheless be good against the company in case of death, should that event occur before the value of the policy, at the time the last premium was due should be exhausted in temporary insurance the value of the policy and the term of the temporary insurance to which it shall entitle to be deternmined by the rules adopted by the Insurance Commissioners, allowing 25 per cent, of loading on the net temporary premium. For example, in the registry in this office, of policies in force against the New England Company, policy number 2,893 was issued January 2, 1850, to a person then aged 50, insuring for life $5,000. Its net value, as appears by the registry on the 1st of November last, was $1,027.01. On the 2d of January last, when the premium was due and before it was paid, the value had diminished to $1,016.68. If the insured then paid the pre- mium of the company, $235, he paid, as compared with the net premium adopted for this valuation, $56.12 as the " load- ing " for expenses, or 23.88 per cent, of his premium, and the balance, $178.88, went to increase the value of his policy, which became at once $1,195.56. When the next year's premium becomes due, January 2, 1860, the policy will have diminished in net value by $61.36, the net cost of the year's insurance, which the company has earned, and it will be then worth $1,134.20. Should the holder fail to pay the $235 of annual premium that day, he will forfeit to the company the $1,134.20, and if he dies the day after, his heirs will not have any legal claim to one cent of the $5,000. The officers of the company, as we all know, if the insured should seasonably request them, would do everything in their power to prevent the lapse, and would not refuse to lend the amount of the premium on the pledge of the policy. And after the lapse they would allow the policy to be reinstated, if the health should be good. But they are under no legal obligation to do this, and should the holder for any reason, or the want of 24 Politics and Mysteries of it, allow the payment to be omitted and be overtaken by death, the officers would not feel themselves at liberty, how- ever much disposed to do it, to pay either the loss or the value of the policy at the time of the lapse, though, having been over-paid by the " loading " for the expenses. The com- pany has no more right in equity apart from the letter of the contract to hold the net value of the policy after refusing to pay the loss, than it has to rob the house of the deceased of an equal sum. Regarding the $1,134.20 as the gross or " loaded " single premium for a person 60 years of age, it is sufficient to insure $5,000 on his life for the term of six years and twelve days, and the company, not returning the value of the policy, would be no loser by paying the $5,000, should death occur at any time within that term. What we would most earnestly recommend is, that the company should be obliged by law to do it. Let the failure to pay the premium as stipulated only release the company from the obligation to insure beyond the time and amount already paid for. Apart from the consideration of justice to the insured, we believe policies under a legal provision of this kind would be greatly preferred, and would attract business to the companies issuing them. Profits caught by the trap of forfeitures frighten away ten times their amount, deterring the most prudent people from running the hazard of life insurance. In 1870 this law, though somewhat popular, had become so vexatious to the executive officers of the companies, in several respects, that some of them applied to the writer to aid them in getting it amended. Having by this time become aware of the mistake in the surrender charge, and having always been aware, of certain other troublesome imperfections in the law, he gladly undertook the task, and drafted the bill which will be found fur- Life Insurance. 25 ther on, for fixing a cash surrender value, with an adequate surrender charge, as a substitute for extended insurance. He understood the presi- dents of at least two companies, to approve this bill, and he expected their aid in recommending it to the legislature. But it would have the effect to prevent the agents receiving the exorbitant commis- sions they now do on certain classes of policies. This sealed its fate. The agents discovered its ten- dency, and raised so vigorous a howl that the pres- idents gave it no support, though they exhibited no animosity towards it. In spite of the active oppo- sition, it passed the House of Representatives by a large majority. Its opponents, however, cunningly introduced into it an amendment, applying it to all companies doing business in the State whether char- tered by it or not. This brought to the aid of the opposition in the Senate, an immense reinforcement. Judge McCurdy of Connecticut appeared as the lobby representative of the Mutual Life Insurance Company of New York, and produced great effect by the statement that Prof. Bartlett, the distin- guished actuary of that company, had the subject of "surrender charge" in hand, and had arrived at results very different from those of Mr. Wright in- corporated in this bill. These results would be published in due time, and he'begged the Senate to postpone the subject till Prof. Bartlett's paper should be published. It was done, and that paper 26 Politics and Mysteries of has since been published and revised. The revised form of it, with the writer's reply, will be found on subsequent pages. Here follows the minority re- port of the Insurance Committee which introduced the bill to the House, a minority of one, which will not probably have reason to be ashamed of its report. [House Document, No. 387, 1871.] MINORITY REPORT. The undersigned, a minority of the Committee on Insur- ance, asks leave to submit the accompanying Report and Bill. JOHN NEWELL. A healthy man stands about 8 chances out of 1,000 of dying within one year at the age of 27, about 9 out of 1,000 at 33, about 10 out of 1,000 at 39, about 11 out of 1,000 at 43, 12 at 45, 13 at 47, 14 at 48, 15 at 49, 16 at 50, 17 at 51, 18 at 52, 30 at 60, 44 at 65, 65 at 70, &c. Hence it costs eight times as much to insure a given sum for one year at 70 as at 27. If a mutual life insurance company of several thousand members could be created, maintained and operated with no other expense than the payment of death-claims, a healthy man at 27 would need to pay only f 8 to be insured for $1,000 for one year; and at 60 only f 30 for the same. But the man at 27 wishes more than one year's insurance. He does not like to have the policy cease at a stipulated age, lest when that time comes his health should be such that the company will refuse to renew the policy. Therefore he wishes to bind the company to continue the policy as long as he pleases to pay the premium. If ther^e were no necessary working ex- penses, and every member could be depended on to continue paying his premium according to Agreement during his whole life, the man at 27 might begin by paying, for $1,000, f 8 the Life Insurance. 27 first year, a little more the second, and so on till at 33 he would pay $9, at 39 $10, at 70 $65, and at 99, if he should live so long, he would pay about $940. But it is impossible to create or maintain a life-insurance company large enough to make anything sure without great expense, and the members cannot be depended on to perse- vere in paying premiums, especially increasing ones, unless they are to forfeit something besides the right to be insured by ceasing to pay. Hence the company charges a person aged 27 on a policy for $1,000 for the whole life, an annual premium payable during life of $15.56 for the insurance, and about $3.89 in addition for expenses, making $19.45. As to the $15.56, from what has been already said, it is plain that it will exceed the company's risk till the age of 49, or 22 years. If the party reaches 49 alive there must then be a fund on hand to the credit of his policy of $256.86. If he dies that year this fund goes to help pay the claim of $1,000, so that the other members have to pay only $743.14. In fact, in every practicable form of insurance covering the whole life or a long term, the policy, historically considered, is a combination of a series of insurances by the company, with a series of self -insurances, or insurances by the party himself, effected either by his money or his note in the hands of the company. According to the Massachusetts rule of re- serve, the relation of these two insurances, in the successive years of a policy for $1,000, entered at 27, and payable at death whenever it may occur, will stand as in the following table. It is assumed that no one can live beyond the age of 100, so that a whole-life policy becomes in fact an endowment policy, payable at 100, or previous death. Omitting, for brevity's sake, the intermediate years, the first and last years during which the policy may exist will have the two insur- ances in any year equal to $1,000, thus : 28 Politics and Mysteries of YEAR, . 1st 2 543 58 91, 859 77 r& 562 27 92, 877 77 re 581 03 93, 896 25 ^7 599 88 94, 903 77 rs 618 81 95, 942 69 F9, 637 79 96, 1,000 00 50, 656 82 LIFE. LIMITED PAYMENTS. For reasons stated 7?' T TEMPORARY. SINGLE PAYMENT. Here or (5) TEMPORARY. ANNUAL PAYMENTS. Take the Reserve R^, as having arisen from a paid-up pol- icy of which the reversionary amount is determined, as be- fore, and we get (6) Life Insurance. 77 SIMPLE ENDOWMENTS.-T-SINGLE PREMIUMS. The company has no interest in the longevity of the hold- ers of this kind of policy, on the contrary, by the principle of the Tontine, its interest is in their early death, at least death before maturity. The reserve on this kind of policy being R x , there are Z^, chances for and against the company: of these d x +d a>+ - L + tf*+m_i, favor lapse by death; and the surrender value is given by d x +d x _L.i+ d x . x+m _ l o ; ' m xwv ?T (?) SIMPLE ENDOWMENTS. ANNUAL PREMIUM. The reserve on this being ~R' X , ENDOWMENT ASSURANCES. SINGLE PREMIUM. Take sum of equations (5) and (7) (9) ENDOWMENT ASSURANCES. ANNUAL PREMIUM. Take sum of equations (6) and (8) ('> The first terms in the brackets of equations (9) and (10), become very small for short term policies and for small amounts, and may be neglected without much error. 78 Politics and Mysteries of The following example of a ten-year endowment assurance, issued at age 35, for $1,000, will illustrate : AGE. Surrender Value. AGE. Surrender Value. 36, $72.486 41, $516.974 37, 149.921 42, g 625.979 38, t 232.673 43, 741.553 39, B 321.130 44, . 866.167 40, 415.736 45, 1,000.000 Such is my solution of the question of surrender value for the more popular and common policies, in so far as the ele- ments that pertain to this complex problem have been sub- jected to mathematical analysis by myself. I like it, and it suits me better than anything of the kind I have yet seen. It gives surrender values more equitable and considerably greater than companies have been in the habit of paying. Permit me, in closing this letter, to express the hope that the labors of yourself and your colleagues in the convention, may result in greater uniformity in the Insurance laws of the different states, and in the dissemination of knowledge on this and kindred subjects, which shall prevent unwise and unfriendly legislation. Very truly yours, WM. H. C. BARTLETT. [From the Insurance Times, September, 1872.] SURRENDER CHARGE. " The present value of the sums the policy would contrib- ute from year to year, if continued in the company in its present condition, to pay death-claims on other policies, will pay in advance for all the insurance the policy-holder will get from the company if he remains in it, because it pays for insurance on the amount the company has at risk from year to year, and the policy-holder's own money on deposit Life Insurance. jg makes up the balance of the policy. With the light before us, we have utterly failed to see that this has any relation to the surrender charge a company should make in case a pol- icy-holder withdraws. When the actuaries agree amongst themselves on this point, the subject will merit, and will probably receive further consideration at the hands of those most interested, the policy-holders and the companies." Report of the National Insurance Convention, second ses- sion, Appendix, page 75. The italics in the quotation above are mine, and intended to express some surprise that such a sentence should fol- low that which precedes it. If the Superintendents cannot see that there is any relation between the amount of the in- surance business withdrawn, by a policy-holder, in cancel- ling his contract and the charge the company should make against him for withdrawing, there seems little use in dis- cussing with them w^hat that relation should be. Suppos- ing the policy-holder and the company were equally desir- ous of cancelling the contract, the policy-holder as much wishing to be released from further payments, as the com- pany from carrying % the risk further, there should be no charge at all. But if the policy-holder alone desires to be released, and the company considering that the future pay- ments will more than compensate for the future risks, wishes to retain the policy, it seems necessary and inevitable that the advantage to the company of retaining the policy must bear some relation to the present value of the future pay- ments. Of course it could not equal it, for that would be to suppose no risk of dying. The charge should, if possi- ble, be equal to the advantage surrendered. This advantage is a certain portion of the normal costs of carrying the future risks. Other things being equal, it cannot but be proportional to the present value of those costs when we compare two policies. But utterly as the Superintendents have failed to see this relation, or any other by which the proper charge for the 8o Politics and Mysteries of surrender of a policy can be determined, they admit that when the actuaries agree among themselves on this point, the subject will merit and receive the attention of the policy- holders and the companies. I respectfully submit that it deserves their attention the more, if the actuaries do not agree. The more the doctors differ, the more it behooves the patients to look out for themselves. Judging from the expressed opinions of the actuaries re- ferred to in this Report of the National Insurance Conven- tion, they do agree in seeing some relation between surrender charge and insurance value. They only differ as to how this relation shall be applied, or perhaps, as to whether the charge should have any relation to anything else. Now it is quite possible that by a diligent study of these opinions, and the reasons expressed to sustain them, the policy-holders and the companies may be able to satisfy themselves which of the actuaries is correct. It is with a view of aiding in this study that I refer to Professor Bartlett's elaborate paper on this subject, printed in this " National In- surance Report," pages 6-10. In regard to a single premium life policy, the distinguished actuary of the Mutual Life distinctly admits that the proper surrender charge has a relation to the insurance value of the policy at the time of surrender, and to nothing else. But for reasons which he does not very distinctly state, and which are very far from being apparent, he fixes the charge at precisely one hundred per cent, of the insurance value. That is to say, he would give the retiring member his self-insurance, " the money working to reach the sum assured," and retain the whole of that sum which is working to pay for the insurance he will receive during that process. It certainly cannot be said that this is an unsafe proceeding for the company, for it exacts, in regard to the future insurance, full payment and carries no risk ! The handle of this jug is entirely on one side. The retiring member, for the sake of getting back his Life Insurance. 81 own deposit, not a dollar of which could ever be used to pay any death-claim besides his own, pays the company not merely what profit it might expect to make by insuring him, but the whole cost of insuring him, supposing him to be a risk on which no profit could be made. This is exactly as if B should hire a horse of A for a week, agreeing to pay $30 for its use, and depositing with A as security a bond for $ 100. After a day's use, he offers to surrender the horse, pay $5 for one day's use, and the damage to A by the loss of profit on the other five days. " No," says A, adopting the logic of Professor Bartlett, " surrender the horse, and pay me the other $25 also, and the bond is yours." Even this on the part of the livery-stable man would be liberal compared with what some life-insurance men have been known to do. Let me illustrate by one of Professor Bartlett's own exam- ples. Using the " American Experience," at four per cent., the reserve on a paid-up policy for $1,000 is $367.58. Of this, $139.69 is the insurance value, or the sum which, accumulat- ing at four per cent., will be sufficient to pay for all the yearly risks to be borne by the company. These risks, it is to be remembered, are a series beginning with the complement of the reserve for the next year and gradually diminishing to nothing at the last. The residue of $227.89 is accumulating at the same rate of interest, so as to make, in addition to the sum insured by the company, exactly $1,000 at the end of any year in which the death may occur. This $227.89 is there- fore a mere deposit, the whole function of which is to limit the company's risk till it ceases at 95. There is no possible profit to be made out of it by the company, and therefore, if the policy-holder retires, Professor Bartlett very properly ad- mits that he may withdraw the whole of it. But although it is clear enough that if he withdraws he will not *enjoy another particle of the insurance for which he has paid $139.69, Professor Bartlett insists that he shall leave the whole of that with the company. Where is the equity of making 4* 82 * Politics and Mysteries of people pay as much for nothing as for something ? If it costs something to carry even the lightest risks, it must be worth something to be released from carrying them, and this some- thing, whatever it may fairly be supposed to be, should be deducted from the $139.69 and given to the retiring member, in addition to his deposit of f 227.89, and only the remainder should be retained by the company as a surrender charge. The quality of Prof. Bartlett's " equities of an actual surren- der " becomes still more apparent when he proposes to apply them to a paid-up term policy. Here his abbreviated formula to express the surrender value, Q, of a policy for a unit to run m years is, Putting zz=36 and m=d we have by American Experience 4 per cent. (^ C 3 6 R 3Y. 8 -- Q025706. ^36 Hence the surrender value for f 1,000 is $2.57, while the re- serve is $70.26, making the charge $67.69. This latter sum would pay for all the insurance to be done by the company in nine years. If the $2.57, which was sufficient to provide for the small self-insurance on such a policy, is all that the retiring member has taken away on releasing the company from its obligations, he is likely to carry with him more awe for the mysteries of life insurance than admiration of its science or respect for its justice. There is not much term insurance in existence, and very little of that is paid up. And there are still fewer pure en- dowment policies of any sort, so that the value of surrender for thbse two classes of policies is comparatively of little practical importance. But the most desirable and popular policies are those which may be regarded as combining term insurance with pure endowment, though for business purposes Life Insurance. 83 it is far more convenient to regard them as combining a series of diminishing insurances with a series of annual trust or savings-bank deposits, and to eliminate altogether the ele- ment of chance from the endowment part of the business, making it, in fact, self-endowment instead of tontine. For such policies a better rule of surrender than has thus far been much practised is a vital necessity. Towards such a rule Prof. Bartlett would have taken a long stride if, when he came to consider the paid-up pure endowment, he had not deserted his principle of making the insurance value the sur- render charge. If he had stuck to that, his abbreviated for- mula (7) page 9, for the value of Q for a unit of policy, would have been which, putting x=36 and m=, as before, would give SQ=. 700.24, if I do not mistake the figures. The reason why this surrender value exceeds the reserve, which is only $642.65, is that the insurance value of this policy is necessarily negative. The application of the principle here .would of course be as frightful to the company, as in the other case it was to the retiring member, . but it is mathematically as good in this case as in the other, the hypopthesis being that the retiring life is better than the average, which implies that the company can well afford to pay something to get rid of it. But since in the case of pure endowment it is the worst lives that are most tempted to retire, and it is for the interest of the company to have them remain, it is very proper for the actuary, who is paid by the company and not by the retiring members, to propose a different principle of surrender in this case. By the contract the company has agreed, we will say, to pay $1,000 to a party on his reaching the age of 45, and as a fair consideration for his chance of receiving it he has paid a sum which, at his present age of 36, has become $642.65, the whole of which and its interest he is to lose if he dies 84 Politics and Mysteries of unckr 45. On the hypothesis that money is worth 4 per cent., and the life is an average one, the company has nothing to gain or lose by the contract, and of course the equitable surrender value is precisely $642.65. But the company will gain by the continuance of the policy if the life is worse than the average, and Prof. Bartlett, on this hypothesis apparently, proposes, as a penalty for. retirement, to deduct $54.82 from $642.65, and return $587.83. In general terms he proposes to find Q, the surrender value of a unit of paid-up endowment, by the formula (7.) : y"v ~TT ^jz-t-m For the particular purpose of guarding against the loss of profitable pure endowment policies this is no more objection- able than charging the whole insurance value on insurance policies, and, indeed, not quite so much so. And there is much ingenuity in getting rid of the negative sign.* But the * Professor Bartlett's surrender charge in this case is for a unit of policy, * which differs from the insurance value, or present value of the negative normal costs of insurance, not only in being positive, but in being nec- essarily a little smaller than which expresses the insurance value; because, while he discounts r m E> x by both mortality and interest, from age x+m to x, into he also discounts in the same way 1 r m R z> the accumulated yearly tontine profits (properly enough assumed to be positive for the purpose above referred to) at age x+m into Life Insurance. 85 Professor does not leave it for this particular use, which is rather imaginary than real. He comes down upon paid-up endowment insurance with it, and is thus enabled to cut a mathematical antic which is truly marvellous. He adds the surrender value of the paid-up term policy, found on the hypothesis that the life is better than the average, to the sur- render value of the paid-up endowment for the same term, found on the contrary hypothesis that it is worse, and thus finds the surrender value of the combined paid-up endow- ment insurance policy! Thus combining the two policies above cited, they have a reserve at 36 of $712.91. Adding the two surrender values, f 2.57-(-? 587 .83in:f 590.40, we have made a charge of f 67.69+f 54.82=f 122.51, or more than ten times the whole insurance value of the combined endowment insurance policy. The adding of the surrender values is a perfectly correct proceeding, and if the professor had not de- serted his principle in treating the pure endowment, the sur- render charge for the endowment insurance would have been exactly its insurance value, or flO.lt). As in this combined policy the endowment bet never fully manifestly a smaller result than if he had discounted the amount at age x+m of each yearly tontine profit, from age x+m to the date of its development by the rate of interest only, and from that date to age x by both mortality and interest, and taken the aggregate. And here I wish to express my regret, as I have had occasion to for such blunders often before, that on recurring to my own formula for the insurance value of a paid-up pure endowment in the preface to the revised edition of my 4 per cent. Valuation Tables (page 7, equation nearest the bottom) , I notice an unaccountable error in the omission of a positive term in the second member of the equation, which, however, any algebraist will readily supply by subtracting the equation for the insurance value of a paid-up term policy from that for the insurance value of a paid-up endowment insurance for the same term, as given in the remarks that precede the error. 86 Politics and Mysteries of hedges the insurance bet, except in the last year, and as the same life cannot be both better and worse than the average at the same time, the more reasonable assumption for the com- pany to make, in case a surrender of one of these policies is called for, is that the life is better than the average. If so, the company loses by the surrender of the term policy and gains by that of the endowment, in proportion to the insurance value of each. That is to say, if it is equitable to charge the retiring member as Prof. Bartlett proposes to do, $ 67.69 for the surrender of the term policy, it must be equally so to credit him $57.59 for the surrender of the endowment. He will then pay full price for all the future insurance on the policy without getting it, which is certainly ten times too much, unless it can be proved in some way that trustees have a right to charge for their services more than the interest of moriey entrusted to them. Notwithstanding the palpable want of equity or fairness in charging the whole insurance value for surrender in any case, Prof. Bartlett's plan is, on the whole, a considerable improvement upon what has been usually practised of charg- ing one-half or one-third, if not the whole of the reserve, for in regard to annual premium policies offering to surrender, in which case his rule would work the most onerously to the retiring member, it is not the insurance value 'of the policy to be surrendered which he charges, but that of an imaginary paid-up policy with the same reserve. By this substitution of a vicarious policy for the real one, without much regard to the question whether the company could afford to give such a policy or not, it comes about that the surrender charge on an ordinary life policy of annual premiums is made to vary from two or three per cent, of its insurance value, which is quite too small, to a little more than fifty per cent, which is much too large but not so bad, I cheerfully admit, as one hundred per cent, would be. It seldom runs much above thirty per cent, of the reserve, which is an obvious improve- Life Insurance. 8 7 ment upon fifty per cent, when the reserve is large. It is easy, by comparing almost any two examples to see the prac- tical arbitrariness of the rule. These will suffice. A is a life policy for $ 1,000, entered at 35, which has paid fifteen annual premiums. B another of the same amount on the same life, entered at 49. Their respective re- serves, insurance values, surrender charges and surrender values, according to Professor Bartlettfs formulas, are as follows : Reserve. Ins. Value. Sur. Charge. Sur. Value. A, ... B, . . . $205 87 22 23 $221 80 273 55 $65 62 7 26 $140 25 14 97 For A the charge is 29.58 per cent, of its insurance value ; for B it is but 2.65 per cent. Both of these charges cannot be correct unless the surrender charge is to be regulated by some other relation than that to insurance value. It obvi- ously comes much nearer being proportionate to the reserve, but the reserve is no measure of the company's loss of strength in losing the policy. In one case the charge is suffi- cient to pay an agent nearly the two firs| premiums for get- ting another policy as valuable as the one surrendered. In the other case it is only sufficient to pay about half the usual commission. Is this business-like ? When Prof. Bartlett comes to apply his double-action rule of surrender charge to endowment insurance policies of annual premiums a class of policies for which an equitable value is particularly needed the arbitrariness of making the same game venison for one purpose and veal for another, is still more striking. Here is policy A, a ten-year endowment insurance for $1,000, taken at age 35, which has paid eight premiums, and B a policy for the same amount and term, 88 Politics and Mysteries of on the same life, taken at 42. The reserves, insurance values, surrender charges and surrender values, according to Prof. Bartlett's formulas, as near as I can get the figures with ex- temporaneous tables, are : Reserve. Ins. Value. Sur. Charge. Sur. Value. A, ... B, $759 44 79 68 $1 31 38 91 #17 89 9 77 $741 55 69 91 Behold a rule by which for the same life a company charges $8.12 more for the surrender of a policy which is worth f 37.60 less ! Is this the way " to secure the equities of an actual surrender " ? Now when policies are being surrendered at the rate of some $300,000,000 a year, or about as fast as they can be acquired, and the retiring members pervade the community with more ^or less vocal expression of dissatisfied minds when the Mutual Life itself pays more than a million of dollars a year as surrender value does it not seem time that the executive officers of the companies should agree upon some rule of surrender charge which the policy- holders can understand and appreciate, and which will keep the companies from decaying as fast or faster than they grow, whether the actuaries can agree to it or not ? As a sequel and clincher to this discussion on surrender charge, the writer published in the "In- surance Times" of December, 1872, the following question, which nobody, thus far, seems to have answered. Life Insurance. 89 A CONUNDKUM ON LlFE INSURANCE. The question to be propounded in this article interests more or "less not only every existing policy-holder, but every future, or possible one. Those who are at all sensitive about such interest had better watch carefully for the answer. Lest it should be slow in coming, they are advised to cut out the co- nundrum bodilv with a pair of scissors, and put it directly to every life-insurance agent, president, actuary, editor, or man of figures they meet. It will not be best to bother the British Institute of Actuaries with it, for the life-insurance companies which nestle most securely under the wings of that profoundly scientific body do not say much about paying surrender value, equitable or otherwise. On the contrary, if a policy-holder there wishes to retire and cease paying premiums, he seems to have no other means of recovering any part of his self- insurance from any respectable office in London, than to sell his policy to some outside speculator, who, without a particle of insurable interest in the life, pays the premiums in the hope of an early, and to him lucky, death, when he receives the whole face of the policy. In this country our life-insurance companies have not been so scientific as to open this charming vista for predestined octogenarians. Take up the prospectus or hand-book of almost any of them and you will find a paragraph something like the following, which I copy from the report of 1862 of the Mutual Life Insurance Company of New York, then as now the foremost of American companies : " Surrender of Life Policies. " Should the original motive for effecting an assurance in this company cease before the termination of life, the party may surrender his policy, after it has run two years, for an equitable consideration, which may be paid to him by the company on its surrender." Though in this wording " may " is not the most efficient QO Politics and Mysteries of auxiliary verb that could have been selected, as a matter of fact a vast amount of surrender value has been paid by this company, and is paid, and so equitably withal, that specu- lators have very little chance of making money by buying and keeping up its p'olicies, even if American law would allow such transactions. That the cessation of the original motive for insurance in any individual case is a very impor- tant and not very improbable contingency, is obvious enough from the fact that at the very time when the report above quoted from was made there were outstanding only 12,258 policies out of 24,929 which had been issued by that com- pany. Considering that most of these 12,671 policies which had ceased to exist were whole-life policies, paying for the time-being largely beyond the risk incurred on them by the company, the question of the " equitable consideration " to be received from the company on the cancelment was a very in- teresting one, involving in the aggregate a very large sum of money. It grows more and more interesting, since the ces- sation of motive to insure and any divergence from equity in the rule for settling surrender value must both increase with the age of the company. It is interesting to every outsider who, by any possibility, may hereafter be tempted to insure. It cannot but be interesting, even when one is about entering an earthly paradise, to know by what gate and on what terms he can get out, in case he should find it necessary or desira- ble to do so. The gentlemen who have the executive management of life-insurance companies may not see fit to notice this co- nundrum immediately. It is very proper that they should take abundant time to consider it, perhaps to consult with each other about it, and avail themselves of all the light which science or the nature of things can furnish to aid them. If after they have done so they cannot give an an- swer consistent with the present practice in any company, then assuredly a revolution in their business is at hand, Life Insurance. 91 and the sooner they welcome it the better for themselves, as well as their constituents. Conundrum. By the law of New York the reserve on an ordinary life policy for $1,000, entered at 35, at the end of its second year, is $20.01. (It has paid two premiums, say of $26.87 each, thougli the law does not regard the premiums actu- ally paid in -fixing the reserve.) Suppose the "equitable consideration" which may be paid to the insured on sur- render is only one cent, the twenty dollars being justly and necessarily retained by the company to compensate it for the loss of a good life. Now, in the case of the surrender of another policy for $1,000, also entered at 35, and which, having paid forty premiums, has a legal reserve of $653.17, let us know why any more than twenty dollars should be deducted from said reserve. In other words, if one cent is the just surrender value of the former policy, can anything less than $633.17 be the "equitable consideration" for the surrender of the latter, and if so, why ? After the defeat of the Surrender Value Bill in the Massachusetts Senate, it became very obvious that no legislature could be expected ever to enact a law which should make the life-insurance auto- cracies more directly responsible to their theoreti- cal constituents, or which should forbid the issue of policies that are the most profitable to agents and officers who share commissions with them. These autocracies have grown too rich to be stinted of their most fattening pabulum. They have too much money to lend, or place " where it will do good," as the phrase now is. The existing policy-holders, 92 Politics and Mysteries of have no interest in the matter, for no legislature can modify existing contracts. The future policy- holders, born and unborn, are an unconscious crowd, incapable of lobbying, and who do not even pretend to have any rights which legislatures are bound to provide for. The only hope that the friends of fair play and honest business can have is in so enlightening the public mind that life-insurance agents, however tempted by exorbitant commissions, shall find them- selves unable to entice any body into a bargain not fit to be made. It was to this problem that the writer addressed himself immediately after the defeat of the Sur- render Value Bill. He had done what he could to correct the blunder committed by him, as much as any one, in the Act of 1861. The result of his labors and consultations with the ablest experts in this country, was published in a series of 268 working or practical tables, in which all the values, important to be known, are pre-calculated for every year of the policy, preceded by a popular explana- tion. As the tabular work is necessarily cumbrous and expensive, "the whole of the explanation will be given in the succeeding pages with two or three specimen tables. The critical reader will undoubtedly be disgusted, before the close of this volume, with its vast amount of repetition, but it is intended for those Life Insurance. 93 who need line upon line, and it must be remem- bered that the nonsense it seeks to explode has been repeated in many shapes many millions of times. Chapter IV. SAVINGS BANK LIFE INSURANCE. The necessity of maintaining a premium reserve, according to some fixed rule, is now generally acknowledged by Amer- ican life insurance companies. It is not so generally acknowledged that this necessarily implies that, whether the policy-holder is allowed to regard himself to any extent as a depositor or not, the company must treat every premium on a policy extending for more than one year as if a certain part of it, more or less, were a . mere savings bank or trust-fund deposit, with only this differ- ence from an ordinary one, that it cannot be withdrawn till the death of the insured or the stipulated termination of the policy. It is then withdrawn only as a part, or the whole, of. the claim. Hence, to the extent of that part of the claim which the company will pay out of the reserve in its hands, in any year when the death may occur, the party may be said to insure himself in that year. Hence, too, if the policy is made payable at the end of a certain year, whether the party dies in it or lives through it, he insures himself during that last year to the full amount of the claim.* In other words so far as his net premium is concerned, he contributes nothing in that year to pay the claims on other ' policies, nor do the other policies contribute anything to pay his. This is the logical sequence of a fixed rule of reserve, and no cavil at * The net premium is always calculated on the supposition that the death-claim will be paid at the end of the policy year in which the death occurs. Whatever the company loses by paying it earlier, has to come out of margin, or surplus from vitality or interest. 94 Politics and Mysteries of the terms " savings bank " or " self-insurance " will avail to set it aside. It is quite true that, so long as a policy-holder does not participate at all in surplus and has no right to a surrender value before the expiration of his policy, the distinction be- tween the insurance and self-insurance on his policy is of no practical interest to him. All he wants to know in that case is, that the claim will be paid when it occurs. But the com- pany, to be able honestly to assure him of this, must know that it has in reserve a certain portion of his past premiums, and how much it will have to reserve of future ones.. It must also know in advance the relation of the insurance to the self-insurance on its various policies, in order to know what it can afford to give to procure them. But whenever policy-holders are allowed in any way to participate in surplus, and still more when they are allowed any surrender value in case of discontinuance, then the inev- itable savings-bank aspect of the company, as distinct from its insurance aspect, begins seriously to interest them. Many of them cannot afford to have the distinction ignored, be- cause the equitable dealing which has been promised them in general terms, depends upon it. It has in fact become im- portant for each one of them to know just how far the com- pany, under his policy, acts towards him as an insurance company, and how far as a savings bank, how far it in- sures Tiim from year to year, and how far he, by his payments beyond the current cost of the company's risks, from year to year, insures himself. Under any policy certainly payable at the end of a shorter or longer term, or at previous death, if the premium paid at the beginning of each year is not restricted to the company's risk of having to pay the claim in that year, which it never is, it, in point of fact, assumes only a decreasing series of risks, ending in none at all the last year ; and the insured, by the excess of his payments over the costs of the company's risks, at interest in the hands Life Insurance. 95 of the company, provides for an increasing series of comple- ments, ending with the full amount of the sum insured. Now if the insured is to receive any surplus, anything at all be- sides the indemnity stipulated, whether that surplus is to be paid in cash, in additional insurance or by shortening the term of the policy, the equitable share of it will depend upon the relation of the insurance to the self-insurance of the pol- icy, and the distinct effect on each of the experience of the company. On the insurance, surplus arises only from the death-claims and expenses of the insurance being less than were provided for, or less than the expenses and normal cost of carrying the risks. On the self-insurance, it arises only from profits on the investments beyond what was assumed in the rule of reserve after deducting the cost of managing the fund. There may be surplus on the self-insurance when there 1% none on the insurance and vice versa. If the surplus arises wholly out of insurance and no extra interest has been realized on the self-insurance fund, it would be a very queer equity which would give a dividend of any kind to a policy having no insurance at all upon it. And so of the apposite case, in which all the surplus should arise from extra interest and none from insurance, to give equal dividends to equal premiums, or equal policies, then would be just as equitable as to give equal dividends to all the depositors of a savings . bank, without regard to the amount of their deposits. By a distinction between insurance and self-insurance a demonstra- ble equity in the assignment of surplus may be secured, or a fair approximation to it, and in no other conceivable way. This, in case the premiums are so high as probably to yield surplus and only with such premiums can mutual life insur- ance be conducted with desirable certainty it is very impor- tant for the policy-holder to know. Perhaps there is no other way of enabling him to understand the contract he makes, and to be satisfied with equitable treatment as to sur- plus and surrender when 'he gets it, than to analyze fully the 96 Politics and Mysteries of business on his policy into its distinct elements of insurance and self-insurance, and let him see how the two, on the as- sumptions of the premium and reserve, stand related for each future year of its possible continuance. Apart from fixing a surrender value, this binds the company no tighter than it is already bound by fidelity to its assumptions as to mortality and interest, if not by statute law as to reserve. Can the company bind itself to a fixed rule of surrender value, so as to make what has been called self-insurance substantially a savings-bank deposit ? The policy-holder who takes a policy binding the company to insure him, sick or well, for a long number of years, must be well aware that its ability to do so will depend upon its continuing to have a very large number of members, and that every healthy member who leaves it, diminishes its strength and stability, more or less, according to what he n^ght be expected to pay towards .death-claims, if he did not leave. Hence it is very absurd to say that a company can afford to release a healthy member from his contract whenever he pleases to retire, and allow him to withdraw his self-insurance fund, without making any compensation to the company for its loss in the non-fulfilment of his Contract. This loss has no relation whatever to the self-insurance or reserve, for that could be of no use to the other members if he remained, being wholly devoted to meet the party's own claim ; but it has- direct relation to the risks contracted to be borne by the com- pany and the successive payments to be made on account of them. The present value of those payments, or normal costs of insurance, discounted on the same assumptions of mortality and interest as are used in computing the reserve, or what may be called the insurance value of the policy as distinct from the self-insurance value or reserve, must be the basis of estimating the company's loss by a withdrawal. The self- insurance value is only a security in the hands of the com- pany, more or less ample, for the payment of this damage. Life Insurance. 97 When this damage or surrender charge is paid, the security is released; and the whole savings-bank deposit is with- drawn. Let it be understood that the insurance value is not the charge, but the basis of the charge. For when the insurance value is lost, there is a cancelment of the company's liability gained, and if the retiring life were no better than the aver- age, the gain would fully offset the loss. We have only to provide a charge on the assumption that it is better. If it is better, the gain Will not fully offset the loss, and the differ- ence will be proportioned to the insurance value. Hence the surrender charge must be some percentage of the insurance value, either variable or invariable. This is by no means an innovation in principle, but only a new mode of applying, or rather looking at, a principle long ago accepted. Though the usual policy a form borrowed from England expressly excludes the right of the policy- holder to withdraw any part of the premiums previously paid, in case of his forfeiting the right to further insurance by non-payment of premium or otherwise, in practice, in this country, the reserve has always been returned, either in cash when applied for while the policy was in force, or in pre- mium notes, the company having deducted more or less of the cash part of it if there was any as a compensation for its loss. The only variation of the practice from the savings- bank theory has been that the companies have not estimated their loss with any regard to the 'insurance value withdrawn, but have erroneously regarded it as having some relation or other to the reserve or self-insurance value. The grotesque absurdity of this, only waited for the short-term endowment insurance business, which has so enormously increased of late, to bring it fully to light. That the principle of recognizing the right of the policy- holder in the reserve, as a savings-bank deposit, which it is the object of the present work to apply more correctly in 5 o> praetK*,. has been held by authority worthy of the highest respect* may be siatffifriently proved by a quotation from a pamphlet issued by the New England Mutual Life Insurance Comply In 1^ ironi the pen of its first President Hon. WIEbrd Pbillip^, UL B^ the author of the well-known treatise on Insurance L&w. He opens by saying, "The object of this iBSftibrtka^ ID that of savings banks," and before he closes he has the JbDowing passage* which clearly recognizes that, to a certain not distinctly defined extent, its method'also embraces a * It sometimes happens, that the motive for making insur- t ceases before the policy has expired. Instances will also ^toaXtf occur, of persons being disappointed of the of paying the premium, and so being liable to forfeit their poueie&. In any such case, the company will- consent to a surrender of the policy upon fair terms, if an application is made lor that purpose before the policy is forfeited. Where the policy is made for a longer period than it has actually run, the amount of premium paid upon it will have been greater than if it had been made only for such time. tt Suppose, for example* that a person of the age of twenty- fire years has insured himself for his whole life in the sum of one thousand dollars, and at the end of seven years, wishes, for whateyer-reason, to surrender his policy. If he had taken the policy originally for that period, he would have paid, in the -whole, in annual premiums and deposits, f 7 7.70, but taking 1 the policy lor his whole life, he has paid in and depe>- itedf 1^60, making a difference of $60.30. In this case the company has paid out the $77.70 ; lor, though the person in- sured sunires the period of seven years, yet if one - hundred hare been insured lor that time, one of them has died and the premium must tie such as to enable the company to pay the loss. This is the principle upon which the premium for a pol- ky lor that period is calculated. The party proposing to sur- render has had the good fortune to live, and the surviving unirj;of the one who has died has bad the good fortune to be provided for. But the company cannot afford to square the account by merely striking this balance, and paying back the whole $60.90 to a person who, being in good health, Life Insurance. 99 wishes to surrender his policy, since another, who was insured for his whole life, and whose health has been impaired during the .seven years, might choose not to surrender his policy; and the company should avail itself of the policy on which the risk has turned out favorably, to make up for th:/ which the risk has proved unfavorable. Some reservation must, therefore, on this account, be made by the company out of the amount, whatever it may be, which, in the above ex- ample, is represented by f 60.90 ; since, otherwise, the com- pany would be prejudiced by agreeing to the surrender. As to the amount of this reservation, it is evident that no precise rule can be laid down, but it is obvious that, after a policy for the whole life has begun to acquire a present value, that value goes on increasing and regularly approximating every year towards the amount insured, and making such approximation more and more rapidly, as the party insured advances in age, and his bodily infirmities increase, and the increase 'of mor- tality becomes developed ; so that, if it becomes necessary for him to avail himself of such value, that necessity is most likely to come upon him at a period of life when it has made a near approximation to the amount insured, and when, if he had not reserved to himself this resource, he most probably would have had no resource whatever. The above sugges- tions are made for the purpose of giving to the holder of a policy for life, the means of making a proximate estimate of its value from time to time.'" * The fact that the method of the company embraces the two functions of insurance and savings bank is here sufficiently admitted. The only defects are the assumed impossibility of distinguishing between them by any " precise rule "' as to the amount of " reservation " or surrender charge, and making the right to receive surrender value or withdraw deposits depend on applying for it while the insurance is in force. Plainly, if there can be any title apart from the terms of the policy to receive such value, it will be as good the moment after, or any reasonable time after, the forfeiture of the right * See, also, the Fifth Annual Report (1848) of the Directors, where the interest of members in the "reserved funds " is expressly admitted. ico .Politics and Mysteries of to be further insured, as it was before, and cannot depend for its existence on the company's being notified to pay it. Let us inquire whether there is any good reason why there cannot be a " precise rule " as to the maximum surrender charge. If there is, it must hold equally good against fixing any precise premiums or terms of entrance. It is no more reasonable to attempt to grade and value individually the good lives that seek to withdraw, and have a sliding scale of surrender charges without a maximum limit, than to do the same thing in regard to those who seek to enter, and have a sliding scale of premiums without a minimum limit. If we have admitted all unexceptionable lives at the same premium for the age, it must be admitted that the best of them will probably pay more dearly for the same benefit than the worst. This, if it is an evil, or a departure from equity, is necessary in a system which is founded on human ignorance of future events, and could not honestly exist if this ignorance had not considerable density. But if, on this system we have made the healthiest of these insured persons pay for several years the same as the least healthy, that is, more than the cost of his insurance, and then, when he applies for surrender, we grow suddenly wise, and charge him more than we would an aver- age good life, we cannot logically refuse to credit him, against this excess, with the excess of his past payments. Here th case becomes as broad as it is long. In all good faith and charity, is the claim that the company must grade the surrender charge according to its notions of the degree of vitality in the retiring life, any better than the pretence that applicants for insurance, in a normal state of health and with no apparent predisposition to disease, can be graded by a study of their ancestors, multiplying back into the past, as an innumerable dim cloud of dusty witnesses, from which, according to theory, ought to converge upon the living individual all possible diseases, including longevity ? This argument proves decidedly too much in both cases. Life Insurance. 101 As to compensating the company on the whole, and suffi- ciently, for the loss of good lives, it is quite plain that it can be done as well by a precise charge MS a variable one, if we only make the precise charge high enough. Because, it is impossible for the company to lose more (this, of course, ap- plies to a mutual company, in which surplus is supposed to be divided as fast as it arises), than (ho whole of the insur- ance value. And even a charge of one hundred per cent, of the insurance value, would be a great improvement, in point of equity, upon the present ill-founded and indefinite rule. But, fix the charge as we will, and admit that it is suflieient to compensate the company for its loss, it is pertinaciously contended that guaranteeing any surrender value at all is offering a premium for lapse, and that it is wiser to oiler nothing, but when a case arises treat it " on its own merits." Very well. How do we get at the merits? How do \ve know that a life that was admitted as good is now better? And if we do know it, would we, on the strength of this knowledge, reduce the premium? If not, and certainly we should not, how can we say to the man, Though your vital- ity is not good enough to justify us in reducing your pre- mium if you stay in, it is so good and so much better than the average that you must pay an extra charge for going out? The plain truth is, that the officers of the company have not knowledge enough to make, :i distinction between the vitalities of what may be called unexceptionable lives. Neither, on the other hand, have the best lives any such knowledge of their own vitality as to get the advantage of the company in selecting themselves out. From the ne- cessities of human ignorance and other circumstances, the game is a pretty fair one on both sides. The fuel, is, that men stick to their policies as long as they have the ?// and the means to continue, and when those fail, or either of them, they will discontinue without much regard to their los Politics and Mysteries of state of health, whether the surrender value returned is equitable or not. But if it is not equitable, the credit and popularity of the company is likely to suffer as much, in the long run, as the purse of the retiring policy-holder. If there is any force in these considerations, the fairest measure of the loss of the company by the non-fulfilment of a policy-contract, is, what it will cost to procure another of equal insurance value, on a life equally good. If the charge is made unquestionably more than this, the stability of the company cannot possibly be impaired by guarantee- ing a surrender value, unless we suppose the public de- mand for insurance is to cease, which is the same thing as supposing that civilized society is to come to an end, or some miraculous change is to happen to it. What does it cost to get insurance value ? What is, or what ought to be its market price? Much of it has, in point of fact, cost too much. Most of it, however, has ac- tually been obtained for three or four per cent, of itself. The scheme here proposed assumes that the company will be fully indemnified, on the average, for its loss of insur- ance value on the best lives by a charge of eight per cent, on the same. Let us see how this rule would apply to the case put by Judge Phillips. The four per cent, reserve on a policy for $1,000 entered at twenty-five, at the end of the seventh year is $58.53. Its insurance value at that time is f 192.41, of which eight per cent, is $15.39. A new policy entered at twenty-five for $1,432, payable at sixty-five or previous death, will have the same insurance value, $192.41, and the annual premium of this in the New England Life Insurance Company, would be $31.51. $15.39 is nearly fifty per cent, of this, or about twice as much as the company has to pay for procuring a policy as valuable to it as the one it lost. The new policy is indeed a little more valuable to it, from being limited to sixty-five. The policy which it lost ex- Life Insurance. 103 tending over the whole life, a part of its insurance value consists of insurance to be done beyond the insurable in- terest, and is of a somewhat inferior quality. It is on this account that a company can undoubtedly afford to give a little more, in proportion to its insurance value, for an en- dowment insurance of moderate term, than for a whole-life insurance, though by no means several times as much, as is commonly done. Let us suppose an army an army of occupation for ex- ample in which sound health is the main desideratum, and which is recruitable at so much a head. Is it weakened, by the " precise rule," that a discharge can be had by pay- ing twice the cost of procuring a substitute satisfactory to the surgeon? Would. the sanitary condition of the army be lowered by such a rule ? It is easy to see how the army might be weakened, by mustering out soldiers for money, if no recruits could be obtained, and so a life-insurance company might be weakened, as such, by members retiring, if none came in. If all public demand for life insurance should cease, the more the old members should retire, the sooner would the business come to an end, but not a dis- astrous one. To recur again to the army : it is plain enough that en- listment is unpopular in proportion to the difficulty of get- ting out, should one change his mind after some experience of camp-life. Any reasonable alleviation of that difficulty will reduce the cost of getting recruits. So in life insurance : nothing has more enhanced the difficulty of adding new members, than the exorbitant sacrifices that often have to be made by old members who have paid their full premi- ums in cash, when they have occasion to retire. If a man is able to take a policy, and will really be ben- efited by it, a stipulated surrender value, which is reason- able and business-like, will remove from his mind every obstructive doubt, and there will be no need of expending io4 Politics and Mysteries of upon him costly visions of dividends, which it would be death to the company to realize. To persuade any pru- dent man to take a policy on the present terms, with no rule of surrender that can be understood or stated in ad- vance in figures, it is necessary to work him up to such a pitch of enthusiasm or infatuation that he shall entirely overlook the fact that his circumstances may change, and he may cease to need insurance before the term of his pro- posed policy expires. This is a tedious and costly process. In the aggregate, it now costs in the United States many millions of dollars a year. In fire insurance a great part of the business flows into the companies spontaneously. The savings banks proper pay nothing to obtain theirs, and it is immense and quite perma- nent. Life insurance companies, to which a great multipli- cation of risks is specially important, will undoubtedly always have to pay something for obtaining business, or at least till State legislatures reduce the rate at which they create new companies. But by adopting the savings-bank plan, the expense of getting it can unquestionably be greatly reduced, so that even the soliciting agent will not be the loser by the low commissions. It is believed that the following tables furnish as copious a choice of policies as is desirable, and a restriction of the business of a company to these will greatly simplify its ac- counts and calculations. From fifteen to thirty years of age persons will have the option of eight different policies ; from thirty to thirty-five, of seven ; from thirty-five to forty, of six, &c., with different proportions of insurance and self-insurance. The lowest premium will turn out the best in case of an early demise, although it pays most to expenses while it continues. But the highest premium will prove best, if the party lives through the term, on the principle that the more he insures himself the less he has to pay towards the expenses of the company. And it will always be better, if one can, to take a Life Insurance. 105 shorter policy at a higher premium, than a longer one at a lower premium, if one is to live and surrender at the end of a given number of years, because in the latter case, one must have paid expenses in proportion to the larger amount of in- surance contracted for. For example : a person at twenty- five, has the option of taking eight different policies, of which, the terms vary from fifteen to fifty years, and the premiums from $22.45 to $56.07 per $1,000. If he takes that of the longest term, paying $22.45 per an- num, and at the end of ten years surrenders, he will get back $83.58 in cash, the rest of the $224.50 and interest, supposing there have been no dividends, having gone for the death- claims of others, the working expenses and the surrender charge. And suppose that he had annually deposited in a savings bank, yielding five per cent, interest, the difference ($33.62) between the lowest and highest premium, he might then have in addition to the $83.58, the amount of $444.02, making $527.60, as the residual of his expenditure of $560.70. If he takes the shortest policy, which will cost him just that, the residual at the end of ten years will be $585.31, a gain in this event, over the other arrangement, of $57.71. It is very true that there would be about thirty-seven per cent, more of insurance done by the company in the ten years under the long policy, which would have made it a better arrangement to die on. The point is, that the short one is the better to live through on, or to surrender on, and in fact better than the long one with the savings bank added, which can by no means be said of the present short-term endowment policies, with the usual rates of premium and conditions of surrender. Under the present system, unless a person is quite sure that he will be able to continue his policy, so as to share the profits of the forfeiture of other policies,* and will need to * Betting on persistence when the persistent members are sure to win, is undoubtedly profitable, whatever may be said of its morality. It is by no means a necessary or graceful feature of life insurance, and 5* io6 Politics and Mysteries of continue it, it is always best for him to take the whole-life or longest endowment policy, because he can always invest the difference between the premium of that and a shorter term more profitably than in the life-insurance company, in a savings bank for example. But, on the contrary, under the system of savings-bank life insurance here proposed, no per- son who needs insurance, and has anything to pay for it, can afford to make any deposit whatever in a savings bank. As life insurance is now conducted, beyond any question, one-fourth of the premium paid into the life insurance com- panies had better be paid into savings banks, as it could be without at all reducing the insurance effected. To illustrate : in 1870 life insurance to the amount of about two thousand it is more congenial to the avowed object of the institution to avoid all needless departure from the legal maxim, suum cuique. But as this betting is now managed, the persistent members, as a body, do not win in all cases of forfeiture, and supposing they do win on the whole, an individual among them is by no means sure of receiving his fair share of the winnings, if any one knows what that is. For example : when a company holds premium notes on a policy be- yond its equitable cash surrender value, it will lose by forfeiture, unless it collects the notes, a process that is never thought of, much less effected. Again, when it gives a paid-up policy, presumed to be a fair reversion of the net value or reserve, it never gains* much, and some- times loses a little, because it takes no account of its loss of insurance value in the operation. Supposing that I is the insurance value per dollar of the existing pol- icy at the date of the change, and z is the proper percentage of it for a surrender charge, and I' is the insurance value per dollar of a paid-up policy at the party's present age ; then for an existing policy of S dollars, which has run t years, the company can afford to give, on a good life, . only x +* ** , and would give too much if it gave g x+t . When II*H zS Hx+t on a policy having m possible payments it gives a paid-up policy for t ~ S, it often gives more than the former value, even when it gives less than the latter. Life Insurance. 107 millions was in force in the United States, and the premium paid was about ninety millions. Sixty-eight millions would have procured just as much insurance, on policies of longer terms or slower payment, and the difference of twenty-two millions, in the absence of savings-bank life insurance, would much more profitably have been deposited in ordinary sav- ings banks. On the other hand, as life insurance ought to be conducted, probably one-quarter or one-half the deposits in the savings banks could be transferred to the life-insurance companies, with great benefit to the families of the de- positors. How TO ADJUST THE PREMIUMS. The light of antiquity tells us that we shall go safest in the middle of things. There is no going in the middle, in life insurance, without providing in the premiums for death- claims occurring somewhat Taster than we expect them, and for interest being less and expenses more than they need be. Putting the working expenses out of the account, we shall have a middle path in providing for death-claims, if we as- sume, in calculating the net premiums, only four per cent, interest and the actuaries' mortality, which has proved con- siderably higher than the average experience of American companies. This is the well-established basis for computing net premiums, and there seems to be no occasion to unsettle it in providing for savings-bank life insurance. But the margin to be added to the net premium, as a pro- vision for expenses and extraordinary contingencies, should obviously be modified to adapt it to the principles above stated. The expenditures of a life-insurance company may be clas- sified under the following heads : 1. The death-claims. 2. Surrender values, including endowments. 3. Cost of managing the reserve or self-insurance fund. io8 Politics and Mysteries of 4. Cost of collecting the premiums. 5. All other working expenses, including the cost of pro- curing business. The first three heads are amply provided for by the net premiums and their interest. The last two only are to be provided for by added margin. The cost of collecting the premiums may as fairly be proportioned to their amount in this business as any other, whether they are devoted to insur- ance or self-insurance. All the other working expenses should be assessed in pro- portion to the insurance value of the policy for the year in which they occur, because that value represents the compara- tive interest which each member has in the company, as an insurance company, in that year. To provide for this and nothing more, would be to add a margin varying with the insurance value from year to year, which would have the great inconvenience of making the gross premiums variable. To avoid this, as well as to avoid extending the insurance beyond the insurable interest, no policy is extended beyond the age of SEVENTY-FIVE. Policies limited to that age do not increase in insurance value much, if any, so that a con- stant margin added, proportionate to the initial insurance value, will gradually become more and more ample for its purpose as the policy increases in age, and of course will be more and more returned in dividend, if not needed for ad- verse contingencies. This redundancy of margin in the advanced years of a policy is far from being undesirable as an additional resource against adversity in a remote future. In the following tables, four per cent, of the initial insurance value is first added to the net premium as a provision for ex- penses under the fifth head, and then one thirty-ninth of itself is added to the sum, to make the gross premium, on the sup- position that two and one-half per cent, of it will be allowed as the cost of collection.* If it should be objected that so * Adopting the notation used in the preface to the revised edition of Life Insurance. 109 slender a margin does not give motive-power enough to work the machine, and the percentages added should be increased, let it be considered that they make the premiums of the long- est ter,ms higher than they are now, and no one pretends that a company wholly consisting of such policies could not stand, or that the premiums have not sufficient motive-power. The premiums of the shorter terms are lower, but they have more margin in proportion to the insurance to be done on them than on those of the longer terms, for the collection-fee is added to the whole. If they are too low, it is because a savings bank cannot be run for two and one-half per cent, on each deposit at the time of its reception, and one per cent. per annum of the whole amount on deposit. The expenses of the fourth and fifth heads must, of course, be confined within that margin at first, and must bear a de- creasing ratio to it as the policies grow older. It is Obvious enough that, on this plan, if the expenses should be exces- sive, assessing them in proportion to insurance value, would show negative contributions to surplus from policies of large insurance value, and small self-insurance, while, at the same time, there might be a preponderance of positive contribu- ' tions from policies of small insurance value and large self- insurance. This would require a new assessment of these negatives or deficiencies, on the policies of positive contribu- tion, and this would produce another smaller crop of nega- tives, to be at last reduced to zero by repeating the process, before the divisible surplus could be equitably distributed. In fact, it might at last amount substantially to assessing the my Valuation Tables, the general form of the gross premium, P*, for a Savings-Bank Insurance Policy will be p_ f - n-xT 1 _ y the first term of the second member being the net premium ; the second, the provision for that part of the expenses which is to be assessed in proportion to insurance value ; and the third, the provision for a collec- tion-fee to be allowed as a constant percentage y of the gross premium. no Politics and Mysteries of insurance expenses, according to the margins, a manifest hardship to the holders of the short-term policies approach- ing their termination, whose margin, small as it is, after de- ducting the uniform collection fee of two and one-hglf per cent., is still very large in proportion to the insurance that remains to be done on them. The proper*course is to restrict the expenses to such a degree that negative contributions shall not appear. The actuary will have no difficulty, with the analysis of the following tables applied to each policy at the beginning of any year, to inform the company within what limit the aggregate expenses of the year must fall, to avoid negative contributions.* It has been found, in almost all financial institutions, a wise thing to restrict expenses by definite pre-appropriation. There is more need of this in life insurance, because the death-claims, which cannot be restricted, must be expected to fluctuate considerably, both in number and amount, and there is always a possibility that they may slightly exceed the normal cost of insurance so as to require some part of the margin. THE ADVANTAGES OF THE SYSTEM. 1. The policies will be more persistent, because every one will know at the start what he is to expect, and will know that the longer he stays in the less it will cost him to get out ; whereas, under the old system, he soon learns that the longer he stays in the more it will cost him to get out. 2. When any one leaves the company he will go out satis- fied, having been dealt with on prescribed and pre-understood * Thus, supposing that S stands for the savings-bank deposits on outstanding policies, P the aggregate gross premiums on the same, pay- able during the year, and I their aggregate insurance value, the ex- penses, exclusive of commissions on new policies, must be limited o l> to avoid negative contributions on some of the policies, in case the death-claims of the year should equal the normal ones. Life Insurance. in terms. The company will thus avoid the back-water from retiring members, which is now troublesome, if not over- whelming. 3. Equitable dividends, should there be any surplus to di- vide, can be made intelligible to any member. He is sup- posed to have a table, like one in this work, analyzing all his annual payments. The company, by means of similar tables, so keeps its books that it can tell, by a mere footing of them, what is its required reserve, what the insurance value of all its policies, and what the normal cost of carrying all its risks. It can tell, at the end of its fiscal year, what has been its average rate of interest, what its death-claims are in excess of the self-insurance on them, and what its working expenses, over one per cent, of the self-insurance fund and two and one- half per cent, of the. premium receipts, have been. Let us suppose the actual interest has been six per cent., the actual cost of insurance four-fifths of the normal cost, and the ex- penses, less the cost of collection, three per cent, of the insur- ance value. If this experience of the company's fiscal year is to be applied to all policies whose policy-years ended in it, to determine the contribution to surplus which is to be re- turned as dividend at the settlement of the next, or the suc- ceeding premium (which is near enough to equity, as a prac- tical rule*), each policy-holder may easily calculate his own dividend, or at any rate easily satisfy himself whether what the company assigns him is correct, knowing the several factors above stated. For example : suppose his policy is for $1,000, payable at death or fifty, entered at twenty-five and has closed its ninth year, within this fiscal year of the company. Referring to * Under this' rule, a retiring policy-holder necessarily forfeits any surplus that may have arisen on his policy during its last year. With this the surrender charge and the rule that surrender value shall be paid only at the end of a policy-year, the life-insurance savings bank will be safer against panic, or a run upon it, than any other. H2 Politics and Mysteries of the table (No. 4), we find his reserve at the end of his eighth year f 207.49, to which was added at the beginning of the ninth, f 22.15, making the self-insurance fund at the begin- ning of the ninth year $229.64. Four per cent, of the inter- est was required to make this $238.83 at the end of the year, and one per cent, to pay for managing the fund, so there is $2.30 of surplus from the self-insurance. The normal cost of insuring him that year was f 6.53, of which one-fifth or $1.31 was saved, which is so much more of surplus from vitality. The insurance value at the beginning of the year was $54.30. Three per cent, of this would be $1.63 for expenses, to which if two and one-half per cent, of the premium be added for collection, we have $2.45 to be deducted from the margin, $4.23, which leaves a surplus from that source of $1.78. Thus the surplus which belongs to him is, From self-insurance, . . . . $2 30 From insurance, . . . . 1 31 From margin, 1 78 $5 39 In the same way, if the policy had ended its first year within the fiscal year, its surplus would have been, From self-insurance, . . . . $0 21 From insurance, 1 46 From margin, . . . . 86 $2 53 And for its twentieth year it would have been, From self-insurance, . . . . $6 70 From insurance, 68 From margin, 3 09 $10 47 Executive officers who have the task of explaining " con- tribution " dividends to thousands of members, will not be a great many years in finding out the advantage of this arrange- ment. Other advantages of great public import might be named, Life Insurance. 113 such as diminishing to the degree of ordinary saving banks the necessity, difficulty and expense of governmental super- vision, and removing the mystery which now deprives the business of the popularity it deserves ; but enough, it is be- lieved, has been said to satisfy all conscientious life-insurance men, who understand human nature and seek its welfare, that it is worthy of a fair trial. THE VALUE OF LIFE INSURANCE. It must not be inferred from what precedes, that life insur- ance, as it exists in this country, is not worthy of the immense confidence it has received. The civilization of this continent has no institution of which it has a better right to be proud. It is the standing together, shoulder to shoulder, of hosts of manly men, to defend each others' homes from that enemy who shoots on the sly and in the dark. It is the realization of fraternity without the destruction of independence and in- dividuality. It is a charity without cant, which enriches the giver and does not humiliate the receiver. Thanks to the care which has been taken to maintain reserve at a high standard, looking at the business as a whole, there is no hollowness. What it has been doing, it can continue to do. The world has been delighted with itself at the degree and promptitude of the alleviation which has met the Chicago calamity. Amer- ican life insurance silently, every year, meets suffering of almost equal amount and deeper intensity, with nearly all the alleviation money can give. The organization, in advance, of this relief, and the certainty of its application in case of need, give it a current value to all parties concerned, which far transcends the ninety or one hundred millions a year which it costs. Here are nearly a million of men whose aggregate material wealth, all told, does not perhaps exceed five hundred millions, who by this institution have possession of two thousand millions in addition, immediately available for the only purpose for which they really need or could enjoy ii4 Politics and Mysteries of it. This is better than a rich uncle to a young man who has not a rich father ; and if he has both, and also the noble am- bition to paddle his own canoe, it is better than a share in a gold mine. The institution may have defects to be supplied, or excres- cences to be pruned away, but any charlatanry which would depreciate its value, or undermine public faith in it, would be equally deplorable and unpardonable. The aim and rea- soning of the foregoing pages will be entirely misapprehend- ed if they are supposed to favor the conclusion that the hold- ers of existing policies had better relinquish them. The number of those who could wisely take such a course has never been one-half or one-quarter as great as of those who have taken it, nor is it likely that good reasons for withdrawal will increase. Life insurance is so good, is capable of a so much wider application, and is so thoroughly in unison with the spirit of our republican society, that it cannot fail, by and by, to be understood by everybody and enjoyed by everybody who needs it, as universally as the various arrangements by which steam and lightning- are utilized. What is wanted is, that the school-house and the press the universal educators shall take up the matter, not in the interest of the companies or their agents, but in that of the public and its coming gen- erations. The companies l^ave nothing to fear, but every- thing to hope from the most thorough discussion of their plans and the exposure of all the details of their management. In borrowing the science of their business from England, they wisely did not borrow that instinct of corporation-secrecy which prevails in it there with very unfortunate results. They have expended liberally to enlighten the public, and have welcomed governmental investigation to an extent that is almost ludicrously superfluous, and threatens to be more so. It is not at all creditable to the press that it should so little aid them in this matter, rarely speaking at all -of its Life Insurance. 115 own motion, and then too often in a style to make it profitable to the. public as well as the companies to buy its silence. Notwithstanding all this, the business has had a develop- ment in this country which a mere reader of newspapers finds it difficult to believe. And this development has been, in the main, sound and healthy, because the companies have been so much more ready to meet intelligent criticism than the press to apply it. The error into which they have inadvert- ently drifted, of allowing too much motive-power on the more self-insuring policies, and the other borrowed error of putting the surrender charge on the wrong basis, making it in re- gard to what has been paid, instead of what is to be paid, will certainly be corrected in due time. They only wait the waking up of a little disinterested discussion. When that is aroused, there will also disappear that other original excres- cence of insuring lives beyond threescore and fifteen. There will be no use of issuing savings-bank policies beyond that limit, because they would be sure to surrender then, if not sooner, unless the disease of which Methuselah died is to become epidemic. Explanation of Tables. Most persons perceive the relation to each other of lines more readily than of numbers. Hence a complicated problem which fails to be understood when stated by numerals, or other symbols, may often be made in- telligible to everybody by diagrams or chalking on a black- board. Mathematical experts in life insurance will smile at the clumsiness of the following illustrations, but they should re- member there was a time before they became familiar with algebra, when this ladder would have been the easiest way to the spot where they now stand. It is not, however, designed for them, but for persons having only the commonest knowl- edge of arithmetic, and eyes to recognize the proportion of things. ii 6 Politics and Mysteries of A man commonly insures a certain sum on his life, just as he does on his house, by paying the same premium yeas after year. Yet the risk of a loss on the life is very different at different ages, while that of one on the house commonly re- mains the same. It is this paying for a variable risk with a constant premium, which is the peculiarity of life insurance and the source of all its mystery. The natural way would be to make the premium vary from year to year according to the variation of the risk, but this variation is so peculiar, as we shall presently see, that this natural way is hardly practi- cable. By the Actuaries' Rate of Mortality, which does not differ materially from any other used for the purpose of insuring life, the average probability of dying at any age is given from 10 to 100, beyond which there is assumed to be no chance of living worth taking into account.* If the question be, how to insure for life $ 1,000 on a healthy person aged 32, let us first try the natural method. He has, according to our as- sumed scale of mortality, 68 possible years to live. Let us (see Plate I.) divide the line A B into 68 equal parts to repre- sent his future years of life. Let the perpendicular line A C and the 68 perpendiculars parallel to it be divided into 100 equal parts by lines drawn parallel to the base, and let each of these perpendicular parts represent 10 units, so that the whole height of the parallelogram may represent either one thousand persons or one thousand dollars, as we please. If the perpendiculars represent one thousand persons living to commence the ages from 32 to 100, the series of heavy black lines standing on A B, being very short, increasing very grad- ually at first, and faster and faster by and by, will nearly rep- resent the number of persons expected to die out of 1,000 at each age. In other words, the ratio of the thick, dark part of the perpendicular to the whole of it, at each age, is the risk * See Appendix for Actuaries* Rate of Mortality, and the natural pre- miums, at four per cent. Life Insurance. 117 of dying at that age, though not exactly. In point of fact, the thick, black lines standing on the base are drawn on the supposition that the whole height represents $1,000, and the heavy lines represent not exactly the risks at each age but the advance costs of the risks at four per cent. Thus at the age of 32 the risk of dying within a year is as 8.75 to 1,000. Hence to settle the death-claims at the end of the year, sup- posing interest at four per cent., each person insured at the age of 32 must pay at the beginning of the year what will amount at that rate at the end of it to $8.75 to insure $1,000, viz., $8.41. The first heavy black line at the foot of A C is intended to represent $8.41, the net cost (net because it pro- vides for no expense but the claim) of insuring $1,000 up to the age of 33. The next heavy black line at age 33, repre- sents $8.58, the net cost of insuring $1,000 till the age of 34, and so on. The heavy line on age 99 represents $961.54 the net cost of insuring $1,000 in the year in which the death is assumed to be certain. With these increasing net costs paid annually in advance, together with a proper addition for working expenses, the company could agree to insure the $1,000 for life, if it could only depend upon members enough continuing to pay, to constitute a fair basis of average. But looking at the dark curve of net costs of insuring a whole $1,000, growing steeper and steeper, it is easy to see that this natural method of insurance would soon come to a natural death by the healthy members ceasing to pay. If we apply it to a policy payable at a certain age or pre- vious death (see Plate II.) we shall find that the costs of in- suring the $1,000 at each age are just the same as before, till the last year, when as the claim is certainly to be paid at the end of that year, $961.54 must be paid at the beginning of it. This sort of endowment, is of course too steep for practice. Now, let us return to tiie long policy, payable at 100 or previous death (by the assumption used in determining the premium) and consider the long ago* discovered method of n8 Politics and Mysteries of getting over this difficulty, by substituting for the ever in- creasing net costs of insuring f 1,000 an equivalent constant net premium. Postponing for the present the question how this equivalent constant premium is ascertained, we will take it for granted that it has been, and see what its effect will be. At the age of 32 the constant net annual premium equiv- alent to the increasing series of net costs, standing on A B (Plate I.) is $18.04, represented by A P on the perpendicular A C. It seems hardly possible that this can be so, and his- tory as well as the judgment of the eye would seem to contradict it. But history would have had nothing to say, if the companies had always taken proper care of the dif- ference between the f 18.04 and the $8.41 (or rather $8.33), instead of squandering it in needless expenses. Let us suppose the company to consist of 84,831 mem- bers. (See scale of Living and Dying in Appendix.) It is plain that if each paid $18.04 instead of $8.41, the 742 who die the first year would pay in advance towards their own claims 742 times $9.63, or $7,145.46, more than on the other plan. This would be so much saved to the other 84,089 members and would be about 8^ cents each, so that their insurance would cost them only about $8.32J instead of $8.41. Consequently the company would have on hand from each member $18.04 $8.32Ji=$9.71 as reserve, which at the end of the year at four per cent, would amount to $10.10. Let a star be placed on the second perpendicular which marks the age 33, so that the portion of it inter- cepted between the star and the base shall be to the whole of it as $10.10 to $1,000. Plainly the company's risk this first year has not been $1,000, as it would have been if only $8.41 had been paid, but $1,000 $10.10=$989.90. For as $1,000 is to $8.41 so is $989.90 to 48.32J, or $8.33, to write to the nearest cent, the cost of the insurance as we have already seen. Again, at the end of the second year the Life Insurance. 119 reserve from another difference and the former one will have accumulated to $20.53, which is marked by a star on the perpendicular at the age '34, and of course the compa- ny's risk the second year will be but $979.47. And as $1,000 is to $8.58 so is $979.47 to $8.40, the cost of the insurance the second year. In this way, by letting the lines intercepted between the stars on the perpendiculars and the base represent the re- serves that arise from funding the excesses of the net con- stant premium over the costs of insurance, we have the $1,000 always divided into the risk borne by the company, which in case of a claim is to be made up out of the costs of insurance of the surviving members, and the risk borne by the party himself, which is wholly paid out of the re- . serve or fund arising from his past payments beyond the cost of insurance. The effect of substituting for the natural increasing scale of premiums the equivalent constant pre- mium is to restrict the company's risks if it reserves prop- erly to the decreasing series of lines intercepted between the stars and the line C D, while the increasing series of lines between the stars and the base is the domain of the self-in- surance or savings bank. The annual advance cost of the insurances done by the company are laid off as dark lines downward from the top of the parallelogram, and they al- ways bear the same ratio to the part of the coinciding per^ pendicular above the star, that the dark line at the base does to the whole. If we lay off the constant net premium $18.04 from top C P and draw a line through P' parallel to the top, we shall easily see how the series of constant premiums, C F, is equivalent to the risks actually borne by the company, for it exceeds the cost of the insurance for thirty years. Thus the first rash judgment of the eye is corrected. But every- thing depends upott the integrity of the reserve. Should this not be maintained, we can see by comparing the con- stant net premium with the increasing ones for the whole i2o Politics and Mysteries of sum, as represented at the base of the parallelogram, that it very soon becomes insufficient to carry the risk of the whole $1,000. The policy represented in the diagram on Plate I. of which the analysis is given in a subsequent note, is usually called a whole-life policy, though in regard to its premium and reserve, it is in reality an endowment insurance policy payable at the age of 100 or previous death. With a very slight enhance- ment of the premium it could be made payable at 75 or pre- vious death. Really the constant net annual premium (let this be taken for granted at present) is only f 19.05. (See Table No. 2 for a complete analysis of this policy.) Turn to Plate II. Fig. 1, and we shall see the heavy lines representing the net costs of insuring $1,000, on the natural method, the same, as far as the policy goes, as in the long policy of Plate L The stars placed on the perpendiculars to represent the height at successive ages of the series of reserves (Table No. 2), here rise *a little more rapidly than in the former case, thus so much more reducing the risks borne by the company that the series of " normal costs of insurance " (insurance done by the company) and represented by the series of heavy lines at the top of the parallelogram is much smaller. This leaves a larger part of the net premium to be deposited in the savings bank. " As has been already and cannot be too often remarked, a policy payable at 75 or previous death ought to be regarded as a whole-life policy, because it covers the whole of life which is, as a general rule, insurable. The extravagant risks which come after that age, no matter how much reduced in magnitude by the reserve, have commonly no insurable in- terest to justify them. And the policy would almost never be kept up beyond that age, if an equitable surrender value could be obtained for it. If we consider in the same way the policy payable at 45 or previous death (Plate II,, Fig.- 2), which is fully analyzed in Life Insurance. 121 Table No. 3, we shall find a still more remarkable diminution of the insurance done by the company, and increase of the self-insurance or savings-bank element. Here the constant net premium equivalent to all the net costs of insuring f 1,000, represented by the heavy perpendiculars on the base will be $62.87 ; and it may be worth while now to consider how this is ascertained, because in this case the calculation is the same in method, though not so tedious in its extent, as in the others. The present value of a dollar to be paid a certain number of years hence, say ten years, provided a person now aged 32 is then living, depends upon two things : the interest of money and the probability at that age of living ten years. If life were certain, it would be simply a dollar discounted at compound interest for ten years, which at four per cent, would be about 67| cents ; or more precisely, .675564. But the probability at 32 of living ten years (see Rate of*Mortality in the Appendix) is expressed by the ratio of the number living by the scale at 42 to the number living at 32, thus : Jrtii 5 so ^ na ^ ^ ne present value of a dollar, at 4 per cent., when contingent on the chance of a person aged 32 being alive to pay it at the end of ten years, is $J$J? of f 0.675564, which is about f 0.6 133. In the following table, column A gives the present values of a dollar, found in this way, to be paid in each of the 13 years of the term, if the party is alive to pay it, beginning with the f 1 paid at the start. The sum of these values is $9.8692. Column B gives the advance net costs of insuring f 1,000, as laid down in the short, heavy per- pendiculars on the base, together with the tall one of the be- ginning of the last year the premiums of the natural method. Each dollar in this column, B, referred back to the start, is worth the portion of a dollar standing against it in column A. Hence, multiplying the values in B by the fractions in A, gives the values at the start of all the natural premiums in B ; and their sum is f 620.44. This, on the two assumptions 5 122 Politics and Mysteries of of mortality and interest, is the sum which, paid at the start, would be precisely equivalent to all the natural premiums of B, considering separately the chances of the party being alive to pay them when due. Now as f 9.8692 is to $1, so is $620.44 to $62.866, the equivalent constant net annual premium to insure $ 1,000, payable at 45 or previous death. AGE. A B C I> E 32, 1. 8.41 8.41 7.93 7.93 33, .9531 8.58 8.18 7.57 7.22 34, .9083 8.75 7.95 7.18 6.52 35, .8654 8.93 7.73 6.74 5.84 36 .8244 9.12 7.52 6.26 5.16 37, .7852 9.31 7.31 5.72 4.49 38, .7477 9.53 7.13 5,13 3.84 39, .7118 9.74 6.93 4.48 3.19 40, .6775 9.96 6.75 3.75 2.54 41, .6447 10.20 6.58 2.95 1-90 42, .6133 10.48 6.43 2.07 1.27 43, .5833 10.82 6.31 1.10 .64. 44, .5545 961.54 533.21 - - 9.8692 620.44 50.54 It is essential in every such calculation, where compound interest is concerned, to treat every payment separately, as in the case above cited. Hence the tediousness of the process, when the possible payments are very numerous, unless resort is had to abridged methods, in which the reasons are con- cealed. Now having ascertained the constant net annual premium equivalent to the natural ones in this short " endowment in- surance," as it is called, we shall find that those we assumed in the other cases can be found in the same way ;* and the three cases differ from each other in no respect whatever, ex- cept in the different ratios of the insurance to the self-insur- ance. In the first case, where the term was 68 years, and the Lrfe Insurance. 123 constant net annual premium $18.04, the reserve increases so that the company's risks are the black lines at the top, instead of those at the bottom. But on account of the enormous risks of the years beyond 75, even the lines at the top become at length more than twice as large as the constant net pre- mium, so that they absorb the whole of it, and a part of the interest on the reserve. In other words, the annual deposit in the savings bank becomes negative (see Table No. 1 in the note) , so that the curve of stars denoting the height of the reserve, which began by increasing so rapidly as to have its concavity upward, slackens its rate of increase and turns its concavity downwards from about 75. Cutting off these enor- mous risks and closing the policy at 75, has the effect of so diminishing the company's risks that no part of the interest on the reserve (unless the entry is at a very early age) is in any year required to meet the normal costs of carrying those risks, as is plain enough from the diagram .(Plate II. Fig. 1) and from the Table No. 2. HencB with the very slight increase of the constant net premium from $18.04 to f 19.05, the re- serve amounts to the whole sum insured in 43 years. In case the policy is closed at 45 (Table No. 3, and Plate -II. Fig. 2) , the great preponderance of the self-insurance has the effect of making the insurance done by the company al- most incredibly smali, as represented by the stubby little dark lines at the top of the parallelogram. If we ascertain the value of these insurances by the company at the start, we shall find that less than one of the net premiums .(f 62.87) will pay for the whole of them. This may be easily done by re- curring to the foregoing table, where column D gives the normal costs of these successive company's risks. If they are all referred to the start, by multiplying each by the corre- sponding present value of a dollar in column A, we shall have in column E the present values of the whole, the sum of which is $50.54, which may be called the insurance value of the policy. We have already found that the single advance 124 Politics and Mysteries of net premium, equivalent to the whole of the natural ones, is $620.44. If we subtract from this the $50.54, we shall have $569.90 as the advance value of the self-insurance or savings- bank business on the policy. Thus we see that in this policy the savings-bank or self-insurance element is a little more than eleven times as great as the insurance element. If we apply a similar calculation to the policy payable at death or 75, we shall find that the advance cost of the insurance to be done by the company is $174.70, and of that to be done by the party himself is $156.50. Here the savings-bank element is not so great as the insurance element by more than ten per cent. In the policy payable at death or 100, the advance value of the insurance element will be found to be $204.42, while that of the savings-bank element is only $114.89 ; or a little more than one-third of the whole. It seems quite obvious from these considerations, that if a company consists of policies having so wide a variety in regard to the proportion in*Which these two elements enter into them, it must be quite necessary to equity that the two elements should be kept distinct, and that while the insurance part of the business is managed on correct insurance princi- ples, the savings-bank part of the business just so far as it is such should be managed on savings-bank principles. This is the aim of these tables. * Though prepared with a good deal of care, they undoubt- edly contain a multitude of errors, which seem to have a fatal ' facility of creeping into such a work. It is hoped, however, that most of them are so small that if laid off on the diagrams we have been explaining they would not be perceptible to the naked eye, in which case they will not be of great practi- cal damage. There is added in a note (Table No. 1) a full analysis of the policy illustrated in Plate L, for the sake of showing why' it should never be sought for or issued* This must be obvi- ous to any one who carefully compares this table with Table Life Insurance. 125 No. 2, or with any of the other tables of policies issued at the same age. The reason why policies have not heretofore been issued to any great extent with a precisely stipulated cash surrender value is that there has been no great public demand for them. And there has been no such demand because the public did not well understand the mq^t desirable, convenient and equi- table form of life insurance. Our companies are numerous, and all of them ready to accommodate the public with almost every conceivable form of policy, often making concessions much more inconvenient if not hazardous to the company than any proposed in these savings-bank insurance policies. If any healthy and insurable person should offer to any com- pany to take any one of these 268 policies, with surrender value stipulated according to the last column of the table, it must be uncommonly dull in its appetite for business or obtuse in its perception of its own interests to decline. The greater part of our life-insurance companies, including some of the most prosperous and useful, have indulged the public in a concession much less conservative than that of stipulating the cash surrender value proposed, to wit, that of taking a considerable part of the premium in notes from the start. If the surrender value stated in the last column of these tables is all that can be fairly conceded with such pre- miums, then, plainly, no part of the premium should be taken in notes till the year at the end of which there is a sur- render value, and then not beyond such value. Against this surrender value the note, of course, is as good an asset to the company as any other. Beyond this, it is hazardous or doubtful. The premium note, as has been already remarked, and as everybody knows, is in effect a surrender value stipulated, for in case of discontinuance it is never collected. In regard to justice and fair dealing it is sometimes too much and sometimes too little. In regard to equity between part-note 126 Politics and Mysteries of payers and all-cash payers, there can be none unless the lat- ter are paid, when they discontinue, as much cash as the former are paid notes, when the reserve is the same. There has never existed any rule to this effect. The notes are a source of great disappointment to simple-minded policy- holders. They should only be resorted to in an emergency to tide the policy over a shallows place in a man's income. Resorted to from the start they have the effect of substituting for a constant premium, securing a fixed sum to the widow, an increasing premium securing a diminishing sum. A ter- rible deception is practised upon the public in making people believe that the surplus will so far wipe out the notes, as to make the policy as good as one paid for in cash. If this were true, a man might become rich by depositing his notes in a savings bank. The only cases where a premium-note policy is as good as one paid for in cash, are, first, when the party can get more interest on the deposit part of -his premium out of the company than in it, and second, when he wishes to dis- continue and the company will not give a cash surrender value equal to the note. If he gives for a policy all the cash he can spare and a note besides, he. runs a serious risk of being obliged to relinquish his policy when he needs to keep it up. The savings-bank insurance, with stipulated cash surrender value, and margins adjusted to an equitable assessment of expenses, gives a person the best possible chance of getting all the insurance he needs at a fair cost, without being obliged ever to pay for more than he needs. Under the present non- forfeiture plans, whether secured by stipulation or legislation, the person who becomes unable or unwilling to pay further premiums, gets as his surrender value only some more insur- ance. This is better than nothing, but may not be so good as the. money. For an obvious reason the company cannot pay money or insurance at the option of the party at the time of discontinuance, though it might have stipulated either the one Life Insurance. 127 or the other at his option declared at the start. But if the party gets the cash surrender value stipulated at the start, he is all right in any event. For, taking the example in Table No. 2, suppose he has paid ten premiums and finds himself unable to pay the eleventh. If he has ceased to need further insurance he receives $101.79 in cash ; he would have received not more than $ 60 or $80 if it had not been stipulated in the policy. If he does need further insurance and is in good health, the company will doubtless lend him a premium or two on the security of his surrender value, rather than have the policy drop. But suppose his health is bad, so that the company had rather pay the $101.79 and have the policy drop. It is good security for that in the money market, so that the party is sure to be able to borrow on it outside of the company to keep it in force. Thus, provided he needs the insurance, he can by means of the cash surrender value stipulation, oblige the company to furnish it to the extent of 88^ per cent, of his reserve. Under the present Massachusetts law to regulate the forfeiture of policies he can get further insurance only to the extent of 80 per cent, of his reserve, whatever it may be. Under this law, of course, he fares a little better, as to te- tter insurance, when the reserve is quite small. But it fails in a great measure to protect him, in that respect, when his reserve is large, and altogether when he needs the money more than the insurance. The reader, it is to be hoped, if he has a family dependent on his earnings, will not fail to take one more look at these diagrams, and by noticing how small an annual payment creates a fortune to leave behind him, become impressed with the manly resolution to lose no time in securing one. 128 Politics and Mysteries of II . -s2 rt I II il 111 811 uosjajjo aSy 88g8 ^SSrHrH i IIOCO-^ Oit>Ol^-OO COCOt*OCO O O rH CX| CO^OGOOOO t>-rHlOOO HTHb*C5rH rHCOOOrHCO -rH O O CO CO -COOrttrH COCNrHrHO ^OOCOCOO ^ O5 O5 Oi C5 Ci C5 O G5 Ci GO GO GO GO GO cocococo cot^b^t 5COO COl>-OOCO t>-COCOCj - tO i I C^OSCOC^CO COCN^fC GO 00 00 00 GO GO CO 00 O Oi Ci Gt> C5 C5 sssss cococococo cococococo cococococo ^ CO CO CO CO CO Life Insurance. 129 - CO H r-H Tt< t>- COOOOOOOO n2HlC.COOOCOI>. t^t>.t>.coco TTttt inn QOOOOOGOOO OOOOOOCOOO OOOOCOOOCO 0000000000 b*l>.|>.t>.CO l>.COOT-i(M CT>OiSOa t(M i < COO5 O C CNCOrH COCTi r-i < (^ -rfrl 1C CO i 1 ^ l>- *O "^ 3 CO CO CO 00 CO CJ GO 3 O i l Tfi Oi GO i i I TH I>.OCOCOC i QO CO TH CO i ( O5 HT^TH XI<-^T*COC c^c 3COCOCOCO COCOCOCOCO COCOCOCOCO COCOCOCOCO COCOCOCOCO cococot>-t> 130 Politics and Mysteries of pdsi 5OCOCO OCOCOOOi-H ^COC !iO(MCO tOCOt^OOO r-ICMC 3l>-t>-l>- l> l>- 1>- 1>- CO OOOOC tO Tfl COCO -1> CO O5 Oi sura Valu y' . mp Ris Normal osts of In- COCOrH-^cO to T^I O to 00 O O O 00 tO . COCOtOtOtO ^rJHCOCOC.COOO COt>.(MCOl 5O5O^OO COt^t^COCO OO OO tO CO tO C^l O5 tO O CD i-H t^- TH i (C^tMCOTH tOtOCO t>- l>- GO OO d ggggg 88i8 888 88 COCOCDCOCO cDCOCDCDCD COCDCOCOCO COCOCD Life Insurance. OOOi Or-KNCOT* kCCDb-00 30 COCOCOCOCO COCOCOCO OO OO OOGOOOOiOi O5 O5 O5 1 1 OOi-H W*. i-H to CO C<1 O U7) O coco cococococo cococo OO OOOOO OOO Or- 1 Oi Ci O5 Oi Oi O 132 Politics and Mysteries of urrender Values. 3COO OCOCOtOOi TH CO TH CO rH CO i I CO .>.-< OSFH-COOI OCOrHOi. CO -^ F I CO tOC.COQO COt>-i I (N C^ O CO ^ "* -rfl Tt< CO CO CO .U5C oococoo5-tO H 1C i i iO rH t-T^COOCO -COCObOO rHOI>-l>-CO u ^2? < '^ ^J 00 .^??^ COWSCO^KCO HTHTjHT^Tt* 3 O O C 3l>.|>.OiOi CDOGOOi COOCOOi^ CO rH C OCOOiOrH COIOCOIMCD rH CO CO O CO COOi-O CD rH C^l C 3COCOCOCO rJH TH T}< TjH O lO lO O CO CO COCOt>t^CO CO GO Oi C OiCO- 1>. CO VO IO rH ICrH G H(M b-^fNOO ^COCOCOCO rH COOI>-GOCO CO O ^d O O CNOit^^CO COCOOir-rH xH^H GO CO CO 15 CO CO O . CO b~ O CO I"- Oi rH CO CO rH CO CO -^ i I CO COCOCOCOCO COCOCOCOCO COCOCOCOCO COCDCOCDCD CDCOCD CO CO CO CO CO CO 'CO COCOCO COCOCOCOCO COCDCOCOCO COCOCO U31QIOC0C b-COOiOi-i 134 Politics and Mysteries of AlMJortT rH i 1 rH rH S .5 CO O TjH CO >O 00 GO GO OS CN rH CO OS ^c^^S ts S | g 1 CO CO CO .CO rHOS GOI>.OO I |SSS 5 *OiO O^O SrHOrH CO co CY-M-SI rOS CO OS t>- OS TH CO OS rH rH O g -3 3 c3 8^c^ScS OqrH'rH 05 ^ COrH | [> 5 ' $ s o^g^Scq CO OO CONOCO co coo cocoo fl ft " (MCOO-* CO TH GO CM U3 GO rHCO^t^GO OSO * I* OSOOOOt^CO CO *O T}< CO CM rHrH ^ N -| 4 CO t>-QO -^ CO t>. rH rfl l>- OS &S3 sp fe 1 "^^ O CO CO O CO l>- i I & rHrHrH- * TH OO ^OOOCOrHCO 5 CO CO b-GOOi ICO rfH CO O5 i-H T*< QCS?q ^38 ^ coococoo co co o co co iO 10 "* rj< T*I COCOCO-* O ri< -rfl it O rH CO IO i i !>.COCS lOtOCOOtO l>- O CO i 1 t>- i^-* OIOGO jjj >O CO O !> <1 Ci-<00 O ^ to to tO C 8 15 rH T OOO .OiO I ^ Life Insurance. 137 With the exception of short-term policies, which are frequently of great convenience, no others are really required besides such as may be fully pre- calculated in two or three hundred tables like Nbs. 2, 3 and 4 above. For example, a joint policy is never necessary, for if two persons are insurable and wish to insure for each other's benefit, the pre- mium which would be paid for the joint policy, payable to the survivor on the death of either, may be divided between two policies, one on each life. Then when one becomes a claim, the other may be surrendered, and the survivor will be as much bene- fited as if the policy had been that present pest of the offices, a joint one. This arrangement would naturally lead the officers to look after the insura- ble interest of each party in the other, instead of contenting themselves, as at present, with finding one insurable interest for the two risks. These Savings Bank Insurance Tables are offered to the public as a practical solution of the impor- tant problem, how to conduct the business and ad- just the premiums of long and short term endow- ment insurances, so that no one can afford to put the difference between the premiums of the two for the same amount at the same age in a pure savings bank, and take the longer term in the insurance company ; in other words, how to make the increase of the self-insurance on a given policy diminish the cost of the insurance by the company, 138 Politics and Mysteries of instead of increasing it as is now the case. Under the old system, the increase of the self-insurance on a given policy diminishes the amount of the insur- ance done by the company, but enhances materially the cost of what is done. The consequence of this is, that many thrifty young people who only need insurance for the ten or twenty years in which they will be accumulating a competence, neglect insur- ance altogether and patronize the savings bank pure and simple* The stock, or non-participating life insurance companies need the solution of this problem, no less than the mutual ones. Such a company will give a whole-life policy for $1,000 to a person aged 30, for an annual premium of $16.55, and an en- dowment insurance, for the same amount, payable at 40 or previous death, for an annual premium of $87.55, a difference of $71 per annum. Now if money is worth six 'per cent, per annum, and a savings bank can be found that will accumu- late it at that rate, the insured party by taking the ten-year endowment instead of taking the whole-life policy and putting the $71 per annum into the savings bank, simply throws away $25.66 at the start, even supposing that the whole-life policy at the end of ten years, the party being then alive, should have no value at all. To make it in any measure expedient to take the ten-year endowment insurance in a stock company, in preference to the Life Insurance. 139 longer policy, the premium of the former must be reduced to $84.14, if not lower. If any consider- able arithmetical knowledge on this subject should get afloat in this country it would be impossible for stock life insurance to flourish without adopting a savings-bank system, in which the profits of the stock shall be confined to the saving of cost on the insurance done by the company, while the self-in- surance should be regarded as savings-bank deposit, withdrawable subject to a fair charge proportionate to insurance value. Inasmuch as life insurance under a law fixing the reserve is a union of insurance and savings bank, and the company when issuing endowment policies is, in the last year of every such policy, a simple trust company, doing no insurance at all, it is not easy to see why it should not exercise savings-bank powers in any case when it is expedient. This would be a great convenience and simplification of business. Many people find it difficult to pay the whole annual premium of a policy, especially an endowment policy, at once. And this leads to splitting the premium into semi-annual, quarterly and monthly payments, a very great inconvenience to the company for reasons which it is unnecessary here to dwell on. The company can much more easily accommodate such people by deferring the issue of an insurance policy till it has received sim- ple savings-bank deposits sufficient to pay a full 140 Politics and Mysteries of annual premium in advance. Then let any pay- ments that can be made during the first policy year be received as simple savings-bank deposits to be applied with interest to the payment of the next annual premium when it becomes due. Chapter V. REDUCTION OF KATES. In the latter part of 1872 the officers of the lead- ing Mutual Life Insurance Company proposed a serious reduction of the premiums. This produced a public discussion, the result of which proved that autocracy in life insurance is far from being synony- mous with omnipotence. Some of the incidents and mysteries of this discussion will be noticed in a subsequent chapter. The following letter was intended to justify the writer's dissent from any such reduction as that proposed : EEPLY TO MR. WHITE. To the Editors of the -Hartford Courant. At your invitation, the secretary of the Charter Oak Life Insurance Company, in your issue of December 14, produces an argument in favor of the lately proposed reduction of rates by the Mutual Life Insurance Company of New York, in the course of which he alludes to me in the following lan- guage : " Mr. Wright's position towards the Mutual Life is very astonishing, when it is well known that for some time past he has persistently urged a plan of insurance upon the companies which, on large classes of policies, does not pro- Life Insurance. 141 Tide for anything like the amount of expenses which is fur- nished by the new rates of the Mutual Life. He now objects to a ' loading ' on endowment insurances, considerably more than his own plans contemplate, as being unsafe. If it is so, what sort of an adviser is Mr. Wright to be considered when he urges his oWn plans with so very little margin for ex- pense that only one company has as yet been induced to use them?" He also says of me, in connection with two other persons, that I am on record in favor of that which I now condemn. It is not that I differ with him in regard to the reduction of rates, or to defend myself against what I deem to be a per- sonal injustice, but to explain a matter in which the public has a deep interest that has thus far been left out of sight in this discussion, that I ask space in your columns to reply to this. Mr. White cannot possibly be so severe on me in regard to my past short-comings as Tarn on myself. But I prefer to tell the story of my own guilt, and confess my real crime. It will then be seen that I am quite innocent of ever advocat- ing such 3, reduction as the Mutual Life proposed. Though the premiums charged by the Mutual Life Insur- ance Company have never, in my opinion, been, on the whole, too high, it is quite undeniable that some of them are un- necessarily high in relation to others. In truth there was committed, long before I was born, and before life insurance was born in America, a blunder in what is called " loading the premiums," which, of course, extended to agents' com- missions and the assessment of expenses among the mem- bers. This was adopted unwittingly in this country, with most of the other rules and practices of the business. It did not become very apparent or troublesome till we had gone largely into the practice of issuing endowment policies. Then, when it was attempted to distribute surplus, either on the percentage or " contribution " plan, the most astounding 142 Politics and Mysteries of and unsatisfactory results developed themselves, I, for one, discovered that something had got wrong end foremost, but I was unable to see what, or how to set it right. I carefully explored the literature of the British Institute of Actuaries, but got no help from 'that. Hints of the trouble were given in the ninth Report of the Massachusetts Instance Commis- sioners in 1864 (see Reports with Appendix, 1865, pages 274 and 366). By about 1869, when the blunder was cheating people out of millions, for nobody's benefit but the agents 1 , all at once the right way of assessing expenses, compensating the agents, and keeping the accounts of a life-insurance*com- pany dawned upon me. Not to have discovered this before was intensely and almost intolerably mortifying. For nobody more heartily than I had recommended endowment insurance policies. Tens of thousands had taken them, and on the short terms had been as good as cheated, every mother's son of them. And I had ignorantly acquiesced in the stupid and stupendous blunder by which this was brought about ! I could have torn the hair off from the top of my head, if there had been any there and it would have done any good. And yet I was as sure as ever that endowment policies were the right ones to take, if they could be dealt by equitably as to their expenses. Nobody would have been gladder than I to have had my discovery proved a mistake. And I will pay a handsome re- ward to any one who will do it now. I saw then, and see now, that the companies that have trusted me as their adviser are in danger of coming to grief, not by want of funds but by want of equity within themselves. On this account I called together my brother actuaries in 1870, at the Mutual Life Office in New York, in presence of Mr. Winston, and some of his directors, and had the method of loading premiums and assessing commissions and expenses discussed. I think it was unanimously agreed by the actuaries present, that the old procedure was wrong, and the only question was how Life Insurance. 143 without alienating the agents, who are interested in the pres- ent exorbitant commissions on endowment policies, the base could be changed from premium to ' insurance value." It was concluded that the thing was only possible by a concert of action of the leading companies, and I understood Mr. Winston to promise that he would endeavor to have a con- vention of the executive officers of such companies assembled for that purpose. They never assembled. I have urged the calling of such a convention, upon sev- eral companies, with all my might. For I felt that such a blunder, affecting one of the grandest institutions of modern civilization, must be corrected. But Mr. White is not quite correct in saying that I have urged MY plan of doing it upon any individual company, and not at all correct when he insin- uates that only one company has adopted my plan, because it has " so very little margin for expense." The contrary will appear by and by. I have not urged, but simply offered, as a sin-offering, freely to all companies who will take it, a plan founded "on equity, to which no objection has yet been offered except this : It does not in any case give or provide for, a commission to the agent larger than the company and the policy-holder himself can ' afford, and therefore the agent will not work it. The present fact is, that on any other plan in any company, the agent gets a larger commission just about in the ratio that the policy is worth less to the company, and so large on short terms that no man but a fool or a dupe ever takes one. Why, will be plainer by and by. The ordinary mind commonly fails to understand the sub- ject I am talking about, because the law of human mortality extends over so many years ^nd is complicated with com- pound interest. The equities would be just the same in kind if life were shorter and money yielded no interest. Hence the easiest way to understand them will be to take a hypo- thetical law of mortality, confined to a very small number of 144 Politics and Mysteries of years, and suppose the rate of interest zero. Let us, for ex- ample, suppose that life could last at longest but four years, and that one out of four will die the first year, one out of three the second, one out of two the third, and the rest in the fourth year. This law of mortality is expressed by the series ' ^ i ? ^ ^. Now if we take a mutual life insurance company of four members, all entering in the first year of age, each insuring for $1,000, the normal or natural net premiums will be as follows : 1st year, $250 00 2d year, 333 33 3d year, 500 00 4th year, 1,000 00 This increasing series of premiums would be objectionable, for reasons too obvious to mention. How can we make the premiums constant or level ? Obviously as much must be paid one way as the other to meet the aggregate of death- claims, which will be $4,000. Of the level premiums, what- ever they may be, there will be four paid the first year, three the second, two the third and one the last, in all, ten, so that each must be $400. This will give the company $600 the first year beyond the one death-claim and of course it must be held in reserve for the future. The three premiums paid the second year will leave $200 to be added to the reserve from the first, making it $800. The income of the third year will be $800, making it necessary to take $200 from the re- serve, thus leaving it $600, which with the $400 received the fourth year will pay the last death-claim, and would just as well pay it, if the man should continue to live, in violation of the law. As to the premiums and necessary reserve from each, under this law, it would make no difference whether the number entering the first year were four or more. Each living member must then have a reserve, as follows : at the end of the Life Insurance. 145 1st year, $200 00 2dyear, . . . . . . 400 00 3d year, 600 00 4th year, 1,000 00 This is as much as to say, the party paying $400 the first year, compared with one paying the normal premium of $250 for $1,000 of insurance from the company, really insures him- self to? $200, and the company only insures him the comple- mentary $800 at the normal premium of \ or $200. The next year he insures himself $400 and pays the company the nor- mal rate of J, or $200, for carrying the complementary risk of $600. The third year he insures himself $600, and paysjihe company the normal rate of \ or $200, for carrying the com- plementary risk of $400. The last year he insures himself the whole $1,000, for if there were any number of living members, entered subsequently, not one of them would have to contribute a dime to his claim. And let it be observed that the reserve of a living member never has to be touched to pay the claim of a dead one. That is always made up out of the normal insurance premiums of himself and the living members that year, and his own reserve, or self -insurance. This is a financial necessity of substituting a constant or level premium for the natural increasing premium, which admits no reserve out of the net premium. It does not become any less a necessity if legislation steps in and compels it. Under such a statute, at any rate, the contract naturally resolves itself into two things, very distinct in kind, and which cannot be confounded or left mixed up, when policies of dif- ferent terms and conditions are issued, without making the wildest work with equity. Distinguishing the successive self-insurances from the in- surance by the company, we have under the level premium the two following series : 146 Politics and Mysteries of SELF-INSURANCE . INSURED BY COMPANY. YEAR. Deposit. Sum. Premium. Sum. 1, . . . $200 00 $200 00 $200 00 $800 00 2 ... 200 00 400 00 200 00 600 00 3, ... 200 00 600 00 200 00 400 00 4, ... 400 00 1000 00 . This is a whole-life policy on our miniature mortality table, without interest or expense. Let us see how it would be on the same hypothesis with a three-year endowment insurance, which would be calculated just as if two instead of one died in the third year. Then there would be only nine of the net level premiums to meet $4,000, and of course each would be $444.44 about, and the contract would resolve itself into two, as follows : SELF-INSURANCE. INSURED BY COMPANY. YEAE. Deposit. Sum. Premium. Sum. 1, . . . $259 25 $259 25 $185 19 $740 75 2, ... 296 29 555 54 148 15 444 46 3, ... 444 44 1000 00 ~ ~* If it were a two-year endowment insurance, the net pre- mium would, in the same way, be found to be $571.43. And the contract would resolve itself into two, as follows : YEAR. SELF-INSURANCE. INSURED BY COMPANY. Deposit. Sum. Premium. Sum. 1, 2, ... $428 57 571 43 $428 57 1000 00 $142 86 $571 43 Life Insurance. 147 Now there is no provision on any of these contracts for expenses, so if there are to be any, some provision must be made for them in addition to the net premium. And if the law is not absolute as to the number dying each year, but only approaches the assumption as the numbers are greatly multiplied, there must be some addition on that account, es- pecially if legislation has stepped in and in effect forbidden any policy's reserve to be used to meet any claim but its own. How shall this addition be made ? Observe that the self-insurance fund is a pure matter of de- posit, occasioning no risk to the company. Indeed the greater it is in relation to the policy the less is the company's risk. If it yields interest, as it always does in practice, then a small part of that interest will be sufficient to pay the expense of taking care of it as it would in any other bank. Hence there is no occasion to increase the provision for expenses on ac- count of this part of the contract, nor for any apprehended excess of mortality, for there is no risk incurred by it on the part of the company. It is only in regard to the insurance parts of these contracts that the respective net . premiums, $400, f 444.44 and $571.43, need to be increased at all. And why should they not be in- creased in proportion to the insurance to be done by the com- pany under such contracts, that is, the insurance value of each ? This is the practical question now before every life- insurance company in this country, and it is several times more important than any other, for other things depend on it. By the antiquated blunder of which I have spoken, not the slightest regard was paid to the insurance value of the con- tract in deciding the question of addition for expenses, or " loading," as it is called. Indeed the thing was wholly ig- nored, and either a fixed percentage of the net premium was added to itself or one arbitrarily graded, but always produc- ing, most absurdly, the largest margin on the largest premium relative to a given amount of policy. 148 Politics and Mysteries of Under the hypothesis above, the insurance value of the first or whole-life policy is found thus : The value of the first risk of $800, is $200 in hand. There are three chances out of four of having the second risk of $600 to carry for $200 which is worth $150, and there are two chances out of four of having the third risk of $400 to carry for $200, which is worth $100. So that the insurance value of the first or whole-life policy is $450 ; of the three-year endowment, $296.30 ; of the two-year endowment, $142.86. These insurance values at the start measure the interest of the respective policies in the company as an insurance com- pany and the additions for insurance expenses and mortality contingency should plainly be in proportion to them. Sup- pose we need an addition or loading to the whole-life pre- mium of $90. This is 20 per cent, of the insurance value, and equity demands simply that the same percentage of the insur- ance values of the other policies should be added to their net premiums, making them respectively $490, $503.70 and $600. But the old blunder starting with the same premium on the whole-life policy, and loading by a percentage of 22-| per cent, of itself to make it, would make the premiums $490, $544.44 and $700, thus giving the shortest endowment policy which has the least insurance by the company, besides its larger expense on its larger deposit, the butt end by $100 of the insurance expenses. Look at it thus, and ponder on it. THE EQUITABLE THING. THE ANCIENT BLUNDER. Gross Premium. Margin. Gross Premium. Margin. Life, . 3-year Endow., , 2-year Endow., . $490 00 503 70 600 00 $90 00 59 26 28 57 $490 00 544 44 700 00 $90 00 100 00 128 57 Life Insurance. 149 Here is the fountain of the present trouble with life insur- ance. It is not the excessiveness of the premiums, but the violation of equity in loading them. And even this would do no practical mischief, however theoretically absurd, if the companies did not proceed to assess insurance expenses, be- ginning with agents' commissions, in the same way, and then aggravate the iniquity, whenever an already overtaxed mem- ber seeks to withdraw, by basing the surrender charge as ab- surdly on the self-insurance instead of the insurance value. This it is that has brought matters to such a pass that an old actuary hardly dares to turn a street corner suddenly, lest he should meet an irate short-endowment victim who will break more than one-tenth of the decalogue over his head. The blunder once found out is almost as ridiculous as it would be to harness our horses tail foremost, and would go out of use as speedily, but for the sanction that has been given to it by long usage, and the cheek of that cheekiest of all apostles, the life-insurance agent. If I have succeeded in establishing in the reader's mind the distinction between the self-insurance and the insurance done by the company, which takes place in widely and ever- varying proportions under every policy, he is now prepared to appreciate the actual figures of the case, to be astounded at Mr, Winston's attempted coup (Petal and still more at the libellous utterance of the Charter Oak against the proposed system of Savings Bank Life Insurance. I give below the present premiums of the Mutual Life for a policy of $1,000, payable at a given age or on previous death and the proposed premiums with their respective margins over, or additions to, the net premiums by the American Mortality at four per cent., and the savings-bank premiums, proposed by me for the same policies, with their margins over the Actuaries', at four cent., which are of course a little less than they would be, compared with the American Mortality. Politics and Mysteries of Policy for f 1,000, at the age of 40, payable at a Given Age or Previous Death. SAVINGS BANK. MUTUAL LIFE. AGE OP PAYMENT. Proposed Present Premium. Margin. Premium. Margin. Premium. Margin. 50, $89 97 $4 11 $94 00 $854 $106 90 $21 44 65, 5921 4 44 59 60 5 42 69 49 15 31 60, 45 48 5 27 43 36 3 94 51 78 1236 65 38 65 6 31 34 50 3 14 42 10 10 74 70, 35 32 7 40 29 45 2 68 36 91 10 14 75, 34 01 8 51 26 66 2 42 33 68 9 44 96 or 100, 3403* 10 35 24 58 2 23 31 30 8 95 The premium for the longest term under the Savings Bank system being larger by thirty-three cents than the present Mutual Life premium for the same term, it is pretty evident that the Charter Oak is mistaken in saying that the compa- nies except one have declined my plan because it has " so very little margin for expenses." If the present life rates are safe and have margin enough for expenses, without the aid of endowment-insurance policies, then the savings-bank rates prepared by me have margin enough, if the commissions and expenses are assessed equitably, and it is an essential feature of the system that they shall be. On the contrary, it will be perfectly evident, I trust, on inspection of the figures above, that Mr. Winston's proposed reduction, now so happily de- feated, worked as it must have been on the old plan of as- sessing commissions and expenses on premiums, could not possibly succeed except at a considerable sacrifice by the old members, and supposing it could, still, inevitably, the long * This is what a whole-life premium would be on the Savings Bank plan. In fact, it is not proposed to issue this absurd policy under it, but to stop at 75. Life Insurance. 151 policies would unjustly burden the short ones which is as much as to say that it could not possibly succeed unless the expenses can be reduced to little or nothing and the stock of fools be largely increased in the land. ELIZUK WRIGHT. BOSTON, December 18, 1872. Chapter VI. * BLACK AND WHITE MAIL. The effect on the free American press of some two hundred life-insurance companies, hungrily competing with each other in every considerable city and village of the thirty-seven States and twelve Territories, is a most interesting study. The multiplication of policy-holders is a necessity of the business. The dispersion of the risks over a wide extent of surface is a great advantage, tend- ing to neutralize the effects of local epidemics. Hence every company seeks to recommend itself everywhere through the press, national and local. Its agents are, if possible, everywhere. They are nothing, if they do not advertise. There are, doubtless, multitudes of conscientious editors, general and special, of greater or less ability, who aim to give the people trustworthy information on every subject which concerns them, without regard to advertising patronage. But if any one carefully surveys the field, early and late, in regard to life-insurance, he will find marvel- 152 Politics and Mysteries of lously little evidence of their existence. He will probably find no subject whatever, of any social importance, on which American journalism has done itself so little credit. The utterances of the press have been sufficiently abundant, but their character has generally been unreliable, if not con- temptible. In fact, the American press, in regard to life insurance may be almost exhaustively divided into the two classes of the black-mailers and the white-mailers. The former needs no description. The executive officers of the com- panies feel themselves at the mercy of certain advertising organs of no use to them, and look at them with as much dismay as Pharaoh did at the multiplying plagues sent upon him. So far as dishonestly conducted companies are concerned, the black-mail press, though an unlovely, is doubtless a sanitary institution. But it operates with quite as much if not more success on companies of the best intentions. This they owe entirely to the mystery in which their proceedings are enveloped. They find it cheaper to buy silence on things which they hardly understand themselves than to explain them to the public. But the white-mailers, always lovely and sapo- naceous, are more dangerous to the people. They are watch-dogs that never bark at all till it is too late. They do not procure advertisements by threats. But they allure them by flatteries- which Life Insurance. 153 do a hundred times more mischief. Iir regard to such profitable advertisers as the life-insurance companies, particularly the most autocratic, the motto of the white-mail press is, nil nisi bonum. It is only when the companies publicly fall out with each other that the white-mail press ventures any- thing like criticism, and then it usually betrays more ignorance than conscience. The relation of life insurance to the press is well illustrated by what happened in New York in ' December, 1872, when the Mutual Life Insurance Company of that city proposed to reduce its rates on all policies ^without regard to the fact that most of them were already too low, unless the company should sacrifice old and retiring members for the benefit of new ones. The announcement was made with a prodigious flourish of advertising trumpets and at enormous expense. It was well calculated to strike terror into the hearts of other companies that were not in a condition to 'saddle upon an immense body of old members, with an accumulation of $60,000,000, the expense of get- ting and maintaining new business with inadequate premiums. And it did it. These companies ob- tained the opinions of professional experts, and rushed into print. Of course at a large expense. The advertising war raged for a week or two. It rained golden manna on the press, from both sides. For the mighty autocracy which provoked the 7* 154 Politics and Mysteries of war was not to be put down by the opinions of two or three humble experts, who could easily be black- guarded within an inch of their lives. During the melee the leading New York papers delivered themselves of opinions in a most unwonted and oracular manner, taking sides, on the whole, with the allied host which opposed the reduction of premiums, but betraying an amusing unconscious- ness of the question which lay at the bottom of the controversy, as to the rights of the policy-holder in his own accumulation, or self -insurance. As the writer was somewhat mixed up in -this fight he had an opportunity to learn ja certain fact, which may serve as a key by which any one suffi- ciently curious may estimate pretty accurately its cost to the companies concerned. As one of the experts whose opinion had been published by the allied companies, he with the others was made the subject of a libellous and rather scurrilous attack emanating from the Mutual Life office, pretending to be from "A POLICY-HOLDER"* of that company, and undoubtedly by its money inserted in nearly all the New York papers. To this he offered, per- sonally, through the New York "Evening Post" the following reply. A sub-editor of that journal who was present in its office could not assure the writer that it would he inserted as a matter of jus- * Understood to be an officer of the company also. Life Insurance. 155 tice, because the article to which it was a reply had probably been paid for, though it was not in the advertising columns. The writer observed that it seemed a queer rule to exact pay for a defence against a libellous attack because the publisher had made money by it, but requested that the reply should be published at any rate and the bill sent to him in Boston. It appeared in the " Evening Post " of December 13, 1872, in a mutilated condition, an important sentence being omitted, and a bill was rendered charging 61 dollars for the 61 lines it occupied. This was returned, saying that the bill would be cheerfully paid when the reply was printed correctly. With the utmost politeness, the "Post," in its issue of December 18, then repeated the publication as follows, and the voucher for the final settlement will be found in a foot-note,* charg- ing for 122 lines inserted once instead of 61 twice. [From the New York Evening Post, Dec. 18, 1872.] ELIZUR WRIGHT ON INSURANCE RATES. The following letter we printed in the " Evening Post" a few days ago with an important omission. * Mr. ELIZUR WRIGHT, To The Evening Post, Dr. Lines. Times. Rate. Amount. 1872. Dec. 18, To advertising Card, 122 1 $0 50 . $61 00 Please remit. Received payment for Wm. C. Bryant & Co., THEO. S. WEEKS. 156 Politics and Mysteries of We now print it corrected in justice to Mr. Wright : To the Editors of the Evening Post: A " Policy-holder " in your issue of December 11 is disturbed in his mind, or has a mind to disturb the public, because certain actuaries, of whom I am one, have disapproved the reduction of rates in the Mutual Life, having previously approved as low rates for stock companies. It is on this difference of opinion in the two different cases that he wants to know whether we are " consulting actuaries " or " consulting weathercocks." This is good as it stands. If "Policy-holder" has been in the Mutual Life long enough to be insuring himself about half the face of his policy and, if he does not understand what this means, perhaps Professor Bartlett will explain it to him and he wishes now to play stockholder gratis to new mem- bers paying only stock rates, God forbid that I should forbid. On the contrary, I admire his self-sacrifice. But to back up his " weathercock " theory on me, specially, this " Policy-holder " resorts to a falsehood and gross garbling of my words. This is the way he puts it : " Elizur Wright, speaking of the advantages of low rates to the policy-holders, says : " 4 It is marvellous how little it is considered that the more you pay in advance, the more you insure yourself! the more you have to pay beyond your just share of the expenses.'" The only place wh|re I have used language resembling this is in a note at the bottom of page 366 of the reprint of "MASSACHUSETTS REPORTS ON LjIFE INSURANCE, 18591865, WITH AN APPENDIX." * I was not there " speaking of the advantages of low rates," and what I did say was this : " It is marvellous how little it is considered that the more you pay in advance the more you insure yourself. And how * A work now out of print, and the plates melted in the late fire. Life Insurance. '57 the more you insure yourself in most companies, the more you have to pay beyond your just share of the expenses." This was aimed not against high premiums in a Mutual company, for it had nothing to do with high or low rates, but a false assessment of the expenses prevailing in too many companies, whereby a smaller risk is made to bear a larger share of the expenses than a larger one. The note, as quoted by " Policy-holder," is not very pertinent to such an issue ; as printed by me, in connection with the text, it is more so. It was certainly intended to inform ancient life and all short- term endowment policy-holders, that whatever might be their respective premiums, they were, in most companies, paying more in comparison with other members than their just share of the expenses. So patent will this be to any intelligent reader who examines the note in connection with the text, that he will bear me out in saying this. If " Policy-holder " does not make a public apology for this falsification, into which he may have fallen unwittingly, then he meant fraud " while Truth was pulling on her boots." ELIZUR WRIGHT. BOSTON, December 12, 1872. The abusive and wilfully* false article of the anonymous libeller occupied 190 lines in the " Post," and without doubt cost the Mutual Life Insurance Company, $190. It was inserted in a large num- ber of other journals that have the reputation of being more mercenary and expensive than the "Post." Any one at all acquainted with the extent of that newspaper war, in which the real question at issue was sedulously kept out of view on both sides, will have no difficulty in believing that the companies disbursed more money on it than they * * No apology was made. 158 Politics and Mysteries of do on fifty average widows. After all, the expendi- ture in resistance was of no earthly use, for it was not the published opinions of the- experts or of the editors that did the business ; but the fact that some of the policy-holders of the Mutual had con- sulted able lawyers and found that they could, and decided that they would, put an injunction on the company if the absurd and inequitable project was persevered in. The expensive care which the foiled trustees of the Mutual took to keep from the public the true cause of their defeat, by exten- sively advertising a humble request of the allied companies that they would suspend their reduction of premium for the present, and pretending con- descendingly and courteously to grant it, would be a very amusing illustration of the high-mightiness of bell-wetherism, if it were not such shameless trifling with sacred 'trusts on the one side, and degrading sycophancy on the other. The whole thing shows that the press in regard to life insur- ance, for the most part occupies itself either as a foul bird of prey, or a silly decoy-duck. This is not much to be wondered at, and it is not worth while to spend a moment in deploring it. Money has the power, under certain circumstances, to reward and punish. As long as nobody knows exactly whose it is, the will that wields it has its own way with the white-mail press, as well as the black. And that other portion of the press which Life Insurance. 159 is rigidly honest, and about as ignorant as honest, will take care to avoid libel suits by entire silence. But money is not omnipotent. Once solve the problem and discover the key which dispels the mystery as to what is whose, and apply a little hydraulic pressure, and not all the money of all the autocrats, whether trustors or trustees, can keep the American press silent. And it is not the argument, but a little money, that will do it. As a quart of water may be made to lift an ocean, so a very little money may be made to lift from the lips of the American press that ocean of life-insur- ance patronage which is now used to keep concealed from the public two or three demonstrable, and to some, profitable, blunders. If anybody offers a prize, of say $100, for a new tract, or essay, or hymn, or method of destroying potato-bugs or the like, in a paragraph of moderate length, it will generally be copied gratuitously in about every newspaper, daily and weekly, from one end of the Union to the other. The writer, after having become convinced by the New York premium war, that the companies on both sides, with a single exception, were resolved to go on perpetuating the old blunders in every policy they issued, thought it his duty to try the hydraulic pres- sure of a little money. And this he did not by ad- vertising, but by asking editors of his acquaintance to publish gratuitously the following card : 160 Politics and Mysteries of A PRIZE OF ONE THOUSAND DOLLARS. Three questions have arisen in the practice of life insurance, of great interest to the public : 1. How to ascertain the proper commissions to be paid to agents, if any are paid. 2. How to assess the office or working expenses, including commissions, on the members of mutual companies. 3. How to ascertain the equitable surrender value of a policy. A new system, called, for want of a better name, " Savings- Bank Life Insurance," was presented by me to life-insurance companies and the public, about one year ago, which answers all these questions in a way radically different from that here- tofore practised by any company. The old system and the new cannot both be right. Com- pared with each other, on these three points, one of them is probably wholly wrong and indefensible, while the other is an approximation to the right thing. If the new system accords with science and reason ; if it is in the main and in principle just and equitable in regard to the points above named, then the old one violates equity in regard to every one of them, and on some of the policies issued falls little, if any, short of obtaining money by false pretences. There is no problem of social science more worthy of thorough discussion than this. In the interest of policy-holders, present and future, and to. stimulate inquiry, always better late than never, into the pos- sibility of improvement, I offer A PRIZE OF ONE THOUSAND DOLLARS, to the writer who will first demonstrate that the old method of answering either of the three questions above is more correct, reasonable and equitable than that given by the "Savings-Bank Insurance" system proposed by me. This prize will be paid to the writer who first, within one year from this date, presents his or her demonstration to me, in Life Insurance. 161 print, with the certificate either of Professor Benjamin Peirce, of the United States Coast Survey, or of Professor William H. C. Bartlett, Actuary of the Mutual Life Insurance Company of New York, that in his opinion such demonstration is con- clusive. And, in that case, either or both of these gentlemen shall be duly compensated by me for the trouble either or both of them may have taken in the matter. ELIZTJR WRIGHT. 39 STATE STREET, BOSTON, Jan. 13, 1873. Of course it was not to be expected that such a card could gain any considerable publicity. It was sufficient, however, that it got published by a num- ber of personal friends as a personal favor. It in- fallibly reached everybody personally interested in maintaining the old, and to them, lucrative blunders. Hence it is really equivalent to a prize of at least $100,000. For people who want to use other people's money are always liberal of it, and there are more than one hundred of them who can easily add $1,000 each to this prize. If there is anybody in existence who can win it, they will be sure to find him and set him at work, if the fore- going card has not. If the prize is won and paid, that fact \yill be published fast enough. The object will be gained, for the public and the press will then inevitably discuss and decide whether it was fairly won. If it is not won by the 13th of January, 1874, the publication of this volume ensures that that fact will be published in about every news- paper in the English language. It will be decisive. 1 62 Politics and Mysteries of It will make it absolutely certain that the companies which thereafter adhere to the old errors and refuse, to stipulate a reasonable cash surrender value will have no business whatever to do except with people who either wish to cheat others or be cheated themselves. Chapter VII. , A WORD TO THE LIFE-INSURANCE AGENTS OP THE UNITED STATES. [From the Insurance Times.] GENTLEMEN : As one of the orders of men whose business it is to persuade other men to provide properly for their fu- ture well-being and to do their whole duty, I believe you have on the whole labored as hard and succeeded as well and been as poorly paid as any other. At any rate, I am proud to have belonged to your order. But a clergyman may be proud of his cloth, without denying that there have been false prophets, bad priests, and scandalously mercenary bishops. Life insurance, sweetening every night the sleep of mil- lions of people with tired brains and troubled hearts, and saving from utter desolation and want thousands of bereaved families every year, is a fact "which could not have existed but for the life-insurance agents. When the world has be- come so good and wise as not to need gospel preached to it, and every man is a moral law unto himself, then there will be no need of life-insurance agentsand not much sooner. If good work will not do itself, it must be done by some- body. And whoever does it should be paid according to his work. As the actuaries of the past have adjusted the premiums on the various kinds of life-insurance policies they have failed and I am sorry to have to include myself in this failure Life Insurance. 163 to notice that they were creating two distinct kinds of busi- ness on each policy that should be paid for on entirely differ- ent principles. ' This failure to recognize the correct analysis, and the consequent allowance of the agent's compensation "simply as a percentage of the premium, part of which is for one sort of business and part of which for an entirely differ- ent sort, has led to great injustice. The blunder, once dis- covered, cannot be adhered to, without ruining the business of the agents as well as of the companies. It is the aim of " savings-bank life insurance " to correct this blunder. Whether it is to be successful or not, the pub- lic has yet to determine. The only objection, theoretical or practical, which has yet been brought against savings-bank life insurance is, that under it the agents cannot receive so large a percentage of the premiums for their services. This is undeniably true of some of the policies, such as short-term endowments, while of some of the policies of long terms, they will .perhaps re- ceive a little larger percentage of the premium than they do now. The fact is, that while the commissions on the latter class of policies are higher than they used to be, and about high enough, those on the former are scandalously too high. They are reactively too high, and the agent must inevitably suffer from the reaction at last. The commissions given for obtaining policies cannot differ much from a fixed percentage of the Insurance Values of the policies obtained without pro- ducing intolerable difficulties in making the dividends, and pernicious dissatisfaction with any that can be made. If the commission is a fixed percentage of the insurance value, then it is necessarily a variable percentage of the premium, be- cause for any given age and amount the largest premium has the smallest insurance value, and vice versa. k But supposing the agent does on the whole receive less, for a given amount of insurance, or premium, it by no means follows that savings-bank life insurance will not be more 164 Politics and Mysteries of , profitable to him. He will profit most by that which yields him the most money for the least labor, in the long if not the short run. If the agent gets so much out of the premium as to break the company, it is plain how that will cut short his profits. If he gets so much that the company cannot pos- sibly keep its policy-holders satisfied, that will produce a similar effect, by making it more and more laborious to pro- cure applications. Experience in any business naturally makes it grow easier and more profitable. But there are not many honest agents, who have been long in the business, who will not tell you that it costs more to secure an application now than it used to. Among the reasons for this, one is that some of the poli- cies are necessarily unsatisfactory to the party insured, while the agent is compensated and other expenses assessed by a fixed percentage on the premium. Suppose the agent gets no more in the aggregate than he is justly entitled to, it is still certain that some policies have paid him too much. And this will produce as bad an effect as if others had not paid him too little. But, in truth, there is no policy issued by the company which does not pay the agent as large a commission as can be justified ; as large as can be for his own profit in the long run ; quite as large, probably, as he himself would be willing to acknowledge to any applicant. By urging upon applicants those that pay larger and much too large commis- sions, instead of driving his business he will drive himself out of his field, just as too stunt a wedge flies from the log instead of splitting it. Everybody knows that an agent must live by his business, and nobody objects to it, provided the rate of compensation is reasonable. The true test of what is reasonable is, that it can be satisfactorily explained to all concerned. The obvious advantages of the savings-bank policy which make it easier to work are, that, without much enhancement of the premium in any case, and a diminution of it in many cases, Life Insurance. 165 1. It stipulates an absolute cash surrender value. 2. This fact and the constant diminution of the surrender charge secures the greatest persistence. 3. The more the party insures himself, the less to an ap- preciable extent, he pays pro rata for what the company insures him. 4. It makes his varying relations to the company intelli- gible, from the first year of his policy to the last. 6. The terms of going out are as plain as the terms for coming in, so that there can never be any dissatisfaction to make the agent's work more difficult. The following schedule of premiums and commissions on a policy insuring $1,000 entered at 30, will show the agent where the trouble comes in under the present system. Policy payable at death or ^ 40 45 5O 55 6O 65 70 Premium, $105 65 $66 35- $47 45 $36 75 $30 25 $26 20 $23 75 1st Commiss., 26 41 16-59 11 86 9 19 7 56 6 55 5 93 Renewal, 5 28 3 32 2 37 1 84 1 51 1 31 118 -& Here is a difference between the premium for the longest and the shortest term of $81.90, and nothing can justify taking the latter at such an excess of premium but an excess of divi- dend. For, suppose the party is to die within ten years, clearly his insurance will have cost him less at the lower pre- mium, and if he does not die the excess of $81.90 compounded even at 4 per cent., will amount to $1,022 or more than he would get on the high premium besides which he would have a policy with a reserve of $107.91. Dividends might justify the high premium, nevertheless, but the commissions paid to the agent, not to speak of other expenses, make this mathematically impossible. It cannot become possible till the commissions are less and all other assessed expenses less 1 66 Politics and Mysteries of on the short-term policy than on the longer one on the high premium than on the low one. Till this matter can be set right every short-term endowment is simply a bomb-shell, liable to explode and blow up the agent if not the company. The only safe and permanent business for the agent is one on which the policy-holder will be satisfied when it is fully explained, and that is one under which the highest premium will pay him less per $1,000 of policy than the lowest one. The law which requires the net value of every policy to be held in reserve, in effect divides every policy into two series of insurances, one done by the company which begins large and comes to zero in the last year of the term ; the other done by the party himself by his own deposits, which can never be used for any claim but his own, which begins small and increases till it equals the face of the policy the last year. When we keep these two series of insurances distinct the insurance done by the company and the self-insurance we shall see why it is impossible to satisfy the short-term policy-holder when we pay the same percentage of his premium for commission no matter what the premium may be as of the premium for the longer term. The deposit or self-insurance part of the pre- mium for the shortest term above cited, is $77.08, and of the longest, $10.98. Either has got to accumulate at 4 per cent., so that if it is depleted by much more than 2 per cent., there is no chance of dividend from that source, to say nothing of making good the reserve. So much for the self-insurance part of the business. The normal present value of all the insurance the company is bound to do on the shortest policy is $36.67, and on the longest, $154.05. Now, no matter what the provision for ex- penses may be on the gross or actual premiums, the dividends of surplus cannot be made just and satisfactory to the policy that pays the highest premium, if apart from 2 or 2^ per cent, on his deposit, he is charged for other expenses com- pared with the other policy more than in the ratio of $36.67 Life Insurance. i6 7 to $154.05. That is, he must not be made to pay quite one- fourth as much. The self-insurance part of the business in regard to the expense it will bear is like a savings bank. It will bear as much expense and no more. The insurance part of the business must bear all the rest of the expense, and if it is not assessed in proportion to the insurance value of the respective policies if a policy with a smaller interest in the insurance done by the company is made to pay more than one that has a larger interest there will be the same row among holders when they come to understand it, as there would be in a company of stockholders assessed without regard to the number of shares they hold. An assessment of working in- surance expenses according to the insurance value of the policies is the sine qua non of equity in dividends, and if equitable dividends are not to come in to make matters right, the premiums for short-term endowments in most companies are very largely too high. The savings-bank policies proposed by me assume a com- pensation to agents so high that it is necessary to enhance tfle premiums of the longest terms, somewhat, in order to pay it. And with such premiums it is on the whole about as good as is now paid on such policies. OB. other policies, while it is as much as it well can be, it is far less than is now paid. For example, on a policy for f 1,000 entered at 30 for the same terms as above, 30- -DEATH OR 40 45 5O 55 6O 65 70 Premium, 1st Commiss'n, $88 23 330 $56 75 3 11 $42 03 332 $34 06 370 $29 55 4 19 $27 04 472 $25 80 526 1st Renewal, 257 1 98 1 81 1 80 1 89 2 03 2 18 2d " 2 57 1 98 1 81 1 80 1 89 2 03 2 18 3d 2 57 1 98 1 81 1 80 1 89 2 03 2 18 4th 2 57 1 98 1 81 1 80 1 89 2 03 2 18 5th 2 20 1 42 1 05 85 74 8 65 1 68 Politics and Mysteries of This means that in addition to 2J per cent, of the premium as a collection fee which is the same on the deposit as on the insurance part of the premium the agent receives 3 per cent, of the initial insurance value the first year^anj[ j^jger cent, of the same for four succeeding years, after which the collection-fee is the only commission. These charges will bear explanation to the policy-holder, and he cannot fail to see that it is for his interest to take the shortest policy of which he can afford the premium. By the old plan the self-insurance is made to increase the cost of the insurance ; by the new one it is made to diminish it, and takes away all motive to dispense with that element, as the " cooperative " plan attempts to do. It is not the agents but the actuaries that have occasion to complain of the savings-bank plan of insurance, for the mo- ment the company adopts it fully, it leaves no work which an ordinary clerk cannot do. All the calculations requiring any actuarial skill having been made in advance, the clerks have only to enter the various values of the policies, at the com- mencement of each policy-year distinctly in the proper books, and the ascertainment of the company's condition at the end of any fiscal yea^, is a mere matter of footing, and comparing assets with liabilities ; and actual losses with expected. And if any surplus appears, a clerk will know how to di- vide as correctly and equitably on the " contribution plan ". as any actuary in Christendom. The necessity of permanent life actuaries arises from the fact that the companies, making no analysis of premiums in advance, find at the end of every fiscal year, the two businesses of insurance and self -insurance, indistinguishably mixed up in their books, and it takes more than an ordinary clerk to disentangle them. This is a considerable item of needless expense. But for want of faith that the work will be faithfully done by all the companies, the State steps in or rather thirty or forty States step in find compel all the companies to transcribe the Life Insurance. 169 of all their policies annually for the State, or rather for thirty or forty States, to make as many separate valuations, to ascer- tain for the satisfaction of each of them, the ratio of assets to liabilities. And all this at the expense of the companies. Here is vastly more needless expense. For if the books were kept on the savings-bank plan any State could ascertain by a few hours' inspection in the office, whether the company's statement was reliable, as well as in any savings bank. Thus could the companies well afford to pay their agents better, if that were desirable. It is the agents, after all, in my opinion, who have the deepest interest in having the cor- rect system adopted. ELIZUJR WRIGHT. JANUARY 20, 1873. Chapter VIII. A RECAPITULATION. The card on page .160 was sent in manuscript simultaneously to a number of leading journals, and among others to the " New York Tribune." The editor not having room to insert it in his next issue, addressed the writer a polite note, assuring him that it was received and would be inserted soon. After some days, and it did not appear, the editor, on inquiry, gave as a reason for not inserting it, a journalistic rule, that it could not appear because it had already appeared in other journals. A private correspondence ensued between the writer and the editor in relation to this journalistic rule and its merits, which was highly amusing to at least one of the parties. It served, certainly, to disabuse the 8 170 Politics and Mysteries of able editor of the idea that a trick had been at- tempted upon his columns, so that he went so far as to invite the writer to give the subject a thorough ventilation therein. This offer was accepted, and the article which follows was bravely published in the "Daily Tribune" Supplement for March 15 > 1873, though not in the weekly issue. The "Tribune," though it did not pay for heating the poker, is certainly entitled to great credit for displaying it to the extent it did. [From the Daily Tribune Supplement, March 15, 1873.] EIGHTS AND WRONGS OF POLICY-HOLDERS. To the Editor of the Tribune : SIR, The existence of life insurance in the country of its birth after more than a century of trial, and its remarkable prevalence in this country, are sufficient evidence of its vitality. .Our country is specially proud of its success in this business ; its buildings are the marvels of our cities ; its accomplished work of endowing widows and orphans amounts already to more than twenty millions annually, with a fair prospect of increase. Yet there are some clouds about it. More than any other business, probably, it professes equity, and oftener violates it, and al- most always with impunity. It has always been covered with what bears about the same relation to its essence as leprosy does to the human organism, which a very little care- ful consideration will show. INSURABLE INTEREST. Legitimate insurance of life is for the benefit of the person or persons to whom the death of the individual insured would otherwise cause a pecuniary loss. Its limit is an indemnifica- tion of such loss, and it has no business to go any further. Life Insurance. 171 The law of Great Britain does not allow a policy to be issued on any life in favor of any person who has no " insurable in- terest " therein, or, in other words, nothing to lose pecuniarily by its decease. But it does allow, and our law does not for- bid and this is the fountain of half the trouble that has afflicted life insurance the policy to continue in force after the insurable interest has ceased to exist. After an insured person has become too old to labor productively, it often hap- pens that he becomes dependent for support upon the bene- ficiaries of his policy ; so that, irrespective of the claim on the policy, his death would be a pecuniary gain to them. The insurable interest has not only ceased, but become reversed. Yet, strange to say, neither in law nor practice has any pro- vision ever been made for the timely and equitable cancella- tion of the policy on this account. Thousands of policies have been, and continue to be, surrendered on this account ; but the surrender has never been regulated on any rational or scientific principle. Thus a policy which was perfectly legitimate and exceedingly useful at its inception, may be continued until it degenerates into a sheer bet, or, what is worse, into a premium for murder ! It was in view of this abuse of it, perhaps, that the old French law prohibited life insurance altogether. Our companies seldom issue policies on lives over 65, and never on one over 75. It would be contrary to law in ordi- nary cases, because there would be no insurable interest. Hence the proper range for life insurance is mainly between the ages of 25 and 75, and policies should not run beyond the latter age. The evil of their covering the period of second childhood is little felt yet in this country on account of the recent origin of the business here. In the mother country it is something terrific. THE NATURAL PREMIUM. Apart from the expense of conducting the business the cost of insuring f 1,000 for one year at a given age, will bo as 172 Politics and Mysteries of "many dollars as there will be deaths in one year of 1,000 per- sons insuring that sum at that age. The average fact is that not so many as 10 will die out of 1,000 at 25 in one year, and nearer 100 out of the same number at 75, so that the premium to insure f 1,000 one year must be more than 10 times as great at 75 as at 25, the lives being equally unexceptionable. Hence, if a company agrees to insure a person the same sum, from year to year, from 25 to 75, the annual premium must nat- urally increase from year to year in the same ratio that the vitality diminishes. And, as an average fact, this natural premium will be exhausted by the cost of the insurance at the end of every year, no reserve being left or needed. This is, on the face of it, a very simple and nice method of insur- ance, and at the West people have gone wild about it, having too much reason for their madness in the defects of the old system. But if the company engages to carry on such insur- ance for a long or indefinite term, irrespective of the health of the insured at the commencement of each succeeding year, on the receipt of the natural premium due to the age, the healthy subjects, discouraged by the increase of the pre- miums, and having nothing to forfeit by discontinuance, will drop out of the company and leave a disproportionate num- ber of sick ones to be insured ; so that the company must inevitably fail. THE ARTIFICIAL OR LEVEL PREMIUM. The contrivance by which this difficulty is obviated is the substitution for the series of natural increasing premiums of an equivalent constant or level one, regard being had to cer- tain assumed rates of mortality and interest. This, of course, must be so much more than enough at first that the overplus, being held in reserve with its interest, will make up for all the deficiencies of the latter years of the term. Two cases arise : First, of term insurance, when the com- pany agrees to pay the indemnity if the insured pays the Life Insurance. 173 premium annually in advance, and dies within a specified term, but nothing if he survives it. Here a moderate re- serve accumulates during the first part of the term, which is wholly exhausted during the latter part. But few persons, however long the term, wish to be left with nothing but a worthless expired policy at the end of it, so that term insur- ance, on any terms, is little sought for. The second case is that where the company, in considera- tion of the level premium paid annually in advance, agrees to pay the full sum insured, whether the person dies during the term or survives it. This, so far as the company is con- cerned, is just the same as if he were sure to die in the last year of the term, in which case the natural premium (in ad- vance) for that year would be the face of the policy dis- counted for one year. This is called the endowment insur- ance policy. For this the equivalent level premium, for a short term, is far greater than for a term insurance of the same term, but for a very long term it is inconsiderably greater. What is called the " whole-life policy " is always calculated as an endowment insurance policy, payable at death or 100 (or, in New York, at 96). The net level annual premium at 25 to insure $ 1,000 payable at 100 or previous death, is $14.72, and for the same payable at 75 or previous death, it is only $15.86, a difference of 64 cents per annum! Here is reason enough why a "whole-life" policy should never be sought for by a young man. But it grieves one to say how carefully this reason has hitherto been concealed from young men. The substitution of the constant or level premium for the natural increasing one has two very important effects, of which one is, that a reserve fund has to be created on every policy. This necessity has been mostly ignored on the other side of the water, and the consequence is that a certain Lord Westbury, in London, at this moment, has in his hands a moribund conglomeration of forty life-insurance corporations 174 Politics and Mysteries of in the process of what is called liquidation. Some years ago, Mr. Gladstone was so much worried with this state of things that he instituted, for the benefit of people of slender means, Government life insurance to a limited amount, through the British Post-Office. This is, of course, exempt from failure, but the premiums being high, no surplus returning and no proper surrender value stipulated, the people do not hanker after it, and it is not much of a success. If American life in- surance has any superiority over British as to stability, it is because the necessity of a prescribed reserve has been more fully recognized here, and has to some extent been enforced by law. Another equally important effect which, till lately, has not been recognized anywhere, is that it necessarily analyzes the policy into two distinct kinds of insurance, one of which is done by the company, and the other may be denominated self-insurance. The latter will be first considered. SELF-INSURANCE. If the natural premium to insure $1,000 one year at a given age is f 10, and instead of it for a certain term, with endow- ment, a level premium of f 40 is substituted, of which say $32 must by deposit and interest be in reserve at the end of the first year, then the person paying this artificial premium of $40, compared with one paying the natural premium of $10, is insured by the company for only $968, for which he pays a little less than $10, viz. : $9.68, and insures himself $32, by depositing in trust with the company the rest of the $40, which by the prescribed interest becomes $32 at the end of the year, and will be used to make up the $968 to $1,000 if he dies, but can be used for no other death-claim, because it must remain with the company if he lives. Hence by the level premiums all endowment insurance policies (including whole life) necessarily resolve themselves into two series of yearly insurances. One, done by the company, commencing Life Insurance. 175 with the face of the policy less the reserve at the end of the first year, and diminishing to in the last year. The other, done by the insured himself, beginning with the reserve at the end of the first year and increasing to the face of the policy in the last year. * INSURANCE VALUE. Leaving entirely out of view the series of self-insurances, which is nothing but a savings-bank accumulation, with pre- scribed or virtually stipulated annual deposits at interest, and regarding only the decreasing series of annual insurances done by the company, it is easy to calculate on the assumed rates of mortality and interest, the exact sum which, paid in advance, will compensate the company for carrying this whole series of risks, or be equivalent to those portions of the level annual premium which will be normally from year to year devoted to this purpose, and this is the insurance, value of the policy a totally different thing from the " net value," or reserve, which might properly be called the self- insurance value. The self-insurance value, or reserve, at the end of any policy-year, is simply what the company's risk in that year lacks of the face of the policy. Now, though in the terms and conditions of the policy there is no express mention or hint of all this, and though in conducting the business for a century or two up to the pres- ent decade nobody ever thought of calculating the insurance value of a policy under that or any other name, the mathe- matical existence and importance of it is none the less real. Indeed, of all the values that need to be known for the safe, intelligent, and equitable prosecution of the business there is none more important than this. Yet, though the proof of this has been before the life-insurance world for full three years, and no expert, in the British Institute of Actuaries or elsewhere, has called it in question, there is probably not a life-insurance president in Europe or America to-day who 176 Politics and Mysteries of knows what is the aggregate insurance value of the policies in his company much better than does his unborn grandchild. Ideas, no matter how useful, are always slow in taking possession of the human mind, but their invasion is, never- theless, irresistible. It is only by knowing the insurance value of all the poli- cies, along with other things, that we can know the real strength of a company. Neither the number nor the amount of the policies, nor the magnitude of the reserve, nor of the premium income, nor all of these together, can enable us to determine the strength of the company. All these things have their significance, and need to be known ; but till we have another element we can only* guess between two com- panies which is the stronger. When two companies are to be compared in regard to the economy of their working expenses, comparing their respec- tive ratios of expense to either total or premium receipts is about as idle as it would be to count the buttons on the cloth- ing of their respective presidents. The only thing which approaches a true test of relative economy is the ratio of the expenses to the aggregate insurance value of the policies. This aggregate bears so little relation either to the amount of the policies, or the total, or the premium receipts, that the ratio of expenses to either of these can have no use, except, perhaps, in some case to place in the front rank for economy a company which does not belong there. The deception which has been practised upon policy-holders and the public, wittingly or unwittingly, by the ignorance or concealment of insurance value, is something which will greatly astound a near posterity, and it might better be discontinued before that posterity arrives. SURRENDER CHARGE. Keeping in mind that every policy comprises a series of in- surances and a series of self-insurances, let us consider how Life Insurance. 177 the entire contract can be equitably cancelled prior to the ex- piration of its prescribed term, in case the insured desires it while the company does not. If the self-insurance part stood alone, disconnected with any other contract, plainly there would be no more reason for the company's refusing to sur- render the whole of the deposits therein with their accumu- lated net interest, without charge, than there would be for an ordinary savings bank doing so. Hence, whatever charge may be necessary to compensate the company for cancelling a contract valuable to it, such charge can have no relation whatever to the self-insurance part of the contract. It is only by the cessation of the insurance part that the company can possibly lose anything, and its loss here will be in pro- portion to the insurance value of the policy at the time, that is, to the value of the insurance yet to be done by it. This brings us to the conclusion that the surrender charge must be such a percentage of the insurance value of the policy as will leave the company as strong after the surrender as it was be- fore. What it needs to be as a maximum, it is unnecessary to inquire here. But suffice it to say, it will not require to be much more than the commission or brokerage which will procure a new policy of equal insurance value, say six or eight per cent, of the insurance value. And what is worthy of particular notice is, that inasmuch as the insurance value of a policy, when limited to an age not exceeding 75, does not increase, the proper surrender charge for a given policy is greater at the end of the first policy year than it can ever be afterward, no matter how much the reserve may increase. And when the policy is not limited, but extends over the whole life, the insurance value increases so little that the surrender charge increases inconsiderably. This is radically different from the customary surrender charge, which is a percentage usually from 25 to 50 per cent. of the self-insurance value, and of course increases rapidly with the age of the policy. The absurdity of this barking up the wrong tree for the sur- 8* 178 Politics and Mysteries of render charge is patent enough when, as often happens, the charge becomes larger than the whole insurance value of the policy ; which means that it costs a man more to withdraw his own self-insurance deposit than the whole value of the insur- ance to be done for him by the company, and from which he releases it by his departure ! The common rule of surrender, in fact, makes entire shipwreck of equity, as any equity court in the world would have to decide, if a case should ever reach it. The true cohesive force of a life-insurance company is the surrender charge. If this is based on the reserve which has no earthly relation to it except being a security for its pay- ment, it must necessarily be too small in the early years of the policy, and monstrously too large in the advanced years. This exorbitant increase of the charge, which one seldom discovers till after he has taken his policy, often induces him to drop it early, whereas if it had been the largest at the end of the first year, he would have continued. Where the charge amounts, as it does in almost all the present " all-cash " com- panies, to a confiscation of a large part of the self-insurance value without the slightest regard to the insurance value, it is anything but a cohesive force. It is doubtless the cause of a large part of the premature discontinuance, which is now pulling down the companies very nearly as fast as extrava- gant commissions can build them up. ASSESSMENT OF EXPENSES. Before any member of a mutual life-insurance company can receive his share of surplus, he must actually or virtually have been assessed and paid his share of the working ex- penses. The mutuality implies that this share shall have been equitably assessed. So far as a member has money in trust with the company, it is plain that he should pay his share of the expense which this occasions it, in proportion to its amount. But the reserve fund cannot well cost the com- Life Insurance. 179 pany more, except for collection, than would the deposits in a savings bank. Hence, after setting aside of the company's expenses the moderate sum which it costs to collect and man- age the reserve it can hardly be one per cent, of it after a year or two the residue must be assessed upon the members without any reference to the self-insurance on the policies, and not in proportion to the premiums, which contain more or less self-insurance deposit. But it must be assessed on what measures the interest which each policy-holder has in the company, considered purely as an insurance company, and this is nothing else than the insurance value of the pol- icy at the time. If there is any logical escape from this, and money will buy it, the companies, none of which ever yet assessed their expenses in this way, w r ill be in full possession of it within less than a year from this time. But if there is not, they will then begin to change their practice, to the great satisfaction and relief of the more self-insuring of their pol- icy-holders, who now pay the more toward the expenses the more they insure themselves, and the less the company insures them. THE LOADING OF PREMIUMS. " Loading " is the addition which is made to the " net pre- mium," to provide for commissions and other working ex- penses, and for occasional excesses of mortuary loss ; the " net premium " being exactly sufficient to meet the policy claims, if there should be no expenses, and no variation from the assumed rates of mortality and interest ; or what amounts to the same thing, if the death-claims of each year should be exactly what they would have been if the expected number of deaths had happened on policies of the average amount. So far as this loading is to provide against occasional excess of loss from mortality, and there is not more than the ordi- nary variation of the amount insured on one life, it is plain enough that it should be proportioned to the present value of 180 Politics and Mysteries of the insurance to be done by the company under the policy, that is, to the insurance value at the start. It should be pro- portioned to this rather than to anything else. And as it has been already shown that nearly the whole of the working expenses should- be assessed on insurance value, it is plain enough that the provision for them should be proportioned also to the same value. And as when the policy does not extend beyond the age of 75, the insurance value does not increase but gradually decreases with the age of the policy, a percentage of the initial insurance value which is sufficient for the working expenses at first will become more than suf- ficient afterward, and leave more and more of the margin as a safeguard against excess of mortality, which not occurring in any year, it will be returned as surplus. To illustrate the difference between the new plan and the old in regard to loading, let us take a case. By the Actua- ries' rate of mortality, at 4 per cent., the net annual premium at 30 for a policy of $1,000, payable at 75 or previous death, is $17.85. Its insurance value is $171.21. Let us suppose that $6.85 added to the net premium would be a sufficient loading for this policy. This is 4 per cent, of its insurance value, and makes an actual premium of $24.70. But if the same policy is to be payable at 40 or previous death, its net annual premium is $84.53, and its insurance value is $36.67, 4 per cent, of which is $1.47, making the actual premium $86. The only objection which can well be made against this mode of loading, which leaves the expenses of the self-insur- ance part of the contract to be wholly defrayed out of the ex- cess of the actual interest over the low assumed rate, is, that a life-insurance company is at some expense for the collec- tion of deposits, while a savings bank is not. This would be obviated, if we provide for the expense of collecting these premiums, which cannot well exceed 2^ per cent., by adding l-39th of itself to each of them, and they will then stand at $25.33 and $88.21 respectively. By the old plan, which Life Insurance. oftener than otherwise loads every net premium by 25 per cent, of itself, they would stand at $22.31 and $105.66. Grant- ing that the former provision is sufficiently loaded, the latter 'is overloaded by $18.11. But if the former ought to be loaded up to $25.33, as prudence would seem to dictate, the latter is still overloaded by $17.27, which means that the party insured by this policy will pay needlessly during its term, if he lives through it, $172.70, with the slightest prospect of getting any of it back, because, as has already been said, expenses, in- cluding commissions, are assessed with the same neglect of insurance value. This overloading, and corresponding over- taxing for expenses, of the more self-insuring policies, has brought needless millions into the exchequers of the life-in- surance companies, from this naturally popular class of poli- cies. But inasmuch as most of this superfluous money has gone either into useless expenses, or into the pockets of the agents, who have thus received the largest pay when they added the least to the strength of the company, to the de- struction of the dividends they promised, a small thunder- cloud is arising which threatens to put a new face on things before we have clear sky again. A distinguished life-insur- ance president to whom this difficulty with the shorter term endowment policies was explained a few years ago, admitted the error, and that it was, in effect, cheating that class of policy-holders out of nearly the whole of the overloading, and then argued against a correction of the blunder, that many people rather liked to be cheatecj, and that if the life- insurance companies did not do it, somebody else would. It will take only publicity and a little time to test the soundness of this argument. TRUE METHOD OF KEEPING TH BOOKS OF A LIFE-INSURANCE COMPANY. If the premiums of every policy issued were properly analyzed into self-insurance deposit, normal cost of com- 182 Politics and Mysteries of pany's risk, and margin for expenses ; if the various values, also, were pre-calculated for every year of the term, and all of these things were every year entered distinctly, each under its proper head, on receipt of the premium, a great part of the expense of what is called actuarial labor would be saved, since the books would then show by their footings, at the end of every year, the liability for reserve, as well as all other liabilities. There would then be no necessity or excuse lor the multiplied and expensive State valuations, which bid fair to cost at last as much as the death-claims. The present method of keeping the insurance, self-insur- ance, and marginal parts of the premium mixed up in the books, and then looking to some Sisyphus of an actuary to separate them at the end of every year, and ascertain the liability for self-insurance, and the relation of the actual to the expected loss, is very much as if the silver and gold paid into the United States Treasury should consist wholly of ingots composed of the two metals, mixed in ever-varying proportions, and should go on to the books in terms of avoir- dupois, Mr: Boutwell having to employ a scientific expert, or a corps of them, every year, to ascertain the value of each metal on hand, by taking the specific gravity of each ingot and applying the proper formula. Is such bookkeeping cred- itable to the last half of the nineteenth century ? SURRENDER VALUE. There is no more difficulty in pre-calculating a maximum surrender charge, and consequently a minimum surrender value, for every possible year of every desirable policy, than there is in pre-calculating the premium. In fact, that work is already done. No such value, however, is ordinarily stip- ulated in the policy, but it might be with perfect safety to the company, and it would be immensely to the advantage of every honest company to do it. This would secure at least three important objects : 1. It would give the policy a Life Insurance. 183 tangible money value, making it useful as a security for a loan to aid in maintaining it through a tight place, or for any other purpose. 2. It would make the officers, in some meas- ure, like those of an ordinary savings bank, more immediate- ly responsible to individual policy-holders, so that greater public confidence would be secured, and the necessity for, as well as the labor of, State supervision, would be reduced nearly to zero. Here is something for harassed life-insur- ance officials to think seriously of. 3. It would remove all possibility of complaint from the tongues of retiring mem- bers, and avoid the backwater caused by too many of them. Everything being fairly foretold to and foreknown by the policy-holder being inscribed in plain figures on his policy itself, from the first year to the last of its term he will have only himself to blame if he changes his mind and retires be- fore he gets all the insurance he agreed to take and pay for. He cannot then, as now, bitterly say, " I was enticed in by seeing in the company's prospectus a paragraph promising to give me an ' equitable surrender value ' in case I should at any time wish to discontinue ; but when at last I was obliged to do it, the company refused to give me anything of the sort, because it was not stipulated in the policy." Here is a very swampy spot in the business (and a very rich spot for some of the companies) , and the apology for a surrender value, whether in cash, or, what the party scarcely ever wants, " paid-up " whole-life insurance, is simply ridicu- lous. When, two or three years ago, the Auditor of the State of Ohio took it into his head to ask all the life-insurance companies their rules about surrender value, the answers he got and published excited a broad guffaw, and were copied by an insurance journal under the head of " Facetiae." But they have been no laughing matter to thousands of poor men who have lost from $50 to $500 beyond any righteous surren- der charge. 184 Politics and Mysteries of DIVIDENDS ON THE CONTRIBUTION PLAN. This plan of distributing the surplus of a mutual life-insur- ance company is per se founded on obvious equity, and theo- retically it has carried the day. But it does not decide the previous question of the mode of assessing the expenses, and when prefaced by the false method above exposed, of assess- ing expenses in proportion to premiums, it becomes prac- tically either a farce or an impossibility. This trouble was evaded in the company where the " contribution plan " was first practised, because the excessive surrender charges in that company (it being an " all-cash " company) were more than equal to the working expenses, so that that burden was thrown wholly on retiring members. But if the policies stip- ulate a righteous surrender value, the retiring members will leave nothing in the company which can properly be applied to defray the working expenses of the year in which they re- tire. What they do leave must either be held as additional reserve against the impairment of the average vitality, or it must be expended in the future years to repair that average by the procurement of new insurance value of higher vitality. Companies cannot expect much longer to throw the whole of their expenses on the retiring members. Most of them re- tire too early, and the old members are consulting equity law- yers about their rights under certain promises of the com- panies outside of the policies. Hence if the " contribution plan " is not to be thrown to the dogs, there seems a necessity of assessing expenses on insurance value. If this is done, and the books are kept and policies written as above de- scribed, " contribution dividends " will work admirably, and be intelligible to everybody. THE TRUE REMEDY. It is in vain to look to legislatures to correct the errors of life insurance. Legislatures cannot impair the .obligations of existing contracts. As to future policy-holders, unconscious Life Insurance. 185 of their own existence as such, they are not likely to appear in person, or by counsel, before any legislature. The insur- ance corporations themselves, if they appear, are not likely to ask the legislature to tie up in any way their hundreds of hands. They are more likely to ask just the reverse. There is a funny story about a life-insurance president who spent several thousands of the company's money at a State capital, and had the amount carried on its books to the dividend ac- count, where, of course, it appeared creditably if not logically. The only hope of having business-like business in life insur- ance, lies in enlightening the public mind, through the press and the lecture-room, up to the point of making all applicants for insurance insist upon being dealt with intelligibly and reasonably, or not at all. EUZUR WRIGHT. BOSTON, March 6, 1873. Chapter IX. PKEMIUM NOTES, LIENS, DIVIDENDS AND TONTINE POLICIES. It would be easy, for one possessing the gift, to write a highly comic chapter on the various schemes adopted by the companies to attract business and get ahead of each other. The States vied with each other in making these corporations, and in some they were hatched by general statute, like chickens in an oven. Of course they must live, - at least long enough to die. Hence a struggle. We have seen how the business, a mixture of in- surance and accumulation, in all possible and ever variable proportions, was as incomprehensible to 1 86 Politics and Mysteries of the simple customer as a marketman's sausages, or a boarding-house keeper's hash. All the more for this reason was it susceptible of no end of tricks, dodges, variations, short cuts and mirages. w Plans," figure-heads and prophecies were the main dependence, and for a while they seemed to be conducting every chicken of a company to wealth, power and glory. What was paid for these inven- tions, in some instances, is quite incredible except on the hypothesis that the directors were vegetables of uncommon verdure. More than once some cute chap has prevailed on a board of directors to allow him a lucrative commission on all the premiums re- ceived under a certain novel "plan," of no value whatever either to the policy-holder or the company, but a decided detriment to the simplicity of the ac- counts. One of them even had the tact to get such a commission commuted into an annuity on his life, worth not less than $15,000, on the supposition that his days will not be shortened by the brilliancy of his inventive faculties. Figure-heads, of course mostly wooden, have cost all the way from $5,000 to $20,000 a year. One, somewhat damaged by the late war, was obtained by a southern company, as it is said, for $10,000 a year, probably the best bargain of that sort that can be quoted. As a gen- eral fact these speculations have not paid. Board- ers who would have been well satisfied with meat and potatoea mixed in the standard dish, could they Life Insurance. 187 have known what they were and in what propor- tions, have become disgusted with the arts of cook- ery which made them believe in something else. They have left and are leaving at such a rate as to discourage the most enterprising landladies. It was demonstrated long ago, both by figures and facts, that if the premiums are not more than sufficient, and the reserve is not calculated at a rate of interest considerably below that which may be expected, a life-insurance company, unless it has a large capital to carry it over the fluctuations of mortality, is a very unsure thing. The purely mutual companies have no capital at all, and the mixed ones but little. They can rely only on a full re- serve at a low interest. In a bad year, when the death-claims are larger than were expected, they have two resources : 1. The excess of the margins of the premiums of the year over the office ex- penses. 2. The excess of interest on their invest- ments over the rate on which the reserve is calcu- lated. In a well-established company this last resource is a very effective one, and will provide for nearly double the average claims. By the same token, in average years, unless the expenses have been scandalously extravagant, there will be a con- siderable surplus of income beyond what is neces- sary to meet the claims and maintain the reserve. No one who has examined the foregoing tables will have failed to perceive that the company, 1 88 Politics and Mysteries of whether it is to have a surplus to divide or not, can safely take a part of the premium in the note of the insured. All the cash it needs, on the self-insurance part of the contract, is what it will charge in case (of surrender. It can take notes up to the surren- (der value at the end of any year. The insured must pay interest on these, at least as high as the rate at which the reserve increases. But who wants to endow his orphans or himself with his own notes ? Who can suppose it profitable to borrow money to deposit in a savings bank, especially if he pays more interest for it than the said bank re- turns ? If a man can accumulate somewhere else faster than in the life-insurance company's savings bank, it may be wise for him to pay premium notes and use the life-insurance company only for insur- ance. But this is not the usual case. The pre- mium would seldom be paid to any extent by note, and never on short-term endowments, if the party was not made to believe that the dividends of sur- plus would cancel the notes, and thus .leave the insurance or endowment at its full face. To estab- lish anything like a probability of all the notes being cancelled, if the policy should survive its term, they must be far smaller than the rule in any note-company, and should not be taken at all on the first year of the policy. That 50, 40 or even 30 per cent, notes would be entirely or nearly can- celled by dividends was always a lie, wherever it Life Insurance. 189 was asserted. A company taking all its premiums in cash and refusing to pay an equitable surrender value, thus getting its expenses and perhaps more out of its retiring members, could undoubtedly make a dividend sufficient to extinguish 30 or perhaps 40 per cent, notes, if they existed in it. But if they did exist in it, as a general rule, the retiring mem- bers would not have been deprived of their money for the benefit of the persisting ones. In fact, the reverse would have been the case with those who retired early. They would have got their insur- ance too cheap. What is true enough about premium notes is that, unless the expenses are much too high, the premium notes usually taken may be so much re- duced as to be after the first year or two within the reserve, so as to be the safest asset the company can have. This, however, has been abundantly denied by the agents of the all-cash companies, who never tire of asserting the entire hollowness and rottenness of companies whose premium-note assets approached the aggregate equitable surrender value of their policies. To a cynical mind it would be an interesting inquiry whether or not the lies told against the stability of the note companies exceed in number those told about the dividends cancel- ling the notes. They must number by millions on both sides. If the author of lies cannot be bound for a thousand years, the next best thing is to sim- 190 Politics and Mysteries of plify the business so that lying will have no reward [ except what it can get in another world. It is hardly necessary to speak of that variety of premium note called a "lien." In this case the first premium is much larger than any succeeding one, and the excess over the level premiums that succeed, is a note, payable only as an offset or lien on the claim. It diminishes the insurance just so much, that is, in regard to the face of the policy, it is so much self-insurance. But holding the com- pany bound for the* face policy, the lien must of course be admitted as an asset. And as it is two or three times the net value of the policy, consid- ered as an ordinary level premium policy, if the Superintendent or Commissioner of Insurance will be good enough to admit it as an asset, and at the same time value the company's liability on the policy as if it had received only the level net annual premium, the company may have spent the whole of the cash received on that policy and another, and still appear to have a full reserve. Supposing that the gross valuation, or discounting future margins into assets, by which the British life insurance com- panies have made their descent to Avernus so facile, is a valuable thing, any board of directors bent upon visiting that shady place, might afford to pay something for this little bit of the same sort of stuff. The invention is ingenious, but its sole utility in this country is to circumvent the State Life Insurance. 191 Cerberuses. Companies that wish to do nothing of the sort, have thrown it aside, if they ever adopted it. f"" The various modes of applying dividend, or get- ting rid of surplus in mutual companies have already been noticed, pages 18 and 19. At the period there referred to, shares of surplus were assigned in proportion to premiums paid, without regard to the reserve on the policy. Two policies paying the same premium would receive the same dividend, and it might be fifty per cent., but pay- able four or five years after, should the policy be then in force. Yet it might happen that one of these policies had by its larger reserve produced twice as much surplus as the other. As the com- panies grew older, and a large surplus arose from the excess of the actual over the normal interest of the reserve, the percentage dividend became almost comically inequitable, though too serious for a joke to the early members, or holders of policies with small premiums and large reserves. To Mr. Sheppard Homans, Actuary of the Mu- ' tual Life Insurance Company of New York, and Mr. D. P. Fackler, his assistant, belongs the honor of devising an equitable mode of dividing surplus, which they called the " Contribution Plan," because it simply returns to each policy-holder what his own policy has contributed to produce the surplus, either from over-payment on the insurance 1 92 Politics and Mysteries of part of the contract or extra interest on the self- insurance part. This plan was adopted by the Mutual Life without delay, and the results were very satisfactory to the policy-holders, the more so that the expenses had been defrayed by the surren- der charges on retiring members and the forfeiture of lapsed policies. It soon attracted great atten- tion and discussion. Hon. John E. Sanford, In- surance Commissioner of Massachusetts in 1867, addressed a circular to a large number of actuaries and mathematical men, soliciting their opinions as to the best mode of distributing surplus in a Mutual Life Insurance Company. The replies which he received were published in full in his Thirteenth Annual Report, and are very various, but a large number of them approve substantially of the con- tribution plan. Prof. William H. C. Bartlett, of West Point, in his reply, uses the following very decisive language. "I find that this question has been solved by Mr. Sheppard Homans, Actuary of the Mutual Life Insurance Company of New York, in a way which leaves nothing to be desired. His solution is simple, direct and accurate, and I commend it to your considerate attention." After suggesting some verbal criticisms, he pro- ceeds : "Mr. Homans' solution of this most impor- tant problem, returns to each member of his^com- pany not only what he may have overpaid, but also what the overpayments may have earned while in Life Insurance. 193 the possession of the company and under its con- trol. He gives back the ' talents' committed to the custody of the company, with their legitimate gains ; and thus, in my opinion, repairs, in the only way they can be repaired, the wrongs con- stantly but unavoidably committed upon individual interests, in the endeavors to keep upon the safe side of the contingencies inseparable *om the busi- ness of life assurance." This was dated March 8, 1868. It was just as easy then as afterwards to see that Mr. Homans' formula took no cognizance of the fact that the year of the policy from one pay- ment of premium to another seldom coincides with the fiscal year of the company, and that his expres- sion for the actual cost of the year's insurance was rather vague, requiring a special interpretation to ,ke it give correct results. But there is no use n putting too fine a point upon anything. In a company as large and well established as the Mutual Life then was, there was no appreciable chance of any harm coming to it from assuming, as Mr. Ho- mans' formula does, that all the policy-years are coincident with the fiscal year ; or, in other words, that no part of the apparent surplus at the end of the fiscal year consists of unearned margins, if the share of surplus thus determined is not paid till the next settlement of premium, as was the fact in the Mutual Life. In a newer and smaller company, of course it would be better to apply the formula only 9 194 Politics and Mysteries^of to the policy-years ending within the fiscal year, and not return the resulting contributions of surplus till the next settlement of premium or the next but one. But in such a company as the Mutual Life, with so large an interest account, and so little chance of fluctuation in the death-claims, if there are two policies, A and B, alike in all respects ex- cept that A's policy-year was coincident with the fiscal year, and B's only just began as the fiscal year closed, that is, A's premium is just due and B's just paid, you may assume almost infallibly, that B will contribute to surplus by the time his next premium becomes due, as much as A is found to have contributed already. If this assumption does not turn out strictly correct, on account of the rate of contribution falling off in the next fiscal year, the succeeding dividend will be smaller, ancL| taking one year with another all will be served alike. The propriety of this view has been so well tested in the late experience of the Mutual Life, that that experience is worth dwelling upon, though it may involve some disagreeable personalities. If princi- ples and facts are to be discussed, the persons who make themselves representatives of the principles and responsible for the facts cannot always be left unmentioned, if we would. In 1869, Mr. Winston, president of the Mutual Life, and Mr. Sheppard Romans, the actuary, be- Life Insurance. 195 came dissatisfied with each other, for reasons which the reader will be allowed by and by to gather for himself from their own statements. Mr. Winston then applied to Professors Bartlett and Church, of West Point, for a searching criticism of Mr. Ho- mans' method of dividing surplus, and those gentle- men then discovered, what had been patent enough to every mathematician practically connected with the business, that his formula was applicable only on the assumptions above stated. They devised and constructed new and very elaborate formulas, on the principle of the "accumulation formula," covering the. whole history of the policy from the start, and reconstructing it, whatever its date, into policy years coincident with the company's fiscal years. Such algebra is as easy as travelling by balloon. The only difficulty is, when you come down to the solid ground of the facts, it may take a great deal longer to establish a satisfactory con- nection with them than it did to make the journey. Mr. Winston then procured from the company's . counsel a legal opinion that the company's charter required the dividend to be restricted to the surplus definitively developed at the end of each fiscal year. It could not proceed on any assumption as to the surplus to be expected in the unexpired fractions of policy years equalling that of the expired frac- tions included in the last fiscal year. This done, Mr. Homans was ordered to apply the formulas of 196 Politics and Mysteries of Professors Bartlett and Church to the policies out- standing on the 31st of December, 1869, so as to divide the surplus actually and definitively then de- veloped, since the last settlement of premiums, and no more, for the critics of Mr. Romans were of opinion that each policy had received its full share of surplus up to that time, if not more. Mr. Ho- mans at once protested against this on various grounds, among others that the formulas were so complicated, and involved so many quantities not tabulated, that the work of making the dividend would consume many months, if not years. The dispute between Mr. Romans and the West Point professors, which had grown to be voluminous, was then referred by the Mutual Life trustees to J. P. Bradley, Esq., since Judge of the United States Supreme Court, Professor Newton of Yale College, and the writer, all of whom had had some practical experience in making life-insurance dividends. The referees had a very delicate duty before them. They . were unanimously of opinion that while the West Point formulas were mathematically correct,*their application must throw away a great deal of labor ; that the interpretation given to the charter by the counsel did not secure any better equity of distribu- tion, while the change it involved would entail a present derangement and needless future expense. They recommended, therefore, that the charter should be changed as soon as possible, and in the * Substantially so. They were not free from errors. Life Insurance. 197 meantime, being bound by the opinion of counsel, they suggested the best formula they could that of Mr. Homans slightly modified, and more fully inter- preted for finding the contribution to surplus of each outstanding policy for the fraction of a policy- year from its last anniversary up to December 31st, 1869, and also another complementary formula, in case the charter should not be altered, to be used at the next calculation of dividend to find the con- tribution to surplus from December 31st, 1869, of each policy up to its anniversary in 1870, the con- tribution from that anniversary up to December 31st, 1870, being to be found by the formula used for the previous fiscal year, or rather eleven months, on account of the change of dividend day from February 1 to January 1. Mr. Homans, using the formula above referred to, ascertained the sum- total of the contributions to surplus up to Decem- ber 31st, 1869, to be $1,091,900.28, while the whole apparent surplus, including "unearned mar- gins " so called, was $2,239 5 387.39. This showed pretty clearly that the method of division he had previously pursued was not very dangerous. But as there was no question that undej his former dis- tributions each policy had received its full share of surplus up to its latest anniversary, under the de- cision of the referees limited as it was practically and rigidly by the opinion of counsel, the $1,091,- 900.28 was all that could be divided on the 1st of 198 Politics and Mysteries of January, 1870, payable at the next settlement of .premium in each case. The balance of $1,147,- 489.11 did not contain any surplus from extrane- ous sources, such as profits of forfeiture, for in that eleven months the company had not made enough out of retiring members to quite pay ex- penses, and Mr. Homans assessed 45 per cent, on the margins of the fractional policy years, counting as surplus but 55 per. cent. Hence under the rule established by the learned counsel, at the invoca- tion of Mr. Winston, the propriety of which was not submitted to the referees, not a dollar of this $1,147,489.11 could be touched till the next divi- dend day, January 1, 1871, came round. But as not only Mr. Homans but the referees had expressed the opinion that there was no hazard in dividing it payable with the next premium Mr. Winston concluded, in spite of his legal counsel, not to dis- gust his policy-holders, after all, by the blunder of so small a dividend, keeping on hand an unneces- sary million for a year*! So without asking either Mr. Homans or any of the referees, or even Pro- fessor Bartlett or Church, how this $1,147,489.11, or any part of it, should be divided, any one of whom, if asked, would have prevented him from making the most comical blunder in the annals of finance, he and his committee voted that each con- tribution or share of dividend ascertained by Mr. Homans, should be increased 80 per cent ! This, Life Insurance. 199 of course, made the whole dividend for the eleven months $1,965,420.50. It was in vain that Mr. Homans protested against the vote as absurd and contrary to the decision of the referees under the rule of counsel. He had nothing to do but to assign the shares, according to the vote of the com- mittee. And the resulting joke may be thus illus- trated : A and B are two policies, alike in all respects except that A had its anniversary February 1, 1869, and B, December 31, 1869. Suppose, as might have been the exact fact, that A's contribu- tion at the end -of the latter day was $81.69, and B's $0.24. The vote of Mr. Winston and his com- mittee gave A a dividend payable February 1, 1870, of $147.04, and B one of FORTY-THREE CENTS, pay- able December 31, 1870. The faculty of putting things wrong end foremost could not go much fur- ther than this. A policy dated the 15th of June was the only one which would get what belonged to it. Those that came after were all to be robbed more and more to gladden the hearts of those hav- ing earlier dates. Probably this blunder has been fully corrected, and though it must have cost some- body a good deal of worry to do it, the fun of it, to say nothing of its lesson, is worth a good deal. Poor plodding actuaries have a dull time of it, and an occasional joke of this sort does them good. It is almost needless to say that after this experience, the Mutual Life has returned to the first simple sys- 200 Politics and Mysteries of tern of Mr. Homans, of rating annually the contri- butions of the entire current policy-years of out- standing policies however dated, by the experience of the fiscal year just concluded. After thus having narrated as clearly as the na- ture of the case would admit, the facts of this re- markable escapade, it is due to the reader to furnish him the means of ascertaining its cause. The "Spectator," of New York, of July, 1873, contains an article headed "PRESIDENT WINSTON INTERVIEWED/' which cannot be supposed to have been published without his full consent. This is an extract : " What were the causes of Mr. (Actuary) Homans' retire- ment from the Mutual Life ? " In brief, unfaithfulness, incompetency, obstinacy, imprac- ticability and insubordination, in my opinion, were the reasons why the board rid themselves of him. " Is it true, as he charges, that when the dividend system was changed in 1869, f 2,000,000 had to be appropriated to correct a mistake that you made, in spite of his protest ? " It is not. I do not know how I can better explain this matter than by reading you a letter I addressed to a com- mittee of the board which was raised in the year 1870 to con- sider certain alleged improprieties on the part of Mr. Ho- mans. I then wrote : "Inasmuch as Mr. Homans, in one of his letters to me (which I have handed over to you) , refers to the present mode of dividing surplus, I think it well to remark that the original cause of all this trouble and discussion about the addition of eighty per cent, to the last dividends ascertained Life Insurance. 201 by Mr. Homans was a mistake which he made in reporting the amount of divisible surplus to the board last year. Under the former system of anniversary dividends running with the policy year, the margins were all earned before the dividends were paid. Hence in estimating surplus as of a given date, payment in the individual cases being postponed as above, no such reserve was necessary. But when it was found nec- essary to ascertain the surplus actually earned on past busi- ness upon a given day, and to divide that amount and that only, Mr. Homans probably forgot the unearned margins in premiums accruing from that day to the respective anniver- saries of the policies, and failed to include, as he should have done, a reserve for these among the liabilities of the company on that day. Mr. Homans at that time either did not compre- hend or was afraid to admit the nature of 'his mistake, and the committee, considering his official statement and most positive assurance that a surplus existed (all of which, to use Mr. Homans' own phraseology, might have been thrown into the dock and the company remain solvent), could not see why it was not divisible. Had Mr. Homans known, and frankly explained his mistake to the committee, a remedy would have been sought, and much of the trouble of the past year would have been avoided. But his first error was in- creased by a disingenuous attempt to cover it up ; and the committee, unable to follow the tortuous windings of his elaborate attempts at mystification, were compelled to take that course which in their judgment the interests of the pol- icy-holders imperatively demanded, leaving a rectification, if any should be necessary, to a future time. In his intercourse with the committee, Mr. Homans manifests neither candor nor capacity as an adviser, while his memory in matters affecting his personal or professional interests is strangely unreliable. " In accordance with the avowed intention at the time, Mr. Homans' mistake was subsequently rectified, so that each 9* 202 Politics and Mysteries of policy-holder had equal and exact justice done him. No ex- pense to the company was involved other than that of the extra labor incurred. For that expense the company has probably been fully compensated by the reduced cost of the actuary's department since Mr. Homans left." After what has been said this needs no comment. It speaks for itself. The reply of Mr. Homans follows, quoted from the " New York Herald," of July 19, 1873 : " Had Mr. Winston given to his interviewer the facts in- stead of his opinions, and allowed the public to form their conclusions, no notice of the matter on my part would have been necessary. The facts are these : " In November, 1869, 1 was the auditor of the Mutual Life Company, and Mr. Winston the president. He brought to me for audit the official quarterly statement of receipts and payments, prepared under his direction by the bookkeeper, in such manner'that, upon investigation, I detected the fact that certain items had been improperly withheld in the final payments of death-claims to the representatives of deceased policy-holders, the books of the company having been al- ready prepared, under his order, with a view to deprive such parties of said amounts so due them. To audit this state- ment by certifying the same in the usual manner to be cor- rect, would have been justifying him, and involving myself as an accomplice in the perpetration of an act of dishonesty to the policy-holders, and a direct violation of the charter of the company. I, therefore, declined auditing the statement, beyond certifying that the same ' was in accordance with the entries upon the books of the company.' This certificate he passionately and violently erased, with the threat that if I did Life Insurance. 203 not audit the statement in the usual manner, he would find somebody else for actuary who would. " That in this matter I was unfaithful to Mr. Winston in his scheme for defrauding the beneficiaries under certain policies of the company I admit, but unfaithful to the company, never. That to Mr. Winston J was in this matter impracti- cable, insubordinate, and obstinate is certainly true. "Upon this occurrence, it of course became necessary that I should be got rid of; but Mr. Winston does little justice to his position in the company by stating that the trustees de- termined to get rid of me. If the trustees had come to such a determination, it would have been practically of but little moment, unless Mr. Winston so willed it. I was got rid of by Mr. Winston. Ever since he ousted Mr. Collins from the presidency by the secret collection of proxies, Mr. Winston has held absolute control of the company by keeping in his possession proxies of such policy-holders as, having given them originally upon the solicitation of his agents, have been too indifferent or too indolent to cancel them. Each of his trustees holds his place by the appointment or toleration of Mr. Winston, and from time to time, the most respectable merchants, who have been members of his board, have been got rid of for exhibiting obstinacy, impracticability and in- subordination, amounting to unfaithfulness to Mr. Winston, in regard to such schemes and practices of his as he may not have been able to conceal from the knowledge of the trustees. " His charge of incompctency, in that I was accountable for the fearful blunder in distribution of surplus in 1870, and that said blunder was occasioned by a mistake of mine, is simply untrue. It was occasioned by the direct interference of Mr. Winston, in opposition to the decision of distinguished referees, which had been approved, adopted and ordered to be carried out by the board of trustees, and he is responsible for the blunder, as he well knows. Mr. Winston never would have made this charge agajnst me exaept under the 04 Politics and Mysteries of excitement of feeling growing out of a circumstance beyond my control viz., that I lately gave testimony, under the compulsory process of subpoena, before the assembly com- mittee, during an investigation which resulted in his convic- tion of malfeasance in office, of the unwarranted use of trust funds by him, aud fraudulent attempts at concealment of his conduct by false and altered entries in the books of the com- pany." One of the most remarkable features of life insurance at present is covered by the not very appropriate phrase of "tontine policies." It is very hard to understand why states that maintain laws against gambling, pure and simple, should allow the most pernicious sort of it to be attached to life insurance, and perhaps harder still to under- stand why State Insurance Departments should maintain so mild a deportment towards a scheme got up on purpose to make their supervision a farce. Many of the best and soundest companies have abstained altogether from this seductive vice, and it deserves to be said to the credit of Mr. Winston that on the advice, as is understood, of Prof. Bartlett, his present actuary, *tiie Mutual Life has discarded this enormity after commencing the practice of it. As long as the law allows such policies to be issued, it is a little dubious whether any demonstration of their nature and tendency does not do more hurt than good. The following essay published in the " Insurance Tirpes " has been Life Insurance. 205 extensively used as a canvassing document by solicitors of tontine business. Nevertheless it is inserted here in the hope that it may stir up some public-spirited reader to ask the legislature either to suppress this sort of policy or repeal all statutes against gambling, so that those who must gamble will have no excuse for defiling a good institution with their constitutional and besetting vice. THE TONTINE PLAN. In every life-insurance company of large extent many policies are held by persons of considerable estate, who have no difficulty in paying the premiums, and who would by no means leave their families destitute if their claim should not be paid when due. Such policies doubtless contribute to the strength of the company, and it is no reason for refusing to insure a man that he is rich enough to do without it. A rich man may insure his house, why not his life ? . And especially if by so doing he strengthens an institution which provides an indispensable blessing for the man who has no estate but his life? But if there were only rich men in the world, life-insur- ance companies would be little better than superfluous, a waste of labor. Their true function is to provide a substitute for wealth, an estate which a poor man can bequeath. They exist particularly for rub-and-go people, whose year-ends scarcely more than meet. Such people always compose a very large, if not the largest, part of the insured. This is so true that, notoriously, many of them rub and don't go. In- surance is a great blessing to them while they can keep it up, and they might keep it up longer if it did not cost too much. Now, with a distinct view of these two sorts of people 206 Politics and Mysteries of who take life-insurance policies, we are prepared to define, understand and appreciate the powerfully and expensively advertised " Tontine Plan." It is a contrivance to facilitate the going of the people who can go without rubbing, at the expense of the rub-and-go people. Its sole and only function is to make the richer part of the company richer by making the poorer part, poorer. It does not introduce into the mechanism a single additional drop of lubricating oil, but it takes from the wheels that have too little whatever they have, and applies it to those that have no lack. It cunningly intro- duces into the body of the policy a bet on the persistence of certain annual payments, say for ten, fifteen, or twenty years, should the party live so long. This little gambling arrange- ment, where the stake in the company's hands is the legal reserve and the surplus, is, of course, a safe thing for it. It holds a considerable sum of money for which nobody can call it to account short of at least ten years. This is a very comfortable thing for the company when it happens to be as much as it can do to show the legal reserve under the high pressure of present expenses. But it is rich, operates in a palace that Midas might envy, and will no doubt have the stakes ready to fork over af the end of a decade. Such is the presumption, How about the parties to the little game, by which is meant the tontine feature as distinct from the insurance ? The losers are, first, those who have died in the meantime, and, second, those who have lapsed or forfeited their poli- cies. The winners are those who have survived and kept their policies in force supposing the company pays them what the losers have lost, a supposition that calls for a certain amount of faith. The losers who have died, have lost by the tontine bet only such surplus as had accrued up to the time of their death. This part of the loss, much the smallest, probably, for in ten years there are commonly many lapses to one death, and surplus is always small compared with Life Insurance. 207 reserve, falls equally on rich and poor. So that the game one loves to call it a little game is fair enough, as a game, J[n regard to this part of it. The losers who have lapsed, have lost both surplus and reserve, as they existed at the date of lapse. This is what, without exactly knowing its amount, they bet on their ability to meet ten, fifteen or twenty annual payments. Here the bulk of the loss is sure to fall on those least able to bear it, and the winnings go to those who least need them. As a game of long purses against short ones, it can hardly be said to be fair. fAt any rate, the average effect must be exactly the reverse of the avowed object of the institution. It is as if a temperance society should endeavor to promote its cause by establishing a liquor saloon under its lecture room, or a church should support its minister by a lottery. Insurance's necessarily, to a certain extent, a game of chance. Its peculiar benefit arises out of this fact. But the hazard should be kept at a minimum. The little appended game, called the " Tontine Plan," is wholly extraneous, superfluous and unnecessary. It could not possibly flourish if the fools were all dead, or nearly all. For that matter, we know that highly gullible but not unworthy people so abound, that lotteries and many other sorts of gambling could flourish, if only legislatures would give sufficient corporate facilities. Why they allow their creatures who are authorized to deal in life-insurance to entrap the unwary by these ton- tine plans, mignt perhaps become known to the public if the advertisements of them were not too profitable to admit of free discussion in the daily press. 208 Politics and Mysteries of Chapter X. THE MONEY . QUESTION IN RELATION TO LIFE INSURANCE. [From the Insurance Times.] As concerned in contracts of the longest duration, a life- insurance company has a deeper interest in the constancy of the money unit than any other financial institution. The latest Massachusetts Report gives a list of fifty-five life-insur- ance companies of which the gross assets, using the existing money unit, are $290,563,953.47, while the present value of the future liabilities, using the same unit, are $261,662,482.40, showing a surplus as regards policy-holders, of f 28,901,471.07. Now, on the assumption that the unit of this numerical state- ment is to remain a constant or fixed quantity in regard to value, or that its value will not vary materially in the proc- ess of time, this statement only needs to be true to be highly satisfactory to the policy-holders. But unfortunately the value of this money unit, which has varied exceedingly in the last twelve years, is by no means fixed for the future, but is left at the mercy of causes which are sure to produce not only fluctuations, but such as are incapable of confinement within predicted limits. Com- pared with the sum which would appear by using the unit of the gold coinage, the least variable standard of value known among men, the gross assets of the above companies are now only about f 254,900,000. As the gross liabilities, ex- cept to a very small extent, will not mature till a distant day, and may then have to be paid in a currency as valuable as gold, it is too plain that a slight cloud rests on the question of the average future solvency of these companies. For, if we are to have specie payment by and by, instead of there being a surplus now, as regards policy-holders, of nearly $29,000,000, there is really a present deficiency of about $6,000,000. On the contrary, if we are not to have specie Life Insurance. 209 payment by and by, but a fluctuating descent towards noth- ingness, of which no prophet can foretell the law of curva- ture, then, though the assets are at present abundant, no prudent man will be tempted to add to them, because the probability is that he will have paid more valuable dollars than his heirs will receive. The actuary, having made careful observations for a series of years, on the rates of in- terest and mortality, bases the business of life insurance on certain assumptions in regard to these two things which he regards as perfectly safe. Supposing them to be so, in vain are all his labors, unless the value of the money unit of his calculations is to be as constant, at the least, as that of a given weight of pure gold. If a legislature steps in and decrees that a piece of paper which is worth only x cents in the market, while a gold dollar is worth 100, shall be the dollar or money unit, and the life-insurance company re- serves accordingly, carrying 1 x per cent, of its reserve to dividend, on account of this interference, the actuary may as well retire, and amuse himself, as he can, in the abstract wil- derness of imaginary quantities. The legislative wisdom has simply made the assured solvency of a life-insurance company an insoluble problem. The importance of this subject, in the present attitude of life insurance, is my excuse for venturing a few words on the elementary principles of money and the stability of its unit. Money, as known to us, is the product, more or less entire- ly, of legislation ; and consists, practically, either of metals coined by the government, or the promises of the govern- ment, or of individuals or corporations authorized by it, to pay such coins ; or, theoretically, the expression of the sover- eign will of the government that certain pieces of paper, without regard to any intrinsic value they have, shall be re- ceived and used as money. We commonly call money the measure or standard of ^ y* 210 Politics and Mysteries of value, and this, perhaps, is as far as we can go without con- sidering the meaning of the word value. Value is not an in- herent quality of any object, material or immaterial. Neither gold nor wheat has any value in itself. The value lies in the affection of the mind of the valuer towards the thing valued. This differs widely in different persons towards different objects, and this difference lays the foundation of that legiti- mate commerce in which the parties on either side make a profit. Value is either special or general, particular or aver- age. When we talk of a standard of value we mean some- thing which agrees with or represents the average attraction between a human mind and various objects. This standard is also called market price. If a gold dollar will buy a bushel of wheat, a yard of silk, or a pint of wine, we call the dollar the measure of the value of wheat, silk, or wine ; but in reality the dollar no 'more measures the value of the wheat, silk, or wine, than either of them measures the value of the dollar. The only difference is that the dollar is used by everybody in exchange for almost everything, whereas any- thing else is used instead of it only in the rare cases of com- merce called barter. The only reason why we select the gold and call it the measure or standard of the value of other commodities, is the convenience of bringing all other things to a comparison with the one which is the most port- able and least perishable, and which, on account of the high affection of the average mind towards it, is most sure to bring in exchange for it anything which may be desired. Though value is not a quality of any object, it always depends upon the qualities of the object as well as upon the character and circumstances of the individual who values. Thus gold, by the qualities which make it clearly king of the metals, has been more universally, perhaps, than anything else, an object of desire and affection to human beings in all ages ; and its scarcity, or rather the great amount of labor and search which is required to get possession honestly of a given quan- Life Insurance. 211 tity of it, has hitherto made it exceedingly convenient, determined in quantity "by coinage, as a medium of exchange. A starving man might be willing to give sixteen ountes of gold for a pound of beefsteak, and if all men were in a state of starvation, gold would be out of the question as currency. But, as things have been, no surer way of reducing to a minimulh the fluctuations of value in the money unit has ever been devised than to fix, as that unit, a duly certified weight of pure gold. Yet almost the whole worjd has gone a long way beyond the use of actual gold as the circulating money. Promises of money have, in fact, become money. And inasmuch as these promises, when made or endorsed by governments do serve the purpose of money in the absence of performance, we have to consider a species of money which may be described as the will of the government coined on paper. This is the theoretical limit, to which the non- payment of promised dollars tends. Let us then consider a purely arbitrary paper currency, made a legal tender exclusively for all debts, to see by what means any stability can be given to the value of its unit, or in other words how its purchasing power can be made con- stant or to approach constancy. Anything which is good to pay old debts, and which will be received in payment of taxes, will certainly have a commercial value or purchasing power in regard to commodities, arid this will depend largely upon its scarcity. If by an irresistible government it should be substituted for an equal amount of metallic money, it would probably start with the same purchasing power. But not being convertible into coin, its future could have no rela- tion whatever to the value of coin or the material of which it is composed. Naturally, if the government expenditure should exceed its income from taxation the volume of this currency would increase, and if the increase should exceed the increase of population and the demands of commerce it would depreciate in value. It could only rise in value by the 212 Politics and Mysteries of taxes exceeding the expenditures, a hardly supposable case, unless the government should see fit to allow the people to regulate the volume by regarding it as a sort of flebt (which is contrary to our hypothesis) to be funded at the option of the holder against the government. It is a favorite theory with some financiers that the perfection of paper currency would be to have it entirely independent of coin, a%d capa- ble of drawing interest in kind from the government at a prescribed jate by being exchanged for coupon bonds at the option of the holder. They say whenever this currency should become excessive, tending to a rise of prices of com- modities, then people would seek and obtain government bonds. Whenever it should become scarce, reducing prices, people would sell their bonds to the government to make it plentier and raise prices. Such an arrangement would un- questionably tend to steady the purchasing power of such a currency, but no such effect would be produced unless the government kept the price received for such bonds out of circulation by treating it as so much waste paper, and then it would be paying interest, and taxing the people to do so, in order to favor sellers at the expense of buyers paying inter- est, in fact, on what could not be considered in any sense as debt without upsetting the logical basis of the whole system. But the grand and insurmountable objection, in this country, to this coinage of the government's will into a com- mercial circulating medium, an objection which precludes any approach to constancy of value, is our popular govern- rnent. There is no stable will to be coined. With an auto- cratic dynasty, it might be otherwise. At any rate we can imagine that in such a dynasty there might be a coinable will, descending from father to son, uninfluenced^ by the clamor of debtor and creditor classes against each other, deaf to expansionists and contractionists alike, and that it should so regulate the income and outgo from its exchequer of a commodity of its own creation, so costless to itself and Life Insurance. 213 eo precious to the people, as to keep its purchasing power reasonably steady. This is barely conceivable. But when we have conceived of it we have conceived of something which does not exist anywhere in this age of the world, and still is no better, if it is not worse, than what nature has done for us in her rare and well concealed deposits of gold. For the people who periodically create our government by a process which very imperfectly represents their collective or average will, much less their interests, to allow it to create money out of nothing, is simply allowing it to set up a rubber balloon between two factions of " bulls " and " bears," one blowing into it for expansion, the other sucking out for its collapse. Taking it pure and simple, it is clearly a project to be let alone. In the first place there could be no calculable stability under it. In the second, it would inevitably corrupt the government and lead to anarchy. Now, we are suffering these very same results, the instabil- ity natural to such a system, enhanced by unproductive and parasitic speculators, under a currency professedly created out of the government debt, a debt which recognizes, in some sense, that constitutional standard of value of which the mint is the organ, because the said debt is not duly honored. In fact, all the evils which must necessarily result from a per- fectly arbitrary paper currency, under any circumstances, will result from an inconvertible debt currency, and proba- bly more, on account of its being a patent, self-evident im- morality on its face. It being a part of the business of any government to enforce the honest payment of private debts, its doing with its own debt what it would be dishonest for a private citizen to do with his, can hardly fail to have a bad moral, as well as financial effect. I have referred to the moral aspect of the matter, because it more or less concerns the remedy for an evil, which, to life insurance, is simply intolerable. If there were no moral wrong, no unhingement of a nation's credit, in its open vio- 214 Politics and Mysteries of lation of its promise, the simplest and best way to arrive at stability of value in the money unit, would be to reduce the weight of the dollars at the mint to the value of the paper dollars to-day, and henceforward redeem the greenbacks on demand with these new dollars. This would remove the ob- jection to immediate resumption, to which President Grant alluded in his inaugural of 1868, as the only one then exist- ing, to wit, that of its injustice to the debtor class. If, how- ever, such an act would be morally wrong, and would bring upon the nation discredit and disgrace, it must be avoided. But avoiding it for this reason, we necessarily admit that the suspense of payment is equally immoral, unless the govern- ment lacks the means, or the ability to borrow the means, to pay its non-interest-bearing notes on demand in full. It cer- tainly cannot be said that the government of a country worth $30,000,000,000, and covering its full proportion of the gold mines of the world, at a time when the owners of gold are giving more than par for its six per cent, bonds, is unable to redeem every dollar of its non-interest-bearing debt as fast as it could be presented. Only the grossest ignorance or the most brazen impudence could make such an assertion. We are brought then into the presence of a conflict of two evils. On the one hand, a perennial violation of the national promise ; on the other, an alleged injustice to a not easily defined " debtor class." It is to be observed that the latter is temporary, that it is pretty exactly balanced, in a pecuniary sense, by an advantage conferred on a correlative creditor class, and that most people belong, more or less, to both classes at the same time. The case is very much like an in- exorable, incurable toothache on one side, and the pain of extraction on the other. If the big patient prefers to. endure the " hell o' a' diseases," rather than to have the dentist apply his forceps too suddenly, that artist will of course have the kindness to allow him a few months in which to screw up his courage. But the thing is not likely to stay in more than Life Insurance. 215 half a year, without throwing the balance of the ache largely on the side of the retained tooth. I must beg the pardon of certain pedantic writers on cur- rency for coming so near the close of what I have to say without noticing their argument, very popular with the para- sitic class of gold gamblers, to prove that before the govern- ment can safely resume specie payments it must contract the paper currency to about the volume it had when the state banks issued.it and redeemed it in gold. These writers, not happening to find laid down in the books they sjudy, the fact that the volume of a paper currency resting on a specie basis depends not only upon the amount of commodities to be ex- changed, and the complexity of the distribution, but upon the intensity of the public confidence in the solvency of the currency, have ignored it altogether. They should have studied the children's game with the paper torch, which, hav- ing quenched its flame without putting out its fire, they pass around a circle, each one saying as he holds it, " Robin's ali^e, as live as a bee, if he dies in my hand you may pack- saddle me." It passes till the last spark expires, and the more rapidly the sparks take their leave, the faster it circu- lates. So it is with paper money ; the less the public confi- dence in it, the faster it will circulate, and the less of it it will therefore take to do a given amount of work. The peo- ple confide in the general government as being vastly more exempt from the danger of bankruptcy than any set of state banks that ever existed, and this accounts for the fact that they are contented to hold in their hands a much larger volume of the present paper, in proportion to the business they have to do with it* than they ever did of bank paper. Were it readily convertible into specie, and sure to maintain the same purchasing power as gold, they would be contented to hold rather more than less ; in other words, the confidence in it being still more enhanced, it would circulate more slug- gishly, requiring a greater volume rather than a less. But it 216 Politics and Mysteries of is useless to oppose facts to the theories of these writers, as they are sure to fall back on their maxim, " So much the worse for the facts if they differ from our scientific princi- pj.es." One thing is quite certain, that if resumption has to wait for the contraction these writers recommend, it will never occur. What resumption is really waiting for, is the waking up of a majority of the people who are not engaged in gambling under the name of trade, and not too deeply interested in the privilege unwisely and unjustly conceded to the national banks, to the very simple truth that every circulating- note, as to the difference between it and the capital which the issuer has to hold idle for its redemption, is a loan from the holder to the issuer without interest. They will then begin to see that as long as the government is a debtor, it can furnish the best possible currency, and ought to furnish the whole which is allowed to circulate, by being a perfectly honest and honorable debtor, paying its non-interest-bearing debt on demand, and borrow- ing at market interest all the funds necessary to enable it to do so. It then gratifies every individual contractionist to liis heart's content by redeeming all the greenbacks he presents, and every individual expansionist, by issuing greenbacks at par for all the gold or government bonds he presents. They will then begin to see that the national banks, in receiving the full interest on the bonds which they pledge to the gov- ernment to sustain their circulation, in spite of the tax under the provisions of the National Banking Act, really get the lion's share of the profit of that circulation, the whole of which should belong to the government, or in other words to the people. They will then see that if corporations or pri- vate citizens own government bonds, and are not contented with the interest they get, but want to convert them into money to lend at a higher interest, the best way for the gov- ernment, if not for them, is that they sell the bonds out and out to the government for greenbacks, and lend them. The Life Insurance. 217 government thus saves nearly the interest, which is much more in years, many millions than any tax on circulation which it does or could get out of the banks, and the extra cost of hundreds of different editions of bills is saved, to say nothing of the simplification of the public accounts. A pri- vate Uncle !?amuel who had a big money debt against real estate so ample and undoubted that his neighbors should be glad to use a third of it for money, in the shape of his I O IPs, without interest, would not be likely to give away this advan- tage, or sell it for half its value, neither will a majority of our people, when they begin to see through their own affairs. There is no sound policy for any life-insurance company, let the government do what it will, but to transact all its affairs in strict accordance with a specie basis, and exert what influence it can to arouse the people to see the necessity of it for their own interests as well. 10 Appendix. APPENDIX. THE ACTUARIES' RATE OF MORTALITY, WITH NATURAL PREMIUMS AT 4 PER CENT., Derived from the combined experience of seventeen English Companies. AGE. to 9 3 i Chances of dying in one year out of 1,000. Natural Premium to insure $1,000 one year. i?; : : : : : 100,000 99,324 676 674 6 76 6 79 $6 50 653 12, 98,650 672 6 81 6 55 13; . : : : : 97,978 . 671 6 85 6 59 14, 15, 97,307 96,636 671 671 6 90 6 94 6 63 6 68 16, 95,965 672 7 00 6 73 17 95,293 673 7 06 6 79 18, 94,620 675 7 13 6 86 19, 93,945 677 7 21 6 93 20, 93,268 680 7 29 7 01 21, 92,588 683 7 38 7 09 22, 91,905 686 7 46 7 18 23, 91,219 690 7 56 7 27 24, 90,529 694 7 67 7 37 25, 89,835 698 7 77 7 47 26, 89,137 703 7 89 7 58 27, 88,434 708 8 01 7 70 28, 87,726 714 8 14 7 83 29, 87,012 720 8 28 7 96 30, 86,292 727 8 42 8 10 31, 85,565 734 8 58 8 25 32, 84,831 742 8 75 8 41 33, 84,089 750 8 92 8 58 34, 35, 83,339 82,581 758 767 9 10 9 29 8 75 8 93 36, 81,814 776 9 48 9 12 37 81,038 785 9 69 9 31 Appendix. 219 The Actuaries* Rate of Mortality Continued. AGE. j I Chances of dying in one year out of 1,000. Natural Premium to insure $1,000 one year. 38, 80,253 795 9 91 $9.53 39, 79,458 805 10 13 9 74 40 78653 815 10 36 9 96 41, 77,838 826 10 61 10 20 42, 77,012 839 10 89 10 48 43, 76,173 857 11 25 10 82 44, 75,316 881 11 70 11 25 45, 74,435 909 12 21 11 74 46, 73,526 944 12 84 12 35 47, 72,582 981 13 52 13 00 48, 71,601 1,021 14 26 13 71 49, 70,580 1,063 15 06 14 48 50, 69,517 1,108 15 94 15 33 51, 68,409 1,156 16 90 16 25 52, 67,253 1,207 17 95 17 26 53, 66,046 1,261 19 09 18 36 54, 64,785 1,316 20 31 19 53 63,469 1,375 21 66 20 83 56, 62,094 1,436 23 13 22 24 57, 60,658 1,497 24 68 23 73 58, t .... 59,161 1,561 26 39 25 37 59, 57,600 1,627 28 25 27 16 60, 55,973 1,698 30 34 29 17 61, 54,275 1,Z70 32 61 31 36 62, 52,505 1,844 35 12 33 77 63, ' 50,661 1,917 37 84 36 38 ' 64, 48,744 1,990 40 83 39 26 65, 46,754 2,061 44 08 42 39 66, 44,693 2,128 47 61 45 78 67, 42565 2 191 51 47 49 49 68, 40,374 2,246 55 63 53 49 69, 38,128 2,291 60 09 57 78 70, 35,837 2,327 64 93 62 44 71, 33,510 2,351 70 16 67 46 72, ..... 31,159 2,362 75 80 72 89 73, 28,797 2,358 81 88 78 73 74, 26,439 2,339 88 47 85 07 75, 24,100 2,303 95 56 91 89 76, 21,797 2,249 103 18 99 21 77, 19,548 2,179 111 47 107 18 78, 17,369 2,092 120 44 115 81 220 Appendix. The Actuaries* Hate of Mortality Concluded. AGE. 9 3 a I Chances of dying in one year out of 1,000. Natural Premium to insure $1,000 one year. 79, 15,277 1 987 130 06 $125 06 80, ... 13,290 1,866 140 41 . 135 01 8i, : .... 11,424 1,730 151 44 145 61 82, 9,694 1 582 163 19 156 92 83 : : : : : 8,112 1,427 175 91 169 15 84, 6,685 1,268 189 68 182 38 85, 5,417 1,111 205 10 197 21 86, 4,306 958 222 48 213 92 87, 3,348 811 242 23 232 92 88, 2,537 673 265 27 255 07 89, 1.864 545 292 38 281 14 90, 1,319 427 323 73 311 28 91, 92 93, 892 570 339 322 231 155 360 99 405 26 457 23 347 10 389 68 439 64 94, 184 95 516 30 496 45 95 89 52 584 27 561 80 96, 37 24 648 65 623 70 97, 13 9 692 31 665 68 98 4 3 750 00 721 15 99, 1 1 1,000 00 961 54 The reader of the foregoing pages has not failed to perceive that the writer has been for some time engaged in a controversy, or struggle for reform, with the guardians of the people's money opposed to him. He has not, however, stood entirely alone. And he desires here to return his cordial thanks to the editors of the insurance press, who have almost without exception treated him with courtesy, and in many cases with solid support ; in fact all they could, and live. His thanks are es- Appendix. 221 pecially due to the plucky editor of the INSURANCE TIMES, who has shirked no risk or expense in giv- ing fair play to the most revolutionary utterances. The volumes of that journal are invaluable, as con- taining about all that has been or need be said, on both sides of the disputed questions. He also takes this occasion to thank his brethren of the actuarial profession, whether agreeing en- tirely with him or not, all of whom have rendered him important assistance, in a cause directly detri- mental to their material interests, not excepting Professor Bartlett, the present actuary of the Mu- tual Life. Indeed, to the writer, altogether the most painful incident of this conflict is to be obliged to say what he has of some of the life-in- surance studies of his amiable friend, the West Point Professor. His mathematical capacity no- body questions. But even a war-horse might not know how to work a bark-mill till he had tried it. One must first get the hang of any machine by a little practice. The writer, at any rate, has made too many mistakes himself not to look charitably on those of others. Perhaps the stars can be got at only through these asperities. To the young actuary, first of the Asbury and now of the Northwestern Mutual Life Insurance Company, of Milwaukee, Mr. EMORY McCLiNTOCK, not only thanks are due, but some proof of the able manner in which he has won them. His bravery 222 Appendix. in going, in spite of authority, wherever truth leads him, reminds one of the way in which his father, Rev. John McClintock, D. D., then a Professor in Dickinson College, Carlisle, Pa., in 1847, volunteered in defence of a hunted fugitive slave, and shared arrest along with his negro rescuers. Young Mr. McClintock's mathematical ability will not be questioned certainly not by Professor Bart- lett and his ability to make mathematical logic in- telligible to ordinary readers is such that the fol- lowing extracts from his papers published in the "Insurance Times "of 1871 and 1872, inserted by his kind permission, will be fully worth the price of the volume. [From the Second Paper, Insurance Times, October, 1871.] The proper surrender value which a proprietary company should give, in the absence of any contract on the subject, is precisely the amount which it is to its interest to give. To determine this amount it must value the liability about to be cancelled by a rate of interest as high and a rate of mortality as low as there is reason to expect for the future, taking credit for future premiums in gross, diminished by a percentage representing cost of collection. To pay more than the amount determined by this rule would, except in the case of an impaired risk, be extravagant ; to refuse to pay as much would be extortionate. A mutual company should pay such sum, additional to the value just spoken of, as represents the withdrawable interest of the retiring member in the profits of the concern. 'If no rule be prescribed, whether by charter or by special contract, , for ascertaining the value of this withdrawable interest, the Appendix. 223 determination of the sum to be paid is always and entirely under the control of the company. The maximum surrender value is, as Mr. Wright has re- peatedly pointed out, that amount which, together with the cost of replacing the risk in a satisfactory manner, represents the share of the company's assets pertaining to the policy in question. There can be no doubt, moreover, that the ten- dency of the business is to make the surrender value of poli- cies as high as is consistent with safety. No one can pretend that a company is injured by the application of a rule by which the satisfactory replacement of the risk is secured. On the other hand, no one can claim that it is unjust to levy a surrender charge amply sufficient to accomplish this object ; unless, indeed, a similar charge has been deducted already from the first dividend. This proceeding is sometimes re- sorted to, I believe, though (at least when premiums are taken in cash) without apparent necessity. Exception to the foregoing -definition of the maximum sur- render value appears to be taken by Prof. McCay, in the cur- rent number of the " Spectator." He says : " The deterioration of life caused by the second selection, amounting as it does to ten or twelve per cent, among those who have been long insured, justifies a considerable surren- der charge to those who withdraw in sound health and with unimpaired constitutions ; and that no company can properly and justly neglect this and regulate its charge by the cost of supplying the place of the retiring member." The article referred to is a very interesting one (leading, as far as it goes, to the conclusion that reserves should be based on Dr. Farr's table), but does not warrant the conclu- sion apparently reached in the sentence I have quoted. It is probable that Prof. McCay will not quarrel with me if I amend this sentence by adding the words, " by another of only average vitality." If the retiring member be satisfac- torily replaced by a newly selected risk of equal vitality, the 224 Appendix. company cannot justly be said to "neglect this," or any other important requirement. Where the surrender value of a policy has been fixed by previous contract, the company should, year by year, make the reserve large enough to cover (with the aid of such undi- vided surplus as may pertain to the policy) both surrender value and surrender charge. The minimum surrender charge is, as Mr. Wright remarks, " not what the individual policy cost, but what it would cost to get another equally valuable." It must be determined by the company with reference to its present scale of expenditure, and in accordance with its present views of the comparative value of different classes of business. Even if the company pursue a stringent course, preferring to pay surrender values below the possible maximum, it is still important to it to know the limits within which safety lies. Hence, before a company can be said to have a correct view of the question of surrender value, it must previously have a correct view of the comparative value of different classes of new business must, in short, have an intelligent mastery of the question of COMMISSIONS. The scientific discussion of this question has been inaugu- rated by a well-known leader of opinion, foremost for the last twenty years in every important movement in American life insurance, Elizur Wright. His work in this respect is, as I believe, as important as any that he has accomplished. It may be expanded somewhat, perhaps, but it cannot be much improved. [From the Insurance Times of December, 1871, and April and May, 1872.] ON THE COMPARATIVE IMPORTANCE OF LIFE-INSURANCE POLICIES. (By E. MCCLINTOCK.) Third Paper. Some of Mr. Wright's views on this subject may be stated briefly, and I trust correctly, as follows : Appendix. 225 1. Every life contract is composite in its nature, virtually comprising (1) an agreement to bold in deposit on interest a portion of the premiums received, and (2) an agreement to insure a varying amount, so calculated that each year the amount in deposit;, and the sum really insured, or " amount at risk," are together equal to the sum nominally insured by the terms of the policy. This is the " Savings-Bank theory," so lucidly and effectively developed by Mr. Wright during his commissionership, and generally adopted by American actuaries as at once the most equitable and most convenient for the various purposes of a mutual society. 2. Of two insurance policies which are to continue only for " the term of one year, that one is most valuable to the com- pany for insurance purposes which yields the larger net premium. As the measure of comparative importance, the net premium on each policy of this kind is called its insur- ance value. 3. The insurance value of a policy which is to continue more than one year is made up of the net premium now due for the amount of insurance to be (really) enjoyed during the first year, plus the present value of the net premium which, one year hence, will pay for the insurance to be (really) enjoyed during the second year, plus the present value simi- larly computed in detail, of the (real) insurance for all fur- ther years of the term contemplated. 4. No scale of commissions can be intelligently adopted without due regard to insurance values. These four propositions, each substantially originated by Mr. Wright, are sufficiently important and distinct to warrant detailed examination. I. SAVINGS-BANK THEORY. Let us suppose that there arc doing business in the same neighborhood, a life-insurance company, an annuity compa- ny, and a savings bank ; that each allows four per cent, in- 10* 226 Appendix. terest for money ; that the two former make use of the Actu- aries' table of mortality, an*d that the insurance company will not insure lives for a longer period than one year at a time. Let us also suppose that a man aged thirty-five, having some money in hand, wishes to apply it in the most advantageous manner to the purchase of two years' insurance of $10,000. What is he to do ? The terms of the insurance company are : To insure $1,000 for 1 year at age 35, . . . . $8.931 " " " " 36, . . . . - 9.122 while the annuity company will, in consideration of $952.61 paid in at age thirty-five, pay back $1,000 if the party live to be thirty-six, and in the same proportion for smaller sums. The second year's insurance, therefore, will cost our sup- posed applicant $91.22 one year hence." What he needs to do is so to invest his money as to secure $10,000 for his heirs in case he dies within the first year, and also to secure $91.22 one year hence in case he survives, with which to purchase the second year's insurance. He has his choice of two plans : He can secure the second year's premium by paying into the annuity company $91.22X. 95261, or . . $86 90 Which, together with the first year's insurance pre- mium, 89 31 Makes a total outlay of . . . . $176 21 Or, he can put into the savings bank $87.71, which in one year will yield the sum of $91.22, sufficient to pay for the second year's insurance should he survive the first year. If he should not survive, it would go to his heirs. This being the case, he requires insurance during the first year, not for the full sum of $10,000, but for the difference between it and Appendix. 227 the amount to be paid by the savings bank, or $9,908.78, which insurance he applies for, paying $9,908.78X .008931, or $88.50. Thus he pays out : To the savings bank, To the insurance company, Total, . . $87 71 . 88 50 . $176 21 Both plans, therefore, produce the same result the two years' insurance costs him, at age 35, $176.21, which amount he considers, in either case, as his insurance premium. So also, by making the proper calculations, he could so arrange his payments as to secure the benefits which are con- ferred by the " 5-year endowment policy " in actual practice. Thus, taking first the supposition that he works through the annuity company, his accounts would stand, year by year, as follows : A B C TEAK. Successive Endowments Wanted. Premium per $1,000. Deposit Required. I; : : : : : $1,811 52 3,711 91 $95.2607 95.2418 $1,725 66 3,535 29 3, 5,706 37 95.2224 5 433 74 4 : : . : : 7,800 41 95.2013 7,426 09 5, 10,000 00 95.1797 9517 97 That is, to secure $10,000 at the end of the fifth year the company would, according to its regular terms, require $9,517.97 to be placed in deposit at the .beginning of that year ; to secure $7,800.41 at the end of the fourth year would need $7,426.09 at the Beginning, etc. ' Let us see where the money comes from : 228 Appendix. C A D YEAR. Deposit Required. Previous Endowment. Cash Required. L $1,725 66 $1 725 66 2 3,535 29 $1 811 52 1 723 77 1; : : : : : 5,433 74 3,711 91 1,721 83 4, 7,426 09 5,706 37 1,719 72 5, 9,517 97 7 800 41 1 717 56 The amounts in column A (corresponding to the reserve on an ordinary five-year endowment) are secured, therefore, by the yearly payments stated in column D. In addition to this transaction with the annuity company there is the insurance of $10,000 to be paid for, according to the regular yearly rates of the insurance company. Thus the total sums to be paid out would be : D E F YEAR. Cost Endowment. $10,000 Insurance. Total Cost. 1 : : : : : $1,725 66 1,723 77 $89 31 91 20 $1,814 97 1,814 97 $>..... 1,721 83 93 14 1 814 97 4, 1 719 72 95 25 1 814 97 5 1,717 56 97 41 1,814 97 The foregoing statement represents the progress of an or- dinary five-year endowment as analyzed into the two ele- ments of endowment and insurance, in accordance with what may be called the " endowment theory," of life insurance. This theory is held more or less consistently by those who reject the " savings-bank theory." fey the one theory the Appendix. 229 transactions of a life company are a combination, more or less complicated, of insurance business and endowment busi- ness ; by the other, of insurance business and savings-bank deposit business. Let us now analyze the same policy on the "savings-bank theory." Our supposed applicant for insur- ance now deals through the savings bank instead of through the annuity company, as in the last case. The deposit ac- count will stand as follows : First deposit, $1,741 84 Interest 4 per cent.,* 69 68 End of first year, $1,81152 Second deposit, 1,757 62 $3,569 14 Interest, 142 77 End of second year, $3,711 91 Third deposit, 1,774 98 $5,486 89 Interest, 219 48 End of third year, $5,706 37 Fourth deposit, 1,794 02 $7,500 39 Interest, 300 02 End of fourth year, ....... $7,800 41 Fifth deposit, 1,814 97 $9,615 38 Interest, 384 62 End of fifth year, $10,00000 So that in case our depositor lives five years, he receives his f 10,000 from the savings bank. In case he dies in the mean- 230 Appendix. time, the accumulations go to the heirs ; and all that he needs to insure his life for is the difference each year between these sums and $10,000. Thus : A m H YEAE. Accumulation. Insurance Required. Cost per $1,000. Insurance Cost. 1 : : : : !; : : : : $1,811 52 3,711 91 5,706 37 7,800 41 $8,188 48 6,288 09* 4,293 63 2,199 59 $8.931 9.120 9.314 9.525 $73 13 57 35 39 99 20 95 5, .... 10,000 00 The total payments will therefore be : I H F YEAR. Savings Bank. Insurance Co. Total. 1, . . . $1,741 84 $73 13 $1,814 97. 2, ... 1,757 62 5735 1,814 97 3, ... 1,774 98 39 99 1,814 97 4, ... 1,794 02 20 95 1,814 97 5, ... 1,814 97 " 1,814 97 By dealing through the annuity company, the insurer would pay to that company each year the amount stated in column D, and also to the insurance company that in column E ; total, $1,814.97 per annum. By dealing through the savings bank, he would each year deposit the amount stated in column I, and pay to the insurance company that in column H ; total, $1,814.97 per annum. In either case the cost would be the same, and the benefits purchased the same ; so that it^may be considered a matter of entire indifference to the insurer whether he act on the " endowment theory," operating through Appendix. 231 the annuity company, or on the " savings-bank theory," through the savings bank. Let us now suppose fhat the three companies are one and the same. The net premium for two years' insurance, at age 35, will still be $176.21, and the company can analyze it in either way, as it pleases. Thus the cashier receiving the premium may keep his books on the " endowment theory," and enter it thus : By premium to insure $10,000 for 1 year, . . . $89 31 By premium to secure endowment of $91.22, . 86 90 $176 21 or on the " savings-bank theory," making the entry thus : By premium to insure $9,908.78, $88 50 By deposit on interest, . 87 71 $176 21 Every possible kind of life-insurance policy might be ana- lyzed like the two cases we have considered on both of the two theories, which are equally admissible in all calculations regarding premiums and reserves, giving always the same results. But when we leave these subjects to discuss the economical questions which continually come up, such as loading, division of surplus, surrender value, &c., we are compelled to make our choice between these two theories or run the risk of self-contradiction. O the two, the " savings- bank theory " is more or less explicitly conceded by most American actuaries to be more convenient and accurate. A rigid adherence to the savings-bank theory (viz., that a life-insurance company's business is compounded of insurance and deposit business) would lead us to discard " pure endow- ments," " children's endowments " and i l annuities " from our rate books. It would, on the other hand, effect a good pur- 232 Appendix. pose in banishing from our minds the unnecessary and even hurtful notion that the endowment assurance policy is in all respects equivalent to a combination of the pure endowment and the term assurance policy. This notion still crops out in all sorts of places, and is the fruitful source of many miscon- ceptions. For example, in a recent discussion of the surren- der-value question, the author adhered rigidly to the sav- ings-bank method in treating of ordinary life and term policies, but abandoned it when it came to endowments ; so that the surrender value of the so-called " insurance part " of an endowment assurance policy would be determined in ac- cordance with the principles of the " savings-bank theory," and that of the so-called " endowment part" of the same pol- icy in accordance with those of the " endowment theory." Again, a singular belief, based obviously on the same notion, finds currency in some quarters, to the effect that the " en- dowment part " exactly balances the " insurance part " in respect to risk. A company was once solemnly informed, I am told, by its adviser, that for the cause just stated " no profit is ever made on endowment assurance policies by rea- son of diminished mortality ! " This singular belief must certainly lie at the bottom of the practice of many officers, who accept risks for endowment policies which would not be taken on the whole-life or term plan. Thus a doubful risk would by some be speedily accepted for a five-year endow- ment for $10,000 which would not be taken on either of the other plans for $1,000, the idea apparently being that the quality of the risk is somehow improved by swelling the pro- portionate size of the premium.* In other words, if a doubt- ful risk were proposed (see column G above) for simple insur- ance of $8,000 the first year, $6,000 the second,' $4,000 the third, and $2,000 the fourth, it would be instantly rejected ; * Which, for a given sum insured, only reduces the quantity of the risk. E. W Appendix. 233 but the same risk accompanied by an agreement on the part of the applicant to make a large deposit in the company's bank is gladly accepted. The delusion is, that this deposit "reduces the risk"; whereas the fact is, that it is simply and purely a bank deposit, belonging for life or death to the depositor ', and having no more real connection with the insurance risk than a corre- sponding deposit in a bank across the street would have. The amounts risked by the company on a five-year endowment issued #t 35 are stated above in column G ; and they remain the same whether the applicant pays the large premiums of column F, on which the company congratulates itself as " re- ducing the risk," or the small premiums of column H. The insurance risk is unchanged by getting the large premium ; the investment department of the company is burdened a little temporarily, and that is all. It may, however, be objected, that on this policy the risk is really less than on a life or term policy for $10,000. This is true. The risk of the company on this policy is only about equal to that on a term policy for $4,000. But the question is, would you take that risk for $4,000 on a term policy ? If you would, you are safe in accepting the risk for a $10,000 five-year endowment and not otherwise. I have, perhaps, said more than enough to explain my rea- sons for agreeing with what I have called Mr. Wright's First Proposition. The still wide prevalence of inexact views respecting the " savings-bank theory " must be my excuse. To sum up : the " savings-bank theory " and the " endow- ment theory "^are equally tenable, mathematically. Life in- surance is made up of yearly insurances plus savings-bank deposits, or of yearly insurances plus yearly endowments. Of the two theories the former is the simpler, and is gener- ally preferred. If the reader holds the opinion that the savings-bank theory is incorrect and untenable an opinion frequently expressed 234 Appendix. by insurance writers, mostly anonymous he may as well read this article no further. Objecting to my premises he cannot feel interest in my conclusions. It is always a good exercise of mind, when you disagree with a writer, to deter- mine to your own satisfaction the precise point at which you part company from him. H. INSURANCE VALUE OF YEARLY POLICIES. What I have set down as Mr. -Wright's Second Proposition is, that of two policies securing insurance for the term of a single year, that one is most valuable to the company which yields the larger net premium, and that the relative value of each policy is measured by the net premium, which in this connection is called the " insurance value." This proposition may be thus sub-divided : 1. The insurance value of a one-year-term policy, the age being given, varies directly as the amount assured. That is, a policy for $10,000 is ten times as valuable to the company as one for $1,000. From the.point of view of the secretary, cashier, and collecting agent it may, perhaps, be regarded as more than ten times as valuable ; or, in other words, it may be thought that one policy of $10,000 is less troublesome and therefore more desirable than ten policies of $1,000. This feeling formerly found expression in the policy-fee, a tax on small policies. From the mortuary point of view, however, it is sometimes argued that ten policies of $1,000 each are better worth having than one policy of $10,000 ; and in view of the almost universal discontinuance .of the policy-fee sys- tem,dt may be considered as agreed that, on the whole, the company may justly regard all sizes of polfcy with equal favor. 2. The insurance value of a one-year term policy, the amount being given, varies directly as the rate of mortality indicated by the age of the party. That is, if a man at 40 pays (net) $10 for a year's insurance of $1,000, and one at 54 Appendix. 235 pays $20 for the same benefit, the latter policy is twice as important as the former is, in fact, worth as much to the company as two policies like the former. This view is in accordance with the almost universal practice of the business and the almost universal opinion of insurance officers. It is, however, not quite so clearly settled as that twice two make four. It is certain that, loading apart, a man aged 54 can afford to pay twice as much per $1,000 as one aged 40, but it is not so clear -that he should contribute proportionally to the running expenses of the society. It is a possible hypothesis that insurance of $1,000 is worth, morally, and apart from the net payment necessary to cover the risk, as much to the man aged 40 as to the one aged 54, or at any rate more than half as much. It is, therefore, a debatable question whether the loading on the premium for one year's assurance should be a function of the premium or of the amount assured, or of both. Assuming the general opinion in favor of assessing ex- penses on such policies by a uniform percentage on premi- ums to be the correct one, it cannot be denied that a one- year policy which contributes twice as much to the insurance fund, and twice as much to the expense fund as another, is worth twice as much to the company. Let it be observed, moreover, that even supposing this now general opinion to be discarded, the importance of estimating insurance values on the general principles urged by Mr. Wright would not be diminished, though the intricacy of the necessary calcula- tions might be considerably increased. IH. INSURANCE VALUE OF POLICIES IN GENERAL. Assuming, therefore, the savings-bank theory as a basis, and assuming that the net premium is the most convenient measure of the value to the company of simple assurances confined to a single year, let^us now consider some of the more complicated cases arising from the various combina- tions of the elements of insurance and deposit. 236 Appendix. In a case already supposed, we found the net premium which a man aged 36 would need to pay for a year's assur- ance of $10,000, to be |91.22 ; and at age 35 for two years' insurance of the same amount, $176,21. On analyzing the latter premium we found it to consist of two parts : Premium to insure $9,908.78 for one ye^r, . . . $88 50 Deposit on interest, 87 71 $176 21 The contract might, therefore, be described as a compound agreement, consisting of (1) an agreement to hold $87.71 on deposit for one year, at four per cent, interest, amounting at the end of the year to $91,22, and (2) an agreement to insure $9,908.78 for one year for an advance payment of $88.50, and also to insure $10,000 the second year for a payment one year hence (transferred from the deposit department) of $91.22. By this arrangement, in case of death the first year, the company pays over to the beneficiary the amount of de- posit, $91.22, and the amount of insurance, $9,908.78, making $10,000 ; and in case of death the second year the whole amount of $10,000 is drawn from the insurance fund. Considering first that portion of the contract which pro- vides for assurance during the second year (age 36, amount $10,000, premium to be then paid $91.22), we may conclude that, one year hence, its value to the company may be measured by the net premium then payable, or $91.22. Tak- ing next that portion of the contract which provides for im- mediate insurance of $9,908.78, we may measure its present value by the net premium now due, or $88.50. If, therefore, we add to $88.50 the present value of $91.22, we shall have the total value to the company of the insurance part of the contract, or what Mr. Wright c^lls the insurance value of the policy. In finding the present value of business, which will be Appendix. 237 worth $88.50 (or some percentage of that sum taken as a measure) one year hence, we are not bound to follow the original standards of mortality and interest, but may use such assumptions as are warranted by our best judgment, having regard to the probable actual experience of the future, while retaining the original standards, of course, in all calcu- lations of premiums and reserves. Mr. Wright considers it convenient to follow the assumptions Actuaries' 4 per cent. of his published tables. Pursuing this course, we should find the present value at age 35 of $91.22 at age 36 to be $86.90. Adding this, the present value of the insurance to be done by the company the second year, to $88.50, the value of the first year's insurance, we have $175.40 as the insurance value of the policy in question. And, disregarding the value, what- ever it may be, of the " deposit part " of the contract, we may, by a like analysis, conclude with reference to any other policy, that its insurance value is equal to " the net premium now due for the amount of insurance to be (really) enjoyed during the first year, plus the present value of the net premi- um which, one year hence, will pay for the insurance to be (really) enjoyed during the second year, plus the present value, similarly computed in detail, of the (real) insurance for all further years of the term contemplated," a definition which I have taken the liberty to call Mr. Wright's Third Proposition. The < deposit part" of a contract has its value, of course, even though a comparatively small one. We shall no doubt find, on investigation, that the best measure of the " deposit value" of a policy is, the amount agreed to be held in deposit the first year, plus the present value of that agreed to be held the second year, plus, &c. IV. COMMISSIONS. "No scale of commissions can be intelligently adopted without due regard to insurance value." This remark, which 238 Appendix. I have called Mr. Wright's Fourth Proposition, naturally fol- lows from the preceding considerations. We may presume that a percentage of the insurance value of a policy, plus sorfte other percentage of its deposit value, would best repre- sent the pecuniary worth of the contract to the company. While not insisting on the expediency of a daily resort to calculations so intricate as are here indicated, I cannot but think that some knowledge of the results to which such cal- culations lead must prove of the highest value to those who may hereafter have occasion to deal with the question of commissions; and that the thanks of all concerned are eminently due to the Hon. Elizur Wright for the initiation and vigorous prosecution, in this connection, of a radical reform. 1 ~ RETURN TO DESK )80ct' SOWM v 3 JAN 5 1993 LD 2lA-50m-4 '60 (A9562slO)476B u - c - BERKELEY LIBRARY ?.* y i 3473 THE UNIVERSITY OF CALIFORNIA LIBRARY