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The Law 
 
 AND 
 
 Distribution of Surplus 
 
 OF 
 
 Life Insurance Companies 
 
 BY 
 
 WILLIAM A'. FRICKE 
 
 NEW YORK 
 I9O2 
 
 Published by 
 
 URA 
 
 87 Nassau St. 
 K: $1.00 
 
Entered according to Act of Congress 
 ^>j^ in the Year 1902, 
 
 By WILLIAM A. FRICKE, 
 
 in the office of the Librarian of Congress, 
 
 Washington, D. C. 
 
PREFACE. 
 
 The study and investigation of the questions in- 
 volved in this Treatise commenced while Commis- 
 sioner of Insurance of Wisconsin, and but for the 
 time and labor required in its preparation, would 
 have been presented in an official capacity. 
 
 Active participation in the conduct of the busi- 
 ness of life insurance has enabled a continuation of 
 the study and investigation from a practical stand- 
 point, and has still further emphasized the neces- 
 sity of a check on the needless accumulation of 
 millions and unjustifiable forfeiture impositions. 
 
 The results are presented not in a spirit of op- 
 position to any particular company, but in the hope 
 that their consideration may prove of benefit to the 
 policyholders, and of lasting good to the business 
 of life insurance. 
 
 W. A. F. 
 
 NEW YORK, Sept. i, 1902. 
 
 1 12685 
 
CONTENTS 
 
 PAGE 
 
 I. INTRODUCTION 7 
 
 II. THE LAW AND ITS APPLICATION 9 
 
 III. PAST AND PRESENT PRACTICES 34 
 
 IV. LARGE ACCUMULATIONS NOT NECESSARY 60 
 V. TAXATION 67 
 
 VI. LEGISLATION 72 
 
L INTRODUCTION. 
 
 The necessity for some law regulating the dis- 
 tribution of surplus becomes apparent when a few 
 simple life insurance facts are considered : 
 
 First That surplus is the excess of a company's 
 funds over all liabilities, and represents the excess 
 payments of policyholders, and profits, and is the 
 amount available for dividends. 
 
 Second That life insurance can be conducted 
 only on the Mutual Plan, by the combining of a 
 large number of individuals who insure themselves. 
 This aggregation of individuals is called "THE 
 COMPANY," and the persons selected as the col- 
 lecting and distributing agents are "THE OFFI- 
 CERS." The company and the officers act only as 
 the medium for the transaction of the business. It 
 is a perversion of the fundamental principles of 
 life insurance that the aggregation of individuals 
 who compose and own the company simply act as 
 the medium for the transactions of the officers. 
 
 Third That all that is vicious in the conduct 
 of the business of life insurance competition, re- 
 bating, excessive commissions and extravagance 
 is chargeable to the deferred dividend contract ; all 
 that is good equity, economy and actual cost is 
 due to the annual dividend or short period account- 
 ing to policyholders. 
 
 Fourth That the surplus accumulations of life 
 insurance companies beyond all needs and re- 
 
quirements have reached the enormous sum of 
 more than THREE HUNDRED MILLIONS OF DOLLARS ; 
 and 
 
 Fifth That the privilege of forfeiture of sur- 
 plus accumulation, as exercised by companies, is 
 without consideration to the policyholders, against 
 public policy, and is apt to nullify the very pur- 
 poses for which the insurance was taken. 
 
II. THE LAW AND ITS APPLICATION. 
 
 We look therefore in the law for some pro- 
 vision which may be invoked to compel equity, by 
 an accounting and return of these enormous accu- 
 mulations to the policyholders from whose contri- 
 butions they have been derived, and in the law of 
 Wisconsin we find : 
 
 Section 14 of Chapter 59, Laws of 1870, of Wis- 
 consin, approved March 4, 1870, as amended by 
 Chapter 309, Laws of 1887, enumerated as Sec- 
 tion 1952 S., 1898, and 151 Ins. Laws, of Wis. : 
 
 "Every life insurance corporation do- 
 ing business in this State upon the prin- 
 ciple of mutual insurance, or the members 
 of which are entitled to share in the sur- 
 plus funds thereof, MAY make distribu- 
 tion of such surplus as they may have 
 accumulated annually, or once in two, 
 three, four or five years, as the directors 
 thereof may from time to time determine. 
 In determining the amount of surplus to 
 be distributed there shall be reserved an 
 amount not less than the aggregate net 
 value of all outstanding policies, said 
 value to be computed by the American 
 experience table of mortality with inter- 
 est not exceeding four and one-half per 
 cent." 
 
The application of this law depends upon the 
 legal construction of the word "MAY." 
 
 Does the word "MAY" in line number five mean 
 "MUST" or "SHALL" ? Is the provision mandatory 
 or permissive? Does it impose a duty, or simply 
 confer a privilege, or discretionary power? 
 
 "The words of a statute are to be construed with 
 reference to the subject matter of the enactment 
 and the object sought to be obtained. Then 
 meaning is not to be found so much in the strict 
 etymological propriety of language, nor even in its 
 popular use, as in the subject or occasion on which 
 they are used. In conformity with the rule that 
 the meaning of words is to be adapted to the par- 
 ticular subject matter in reference to which they 
 are used, general words are to be restricted or ex- 
 panded to suit the subject matter to which they are 
 applied." 
 
 23 A. & E. E. of Law, 322, 323. 
 
 "The word 'may' in a statute has always been 
 construed 'must' or 'shall' whenever it can be seen 
 that the legislative intent was to impose a duty and 
 not simply a privilege or discretionary power, and 
 where the public is interested and the public or 
 third persons have a claim de jure to have the 
 power exercised. But it is only where it is neces- 
 sary to give effect to the clear policy or intention 
 of the legislature that it can be construed in a man- 
 datory sense, and where there is nothing in the 
 connection of the language or in the sense or policy 
 of the provision to require an unusual interpreta- 
 tion, its use is merely permissive or discretionary." 
 14 A. & E. E. of Law, 979. 
 
 10 
 
"The word 'may' means 'must' or 'shall' only 
 in cases where the public rights or interests are 
 concerned, or where the public or third persons 
 have a claim de jure that the power should be ex- 
 ercised." 
 
 "For a complete application of this rule it only 
 remains to be determined in what cases the rights 
 or interests of the public or third persons are con- 
 cerned, and where they have a claim de jure to the 
 exercise of the power ; and here, fortunately, there 
 is no disagreement among the authorities. The 
 cases fully establish the doctrine that when public 
 corporations or officers are authorized to perform 
 an act for others, which benefits them, that then the 
 corporation or officers are bound to perform the 
 act. The power is given to them not for their own, 
 but for the benefit of those in whose behalf they 
 are called upon to act ; and such is presumed to be 
 the legislative intent. In such cases they have a 
 claim de jure to the exercise of the power. But 
 where the act to be done is not clearly beneficial to 
 the public or third persons, the exercise of the 
 power is held to be discretionary." 
 
 9 Wisconsin 309. 
 
 The rule thus laid down is adopted from New 
 York, and the authoritv of the courts of this State 
 cited to sustain the position. 
 
 "Effect must be given -to the obvious intention 
 of the legislature, when to do so will prevent the 
 act from failing, and when no violence will be 
 done to the language employed." 
 
 People, etc., vs. Lohnas, 54 Hun. 604. 
 
 8 N. Y. S. 104. 
 
 II 
 
"To determine whether 'may' in a statute is 
 equivalent to 'shall,' not only the context, but the 
 circumstances surrounding the passage of the act, 
 and the object in view, must be considered; and 
 where such language is held to be mandatory there 
 must be a defined public interest or a vested, well- 
 defined private right to be subserved, given or pro- 
 tected." 
 
 People, etc., vs. Mayor, 59 Hun. 258. 
 
 38 St. Kept. 296. 
 12 N.Y. 8.890. 
 
 "The rule reiterated that in the interpretation 
 of statutes the great principle which is to control 
 is the intention of the legislature in passing the 
 same, which intention is to be ascertained from the 
 cause or necessity of making the statute as well as 
 other circumstances. A strict and literal interpre- 
 tation is not always to be adhered to, and where 
 the cause is brought within the intention of the 
 makers of the statute, it is within the statute, al- 
 though by a technical interpretation it is not within 
 the letter. It is the spirit and purpose of a statute 
 which are to be regarded in its interpretation ; and 
 if these find fair expression in the statute, it should 
 be so construed as to carry out the legislative in- 
 tent, even though such construction is contrary to 
 the literal meaning of some provisions of the 
 statute. A reasonable construction should be 
 adopted in all cases where there is a doubt or un- 
 certainty in regard to the intention of the law- 
 makers." 
 
 People vs. Lacombe, 99 N. Y. 43. 
 
 "Where the intent of a statute is manifest effect 
 should be given to that rather than to the letter." 
 Harntze vs Howe, 28 Wis. 293. 
 
 12 
 
" 'May' should be construed in a statute to mean 
 'shall' whenever the rights of third persons or the 
 public good requires." 
 
 Steines vs. Franklin County, 48 Mo. 167. 
 State vs. Saline County Court, 48 Mo. 390. 
 James vs. Dexter, 112 111. 489. 
 
 "In construing statutes the word 'may' will be 
 construed as mandatory only, for the purpose of 
 sustaining or enforcing, but not creating a right." 
 
 State vs. Holt County, 39 Mo. 521. 
 "The words 'may' and 'shall' should be consid- 
 ered, in the construction of the law, as convertible 
 terms." 
 
 Cook vs. Spears, 2 Cal. 412. 
 See list of cases in : 
 
 14 A. & E. E. of Law, 979. 
 
 The conclusion would seem to be that Section 
 1952 is mandatory; that the word "may" means 
 "must" or "shall," and that no other discretionary 
 power is vested in the officers of a company than 
 to extend the period of distribution to two, three, 
 four or five year periods, instead of "annually." 
 
 That such interpretation of the word "MAY" in 
 the insurance statutes of Wisconsin is accepted is 
 evidenced by the action of the Northwestern Mu- 
 tual Life Insurance Company at the last session of 
 the legislature. Section 1951 of the statutes pro- 
 vides how a life insurance corporation "MAY" in- 
 vest its funds, and such investments, prior to 
 the session of 1901, were restricted to United 
 States, State, county, city, town or village bonds ; 
 first mortgage liens on real estate worth at least 
 twice the money loaned thereon, or in the first 
 mortgage railway bonds of any railway company 
 
 13 
 
duly incorporated and organized under the author- 
 ity of this State; promissory notes secured by 
 pledge of such bonds as collateral as the company 
 may invest in, and policy loans. The "Northwest- 
 ern" desired to extend the field of its investments 
 to "mortgage bonds of street railway companies," 
 and applied to the legislature for an amendment 
 of Section 1951, and in Chapter 22, Laws of 1901, 
 this law appears amended by the insertion : "or in 
 the mortgage bonds of any railway or street rail- 
 way company duly incorporated and organized 
 under the authority of this State." If the word 
 "may" was simply permissive, and it was left to 
 the discretion of the officers how to invest the 
 funds of the company, then it was unnecessary to 
 go to the legislature for the authority granted by 
 this amendment, but because the act of investing 
 the funds is a case where the rights and interests of 
 every policyholder are concerned, the word "may" 
 means "must" or "shall" and the investment of 
 the funds in the class of securities defined in Sec- 
 tion 1951 becomes mandatory, and could be ex- 
 tended only by an act of the legislature. 
 
 A study of the methods and practices of the 
 companies will show that such was the intention 
 of the legislature, and that compliance with this 
 law is in harmony with the practices of the funda- 
 mental idea of mutuality, by which life insurance 
 alone becomes possible, and that by the method of 
 short period accounting to the policyholder the ac- 
 cumulations on a policy will always be greater. 
 
 To emphasize the intention of the legislature in 
 enacting what is now known as Section 1952 S. 
 '98. it will only be necessary to state that the gen- 
 
 14 
 
eral practice at that time among companies was 
 either annual dividends or a distribution within a 
 five-year period. 
 
 Policies which provided for the distribution of 
 surplus at ten, fifteen and twenty year periods were 
 then unknown. The competition for business, and 
 the consequent increase in the commission rate paid 
 to agents, and increased expenses, made necessary 
 some plan to enable the companies to get away 
 from this annual or short period accounting to 
 policyholders. 
 
 First came the Tontine plan, under which the 
 non-payment of premium lapsed the policy, and the 
 reserve and accumulated surplus became forfeited. 
 While the plan proved an incentive, by catering to 
 the cupidity of many to take insurance, the hard- 
 ships it imposed created much opposition, result- 
 ing in some States in the enactment of non-forfei- 
 ture laws and legislative investigations, with the re- 
 sult that this plan was changed to the Semi-Ton- 
 tine or Deferred Dividend plan. Under this plan, 
 in the event of lapse, the reserve on the policy is 
 used as a single premium to purchase either paid- 
 up or extended insurance, and the surplus to 
 which the policy is entitled, forfeited. In theory, 
 the benefit of this plan is that the large lapse ratio 
 which occurs, and the attendant forfeiture of accu- 
 mulations, will swell the amount of profit to the 
 persistent policyholder. In practice, the result is 
 an increased expense and larger commissions, 
 which in every case has left the actual profit to the 
 persistent policyholder smaller than the estimate 
 which tempted him to accept this plan. 
 
 15 
 
A company is not much different than an indi- 
 vidual. If you or I were compelled, annually, to 
 give some one in authority over us a statement of 
 the money we received and itemized expenditures, 
 and our success and future prosperity was depend- 
 ent upon making an economical showing, without 
 doubt our balance of savings would be much 
 greater than if we could defer the day of reckoning 
 for twenty years. Deferred for twenty years, we 
 would hope to make up the extravagances of each 
 year by the economies of those to follow, until in 
 the end, just as does the company, we should find 
 that the result did not realize our estimate. Now, 
 if we will follow this illustration, elementary 
 though it may be, a little further, the question, 
 ''Will the accumulations on a policy be greater 
 under a short period accounting?" will be an- 
 swered in the affirmative and prove the merit of 
 Section 1952 S. 98. 
 
 Life insurance can properly be conducted only 
 in one way the coming together, or combining, 
 of a large number of individuals to insure them- 
 selves. This aggregation we call a company, and 
 the collecting and distributing agents selected are 
 the officers. This is not changed by reason of some 
 companies having a capital stock. Capital stock 
 for a life insurance company came about in this 
 way: Over forty years ago there were so many 
 companies formed, and so many failed, that the 
 legislatures of a number of States amended the 
 law so that no life insurance company could be 
 organized unless with a capital or assets of at 
 least one hundred thousand dollars, and of course 
 the organizers put up their money as capital and 
 
 16 
 
controlled the company, rather than to pay it in as 
 assets ; but this does not change the fact that those 
 who join a company simply combine to insure 
 themselves, and that, with very few exceptions, the 
 general practice is that companies are conducted 
 on the mutual plan, i. e., the policyholders par- 
 ticipate in the accumulations to reduce the cost of 
 their insurance by having their overpayments re- 
 turned, together with their proportionate share of 
 the profits. 
 
 If we were to-day to organize a life insurance 
 company for the insurance of our lives, the com- 
 pany would form only the medium for the trans- 
 action of the business of protecting one another. 
 If we could at the beginning of each year deter- 
 mine just what would be the actual expense, actual 
 mortality, actual interest earnings and the profits 
 from forfeitures, we should all insist that our 
 premiums should be based upon such actual cost, 
 plus the reserve; and, were we able to so deter- 
 mine the actual cost, the dividend feature would be 
 eliminated, as there could then be no overpayments 
 or profits. Being unable, however, to determine 
 beforehand such actual cost, we base the premium 
 upon a standard table of mortality, and assume for 
 our reserve requirement a rate of interest so low 
 that it will be sure to be realized, and to this net 
 premium we add our loading for expenses. We 
 now have a gross premium entirely on the side of 
 safety; but, since our interests are mutual, we 
 agree that at the end of the year, after the actual 
 cost has been met and all contingent liabilities pro- 
 vided for, there shall be returned to each member 
 his overpayments, plus the proportionate share of 
 
 17 
 
what profit has been realized, and interest earnings 
 over and above that required to maintain the re- 
 serve. 
 
 "Since the return of surplus simply adjusts the 
 assumed cost and the actual cost of the insurance, 
 and is, in effect, merely a return of overpayments, 
 it should be made as often as the actual cost is as- 
 certained, whenever the overpayment is deter- 
 mined. There is no reason why the surplus should 
 not be returned each year, or such portion of it as 
 prudence will allow; no reason why such portion 
 as may be safely divided should be retained for any 
 period of years. Especially is this true of any com- 
 pany with a considerable business and an experi- 
 ence sufficient to establish the safety of its as- 
 sumptions as to mortality and interest, and which 
 doesn't expect to spend for expenses more than its 
 future premiums will provide." 
 
 The policyholder in a mutual company, or a com- 
 pany conducted on the mutual plan, is a partner, 
 and has a right to an accounting, a right to demand 
 tie distribution of his excess payments and profits 
 within such a limited period as will incur forfeiture 
 to the least number, and that was the practice of 
 companies, and that was the purpose of Section 
 1952. 
 
 The repeated decisions of the Supreme Court 
 of Wisconsin clearly show that companies of other 
 States are permitted to transact business in Wis- 
 consin "not inconsistent with the laws or policy 
 of the State," and only under such conditions and 
 restrictions as the law may impose "they may be 
 permitted or prohibited, and if permitted, the sov- 
 
 18 
 
ereign power may impose such conditions and re- 
 strictions as it sees fit." 
 
 A company violating or failing to comply with 
 any law applicable thereto is subject to the penalty 
 of having its license and authority to transact busi- 
 ness in the State canceled and revoked. 
 
 It is a question whether a company can enter 
 into an agreement with a policyholder that the 
 surplus accumulation to which he has become en- 
 titled under the provisions of Section 1952 shall 
 remain with the company. Section 1951, which 
 has been the law for many years, says : "No life 
 insurance corporation organized under the laws 
 of this State shall * * * do any banking busi- 
 ness." And while from the language used in Sec- 
 tion 1951 "organized under the laws of this 
 State" the doing of a banking business is pro- 
 hibited only to Wisconsin life insurance corpora- 
 tions, is it not true that when a life insurance 
 company of another State is licensed and admitted 
 to transact business in Wisconsin, it becomes to all 
 intents and purposes a Wisconsin corporation, and 
 subject to all laws applicable to domestic corpora- 
 tions? To hold otherwise would be to hold that 
 the legislature, in the enactment of Section 1951, 
 intended to confer greater rights and privileges 
 upon the life insurance corporations of other 
 States by restricting the privileges of domestic 
 corporations. Whatever may be the string tied to 
 the surplus accumulation of a policyholder as to 
 forfeiture, when once that surplus accumulation 
 has been determined in accordance with the pro- 
 visions of Section 1952, and it remains as a sur- 
 plus accumulation to be credited to the account of 
 
a policyholder, it is as much a DEPOSIT with the 
 company as it would be a DEPOSIT with a bank 
 if placed there to the credit of his account. The 
 company receiving such a deposit of surplus ac- 
 cumulation holds out as an inducement to making 
 such a deposit the accretions of compound interest, 
 and invests and loans such deposits to accomplish 
 that purpose. 
 
 As a matter of fact there can be no other profit 
 to such a depositor except compound interest, since 
 the Annual Dividend policyholder shares equally 
 in all other profits. Such deposits are not part of 
 the life insurance business of the corporation, and 
 are beyond all its needs and requirements, and 
 constitute the features of a "banking business" 
 detrimental to the best interests of the policyhold- 
 er, and therefore prohibited by law. The fact that 
 the company injects into this one-sided banking 
 business agreement, a provision that if the de- 
 positor fails to continue making deposits for a cer- 
 tain number of years all his surplus accumulation 
 deposits shall be forfeited to the company, does 
 not make it less a banking business, since all these 
 one-sided forfeiture provisions are without con- 
 sideration, and make the policy a wager contract, 
 and are clearly against public policy. 
 
 But even if Section 1952 does not prohibit a 
 policyholder agreeing to permit his surplus accu- 
 mulations to remain with the company, it does re- 
 quire that the distribution of such surplus shall be 
 annual, unless the directors have made use of the 
 option and extended such distribution period to 
 two, three, four or five years. This carries with it 
 an individual account with the policyholder, peri- 
 
 20 
 
odical accounting showing the credit of such sur- 
 plus, and carrying such accumulations as a lia- 
 bility. 
 
 When such individual accounts are not kept, 
 periodical accounting not made, and such credit 
 accumulations not carried as a liability, then the 
 word "DISTRIBUTE" in Section 1952 means "PAY 
 OVER," and the policyholder of any company which 
 does not comply with this section, who has a policy 
 providing for a ten, fifteen or twenty years distri- 
 bution, can at any time demand an accounting and 
 the payment to him of his accumulation. 
 
 The reason the word "DISTRIBUTE" does not 
 mean "PAY OVER" in all cases is that when this 
 law was enacted a number of companies were do- 
 ing business upon what was called "The half-note 
 plan;" policyholders would settle their premiums 
 by paying half cash and giving a note for the bal- 
 ance ; these notes were charged against the policy- 
 holder with a certain interest rate ; the distribution 
 of the surplus was made annually, or within the 
 rive-year period, and the policyholder's share 
 credited against his note debit, so that there was 
 an individual account and accounting, a distribu- 
 tion and not a paying over. On the other hand, 
 the policyholders who had paid their premiums in 
 cash had their share paid over to them. This half- 
 note plan proved unsatisfactory, as one-half of the 
 premium in note, with the attendant interest, was 
 a greater load than the dividends could take care 
 of, and therefore created dissatisfaction among the 
 policyholders, who were led to believe that their 
 profits or dividends would take care of the notes 
 and interest, and the plan was done away with. 
 
 21 
 
Then, too, a number of companies, in their con- 
 tract agreements, provided that the dividend ap- 
 portioned should be added to the policy. 
 
 Section 1952 does not permit discrimination be- 
 tween policyholders ; if the option of two, three, 
 four or five years has not been made use of, the 
 distribution must be made annually on all policies. 
 Neither can the distribution be annual on some 
 and at other periods on others. The period of dis- 
 tribution within this five-year period must be alike 
 on all policies. 
 
 When a policy has lapsed in a company failing 
 to comply with Section 1952, upon which surplus 
 accumulation has been forfeited, such lapsed 
 policyholder has a cause of action for an account- 
 ing and payment of such forfeited surplus, within 
 the statute of limitation. 
 
 In a company which has not and does not com- 
 ply with Section 1952, a policyholder has paid his 
 premiums for three years, and then fails to con- 
 tinue payment. Under the terms of his contract 
 the company forfeits his surplus accumulations but 
 uses the reserve of his policy as a single premium, 
 and continues his policy in force as extended in- 
 surance for 3 years 131 days, when the insur- 
 ance terminates. Had the company also added the 
 accumulated surplus to the single premium, the 
 extended insurance would, for example, have con- 
 tinued for a year longer. Six months after the 
 3 years 131 days this policyholder dies. The 
 company having violated the law and forfeited the 
 surplus, will not an action lie against the company 
 for the face of the policy of course within the 
 statute of limitation ? 
 
 22 
 
When we consider that all the companies trans- 
 acting business in Wisconsin, with four or five 
 exceptions, are violating this law; that eight out 
 of ten of all the policies issued are deferred divi- 
 dend contracts, and that these policy-holders do not 
 know of their right to demand an accounting ; that 
 thousands of such policies have been lapsed and 
 the surplus to which they were entitled forfeited, 
 then only do we realize how widespread will be 
 the effect of a decision on this section by the 
 courts, though there are grave doubts, whether any 
 company will ever permit such an action to be 
 tried. Still, a decision on this law, as no doubt it 
 would be rendered, would do more real good to 
 the policyholder and to life insurance as a whole, 
 than anything else that could happen. 
 
 Another important question arises under Section 
 1952 S. '98: 
 
 Several companies issue Semi-Tontine, or De- 
 ferred Dividend policies, yet comply with the 
 provisions of Section 1952 in so far as a distribu- 
 tion as the company sees fit to make is made 
 annually and credit the dividends to the account 
 of the policyholder, and such apportioned surplus 
 is carried on the books and in the annual state- 
 ments to insurance departments as a liability. 
 Under these deferred dividend policies the accu- 
 mulation is not paid over until at the expiration of 
 the deferred dividend period generally at the end 
 of fifteen or twenty years and such accumulation 
 is declared forfeited to the company in the event 
 of failure to continue the payment of premiums or 
 the death of the policyholder. The policyholder 
 receives no consideration of any kind for the privi- 
 
 23 
 
lege of forfeiture which the company arrogates to 
 itself, and by means of which the policy holder may 
 be deprived of the very purpose for which he has 
 taken a policy of insurance the protection of his 
 family. 
 
 To illustrate: A man aged 31 takes a $10,000 
 twenty-payment life policy, with a twenty-year de- 
 ferred dividend period, for which he pays an an- 
 nual premium of $310.30. He continues the pay- 
 ment of his premiums for six years, and during 
 that time there has been a surplus accumulation of 
 $439.88 on his policy. The seventh annual pre- 
 mium falls due, which, owing to temporary finan- 
 cial embarrassment, the man is unable to meet. 
 The company declares the policy lapsed, and 
 under the non-forfeiture laws, or the policy con- 
 ditions, uses the reserve held on the policy as a 
 single premium for a small paid-up policy, payable 
 at death, and forfeits the $439.88 of accumulation 
 which would have kept the policy in force for its 
 face. 
 
 Compare this Deferred Dividend contract and its 
 results in this case and there are thousands like 
 it with a short period accounting or Annual Divi- 
 dend policy: 
 
 At the same time, another man, also aged 31, 
 takes a $10,000 twenty-payment policy on the an- 
 nual dividend plan, with an annual premium of 
 $310.30. Instead of taking his dividends in cash 
 or using them to reduce his premium, he allows 
 them to remain to purchase additions to his policy. 
 These are called reversionary additions, the com- 
 pany using the cash dividends as a single premium, 
 and such an amount of paid-up insurance as the 
 
 24 
 
dividend will buy is added to the policy, the policy- 
 holder having the privilege at any time to recon- 
 vert these additions into cash ; in the event of death 
 the additions are paid with the face of the policy. 
 During six years, dividends amounting to $439.88 
 have been so applied, adding $1,000 of paid up 
 insurance to the policy; then the seventh annual 
 premium falls due, which, owing to temporary 
 financial embarrassment, this man also is unable 
 to meet ; he goes to the company and requests that 
 his reversionary additions be reconverted into cash, 
 and receiving $439.88 in cash for such reversionary 
 additions he pays his premium, has a balance left 
 and his policy is in force for the full amount. 
 
 Now apply this reasoning to the policy in the 
 event of the death of both of these men after the 
 payment of the sixth premium. Both have the 
 same premium, the same dividend accumulation, 
 yet the company forfeits the whole accumulation 
 of the one under the deferred dividend contract, 
 while under the annual dividend contract it pays 
 to the beneficiary $1,000 more than the face of the 
 policy by reason of the reversionary additions. 
 
 Carry this illustration a little further to see the 
 results on these two policies if both policyholders 
 live to pay the twenty premiums and should both 
 happen to die nineteen years and eleven months 
 after the issuance of these policies : 
 
 The annual dividend policyholder, having left 
 his dividends to be applied as reversionary addi- 
 tions, which at this time amount to the sum of 
 $3> ! 57-8o (figures given are actual results), the 
 company pays the beneficiary under the policy 
 $13,157.80 in settlement of the claim. 
 
 25 
 
The deferred dividend policyholder dying just 
 thirty days prior to the dividend period fixed in his 
 policy, the company pays the beneficiary the face of 
 the policy, $10,000, and forfeits the accumulated 
 cash dividends, thus depriving the beneficiary of 
 the $3,157.80 in additions, which the dividends, if 
 so applied, would have added to the policy. 
 
 Yet both policyholders paid the same premium 
 for the same amount of insurance and under Sec- 
 tion 1952 would have been entitled to the same 
 dividend. The annual dividend policyholder had 
 every right and privilege under his contract that 
 was granted the deferred dividend policyholder, 
 with the additional advantage of retaining absolute 
 control of his surplus accumulation, while the de- 
 ferred dividend policyholder received no considera- 
 tion of any kind for the forfeiture privilege, which 
 the company arrogated to itself, should h* fail to 
 continue payment of premiums either by lapse or 
 death, during the full period of twenty years, and 
 to which surplus accumulation, the company 
 claims, the deferred dividend policyholder has no 
 right or interest until at the end of the dividend 
 period of twenty years and must then accept as 
 such accumulation, without question, the sum 
 which the company apportions to him conditions 
 which it was the purpose of Section 1952 to pre- 
 vent a contract which is in violation of this law. 
 
 Everything that is vicious in life insurance 
 comes from deferred dividend contracts; every- 
 thing that is good comes from the short period 
 accounting or annual dividend contract, and it was 
 to preserve perfect equity and prevent iniauity, 
 that prompted the enactment of Section 1952. 
 
 26 
 
If a company may agree with a policy holder to 
 defer the actual payment of his accumulation for a 
 period beyond five years, surely it cannot under 
 this law arrogate to itself the right to forfeit these 
 accumulations, a right for which it has given the 
 policyholder no consideration, and making of the 
 misfortunes death or financial embarrassment a 
 wager in which the policyholders' accumulations 
 are the stake, a "heads I win, tails you lose" game, 
 contrary to public policy and contrary to ever^ in- 
 tent and purpose of Section 1952. 
 
 That such was not the purpose of the Legislature 
 is again shown in the enactment of Section 1955 o 
 S. '98: 
 
 "No life insurance company doing business in 
 this State shall make or permit any distinction or 
 discrimination in favor of individuals, between in- 
 surants of the same class and equal expectation of 
 life, in the amount or payment of premium or rates 
 charged for life or endowment policies, or in the 
 dividends or other benefits payable thereon, etc.'*' 
 
 The premium or rate for "insurants of the same 
 class," i. e., same age and same form of policy, 
 whether deferred dividend, or annual dividend, 
 are the same in all companies issuing both kinds 
 of dividend contracts; the dividend earning must 
 consequently be the same, yet there is a distinction 
 and discrimination in the dividends and benefits 
 payable. The manner of the payment of the sur- 
 plus or dividend, whether annual or deferred, does 
 not distinguish the "form of policy," the distin- 
 guishing feature being, whether it is a contract 
 upon which premiums are payable during the 
 whole life of the insured, or the premiums are 
 
 27 
 
limited in number, as for 10, 15 or 20 years; 
 whether the insurance carries only for a term of 
 years and then ceases ; or whether it is an endow- 
 ment contract under which the policy also becomes 
 payable if the insured lives to the end of the lim- 
 ited period fixed in the contract. 
 
 Under any mutual form of contract the policy- 
 holder is entitled to his share of the profits or 
 surplus. The surplus to the annual dividend 
 policyholder is absolute; with the deferred divi- 
 dend policyholder the surplus constitutes a wager 
 in which the company risks nothing and holds 
 the stakes and this makes the whole difference 
 between an annual and a deferred dividend con- 
 tract. 
 
 Does it not seem reasonable, that under Section 
 1952, emphasized by Section 1955 o and prohibited 
 by Section 1951, there can be no forfeiture of the 
 surplus accumulations once apportioned and cred- 
 ited to the policyholder, and no one-sided agree- 
 ment will permit such forfeiture. 
 
 If this is true, then there are thousands of 
 former policyholders who have been wronged by 
 these forfeitures. 
 
 The rivalry and competition for a large volume 
 of business, with the attendant excessive commis- 
 sions and bonuses, which have fostered rebating, 
 'twisting" and lapsing, have increased the cost of 
 life insurance to the policyholder by decreasing divi- 
 dends ; to all of which enormous surplus accumu- 
 lations, far beyond the needs of "unforeseen con- 
 tingencies," have lent a helping hand. Large ac- 
 cumulations of surplus can add no especial strength 
 to a mutual company in which deferred dividends 
 
 28 
 
are carried as a liability, nor can it offer any special 
 inducement to the new policyholder. Except for 
 the purpose of guarding- against depreciation or 
 fluctuation of securities, for which a reasonable 
 accumulation is sufficient, a large surplus is rather 
 an unnecessary temptation, and not in the interest 
 of the policyholder. 
 
 True mutuality and perfect equity demand that 
 as soon as each policy's share of the surplus can 
 be determined, such excess and profit shall be re- 
 turned to the policyholder. or be credited to the 
 policy as a liability to the holder or his beneficiary. 
 
 The profits accruing to a policyholder will al- 
 ways be greater if the distribution is made in com- 
 pliance with Section 1952, not only because such a 
 short period accounting will have been a check to 
 extravagance and promote economy in order to 
 prove to the policyholder the benefit of continuing 
 payments, but also, because the distribution will 
 have been an equitable one, instead of an arbitrary 
 amount "in the manner and amount as determined 
 by the actuaries of the company" and to which, in 
 some companies in violation of Section 1952 the 
 assured is said to agree to accept the distribution 
 made at the expiration of the dividend period, for 
 himself, his heirs and assigns, irrespective of what 
 that determination may be. 
 
 Then again the distribution under Section 1952 
 permits no other deduction from the total assets 
 of the company to determine what constitutes sur- 
 plus, except the reserve; while this may not be 
 good practice, it gives a larger surplus to distribute 
 and requires the distribution of the whole surplus 
 so determined. 
 
If a company has not complied with the provis- 
 ions of Section 1952, and is issuing policies in 
 which a distribution of profits is provided beyond 
 a period of five years, then ihe company has vio- 
 lated the law, has subjected itself to the revocation 
 of its license, and any policyholder holding such a 
 contract can demand an accounting under this sec- 
 tion and the payment of accumulated profits; and 
 on such policy the distribution of such profits must 
 thereafter be annual. 
 
 Again, where a company has failed to comply 
 with this law, there cannot be a legal lapse or for- 
 feiture of a deferred dividend policy, if it can be 
 shown that the policyholder had an equity in any 
 surplus accumulation of the company and that such 
 equity or credit, had this law been complied with, 
 could have been used to keep the policy in force. 
 
 Section 1978 S. '98 expressly provides that no 
 corporation "shall do any business of insurance 
 of any kind * * * in this State, or with any 
 resident of this State, except according to the con- 
 ditions and restrictions of these Statutes," and 
 
 Section 1955 makes it "the imperative duty" of 
 the commissioner of insurance "to revoke any and 
 every authority * * * to transact business in 
 this State" "If any such corporation shall violate 
 or fail to comply with any provision of the law ap- 
 plicable thereto." 
 
 The insured makes no specific agreement as to 
 the forfeiture of his overpayments and profits, nor 
 does the application or contract specifically provide 
 for such forfeiture other than the fixing efi a period 
 deferred for fifteen or twenty years wheij the dis- 
 tribution of such accumulation shall be made to 
 
 30 
 
him ; on the contrary, the fact of such forfeiture is 
 systematically withheld from the knowledge of the 
 insured, who is dazzled by the alluring estimates 
 of great profits to be his at the end of the distribu- 
 tion period. 
 
 "Forfeitures are only enforced when it is the 
 plain intent of the contract that they shall be ; pro- 
 visions relied upon to authorize a forfeiture are 
 construed most strongly against insurer, and if 
 they are repugnant, courts will enforce those in 
 favor of insured." Hull vs. Northwestern Mutual 
 L. Ins. Co. 39 Wis. 397. 
 
 The conclusions on this statutory provision may 
 be summarized as follows : 
 
 That the surplus of every life insurance corpora- 
 tion doing business on the mutual plan, the policy- 
 holders being entitled to share in the profits, must 
 be distributed in accordance with the provisions of 
 Section 1952. 
 
 That unless the directors of a company have 
 made use of the option given in Section 1952 to 
 extend the time of distribution to two, three, four 
 or five year periods, the distribution of the surplus 
 on all policies must be annual. 
 
 That the distribution must be made at a like 
 period, within the time limit laid down in Section 
 1952, on all policies entitled to participate ; that to 
 make the distribution annually on some policies, 
 and at the end of five-year periods on others, is not 
 compliance with the law. 
 
 That when the distribution of surplus is made in 
 accordance with Section 1952 a company may 
 agree with the insured to apply such apportioned 
 dividends as reversionary additions or as additions 
 
 31 
 
to hasten the maturity of the policy as an endow - 
 ment. 
 
 That there can be no holding of surplus beyond 
 the period accepted by the company in accordance 
 with the provisions of Section 1952, and that once 
 declared, must be turned over to the policyholder. 
 
 That there can be no forfeiture of surplus ac- 
 cumulations. If not distributed, the company has 
 violated the provisions of Section 1952 and cannot 
 benefit by its own wrong; when once the surplus 
 has been declared under the law it becomes a vested 
 right and cannot be forfeited for failure to comply 
 with conditions beyond the control of the policy- 
 holder. 
 
 That all agreements made contrary to the pro- 
 visions of the statutes are illegal and void. That 
 any agreements as to forfeiture of surplus accumuM 
 lated beyond the period provided in Section 1952!) 
 are in violation of the law and contrary to public' 
 policy. 
 
 That on all policies on which the distribution of 
 the surplus has not been made, or on which pay- 
 ment of the same is deferred beyond the period 
 fixed in Section 1952, the policyholder can demand 
 an accounting and payment of his equitable share 
 of the surplus. 
 
 That where there has been forfeiture of surplus 
 by reason of lapse or death, the policyholder or 
 beneficiary has a cause of action for the recovery 
 of such surplus, within the statute of limitation. 
 
 That wherever there has been a death of a lapsed 
 policyholder, whose forfeited surplus would have 
 kept the policy in force beyond the date of death, 
 the beneficiary has a cause of action for the face 
 
 32 
 
of the policy, within the statute of limitation. 
 
 That fully 80 per cent, of all policies of life in- 
 surance issued, with the requirements imposed by 
 companies covering surplus accumulations, are in 
 violation of the Statutes of this State. 
 
 That compliance with Section 1952 would favor- 
 ably effect the holder, and beneficiary, of every one 
 of the 77,910 policies now in force in Wisconsin 
 in deferred dividend companies. 
 
 That on 80 per cent, of the 30.470 policies lapsed 
 in Wisconsin during the past six years, to which 
 this law is applicable, there was more or less for- 
 feiture of surplus accumulation to which the pol- 
 icyholder is rightfully entitled. 
 
 Just immediately prior to 1870, when this law 
 made its appearance on the statute books of Wis- 
 consin, the Equitable Life Assurance Society of 
 New York, for the first time presented a policy pro- 
 viding for a deferred dividend period beyond five 
 years, and the almost simultaneous action of the 
 Legislature in the enactment of Section 14, Chap- 
 ter 59, Laws of 1870 (now Section 1952), naturally 
 leads to the conclusion that the purpose and inten- 
 tion was to prevent the very practices which then 
 were beginning to be agitated, for, next to the 
 beneficiary, the State is most largely interested that 
 life insurance shall not be endangered by the as- 
 sumption of practices which may nullify the very 
 purpose for which the insurance was taken, and 
 which are clearly against public policy. 
 
 33 
 
III. PAST AND PRESENT PRACTICES. 
 
 The practices of the companies as to the dis- 
 tribution of surplus, prior to 1870 and before the 
 enactment of the law, known as Section 1952 S. 
 98 Wis., will be found in the sworn annual state- 
 ments of the companies, as submitted to the Insur- 
 ance Department of New York. 
 
 The annual statement then contained the follow- 
 ing ''Interrogatory :" 
 
 "8. HOW OFTEN DOES THE COMPANY DECLARE 
 DIVIDENDS OR BONUSES OR SURPLUS, AND WHEN, 
 AND IN WHAT MANNER, ARE THE SAME PAID? AND 
 ARE SUCH DIVIDENDS MADE UPON THE BASIS OF AN 
 EQUAL PERCENTAGE UPON PREMIUMS OR OTHER- 
 WISE, AND UPON WHAT PRINCIPLE?" 
 
 To which the companies, all doing business in 
 Wisconsin at that time, replied as follows : 
 
 EQUITABLE LIFE : 
 
 "Answer Annually, on the contribution 
 system; dividends applied to the increase of 
 policies or in the payment of premiums." 
 
 GERMANIA LIFE: 
 
 "Answer Annually, in cash, or at the 
 choice of the assured, in such other manner as 
 the Board of Directors may determine; divi- 
 dends are made upon the basis of an equal per- 
 centage upon premiums." 
 
 34 
 
HOME LIFE : 
 
 "Answer Dividends are declared annually, 
 and paid at the next settlement of premium, by 
 indorsing the amount on premium loans or ap- 
 plying it to the payment of premium ; hereto- 
 fore the dividends have been by equal per- 
 centage." 
 
 MANHATTAN LIFE: 
 
 "Answer Annually settled when annual 
 premium is paid ; rates vary according to class 
 of policies." 
 
 MUTUAL LIFE : 
 
 "Answer Dividends are declared annually, 
 upon the contribution plan by the Actuary, 
 and may be used by the policyholder either to 
 augment the insurance, or toward the pay- 
 ment of premiums, and, with a paid-up policy, 
 are payable in cash." 
 
 NEW YORK LIFE : 
 
 "Answer Dividends are declared annually, 
 upon the 'contribution plan/ and may be used 
 to augment the insurance, or toward payment 
 of premiums." 
 
 UNITED STATES LIFE : 
 
 "Answer Every three years, and payable 
 with the sum insured, and are made on a 
 basis of percentage on the premiums with 
 dividends on dividends." 
 
 WASHINGTON LIFE : 
 
 "Answer Annually, from January I, 1869, 
 upon the 'contribution plan.' '' 
 
 35 
 
METROPOLITAN (then National Travelers) : 
 
 ''Answer Annually, payable in three years. 
 Percentage basis." 
 
 AETNA LIFE : 
 
 "Answer On ordinary life participating 
 policies, annually, commencing with the third 
 payment of premiums. All other participating 
 policies annually, commencing with the fifth 
 payment, applied in reduction of premium and 
 upon the basis of an equal percentage." 
 
 CONNECTICUT MUTUAL: 
 
 "Answer Annual, and applied to the re- 
 duction of premiums, as the policies are re- 
 newable, the same year in which the dividend 
 is declared, to-wit, four years after the pre- 
 mium was paid, and on the basis of an equal 
 percentage." 
 
 MASSACHUSETTS MUTUAL : 
 
 "Answer Heretofore dividends have been 
 paid once in five years on a basis of equal per- 
 centage; hereafter they will be declared and 
 paid annually from August i, 1868. Paid in 
 cash to all who have paid their premiums in 
 cash, and deducted from the loan notes of all 
 who have given such." 
 
 MUTUAL BENEFIT LIFE : 
 
 "Answer Annually; paid at renewal of 
 premium in the second year after being de- 
 clared ; they are made by an equal percentage 
 upon premiums." 
 
 36 
 
NATIONAL LIFE (Vt.) : 
 
 1 'Answer Dividends have been made every 
 fifth year, and made upon basis of equal per- 
 centage. Hereafter dividends are to be made 
 annually/' 
 
 NEW ENGLAND MUTUAL : 
 
 "Answer Annually ; surplus to be returned 
 according to the contribution of members to 
 the entire surplus to be divided." 
 
 PHOENIX MUTUAL : 
 
 "Answer Dividends are declared annually 
 and are to be applied in the reduction of pre- 
 miums. Dividends are based on an equal per- 
 centage on premiums paid." 
 
 UNION MUTUAL : 
 
 "Answer Surplus is apportioned annually 
 in the ratio in which it is accumulated, and is 
 paid in cash the fifth year thereafter." 
 
 PENN MUTUAL : 
 
 "Annual. The dividends made have aver- 
 aged 50 per cent, in script, and are receivable, 
 three years after they are declared and issued, 
 in reduction of premiums." (Not in Wis. in 
 1870.) 
 
 UNION CENTRAL LIFE: 
 
 "Annual; applied in additions to policies, 
 cancellation of premium notes or credits, re- 
 duction of cash premiums, and payments in 
 cash to policyholders." (P. 184, N. Y. Report, 
 1870; not then in Wis.) 
 
 37 
 
NORTHWESTERN MUTUAL LIFE : 
 
 "Dividends declared annually," and, accord- 
 ing to statement of company, were applied, in 
 additions to policies, in cancellation of pre- 
 mium notes or credits, and by payment in cash 
 to policyholders. (See page 728, N. Y. Ins. 
 Dept. Kept. 1869.) 
 
 The practice of every other company conducted 
 on the mutual plan then doing business in Wis- 
 consin, was in harmony with Section 1952, and as 
 outlined in the answers of the foregoing com- 
 panies. 
 
 The effort of companies prior to 1870 was di- 
 rected to discover the most equitable manner of 
 distributing the surplus accumulation, and not to 
 find ways and means to defer the accounting to the 
 policy holder. In the New York report for 1863 
 the Commissioner of Insurance said : 
 
 "One of the mooted questions of actuarial dis- 
 cussion and difference has been the most equitable 
 and just manner of distributing surplus. Un- 
 doubtedly if all future contingencies could be ac- 
 curately settled in advance, the most equitable dis- 
 tribution would be no distribution at all, but its re- 
 tention in the pockets of the insured, without ever 
 paying it over to a company." 
 
 In the report of 1868 the Commissioner gives 
 this expression of his opinion : 
 
 "Policyholders' burdens should be lightened by 
 annual dividends with the second annual pre- 
 mium." 
 
 And the necessity of just such a law as Section 
 1952 is shown in the New York Report of 1870, 
 
 38 
 
when the Commissioner calls attention to the con- 
 ditions and practices then springing up : 
 
 "It is believed to be a fact, now causing quite 
 general complaint, that there are too many compli- 
 cated schemes or plans of insuring, and conducting 
 companies, as well as too many and too elaborate 
 forms of contract or policy. Each new company 
 announces some new feature in its business, which 
 is to inure greatly to the advantage of the insured. 
 Although it may be said that life insurance in this 
 country is in its infancy, sufficient is certainly 
 known of its great principles to establish, beyond 
 much doubt, about the actual value of insurance. 
 This done, it is difficult to perceive any excuse for 
 the promulgation of so many theories and schemes, 
 except upon the ground that they are intended to 
 accomplish just what is accomplished, to wit, the 
 entering into contracts by the insured the true 
 force and effect of which they do not understand. 
 Let the companies adopt a simple and uniform sys- 
 tem, and forms of business easily understood, and 
 life insurance will commend itself to hundreds of 
 thousands who now stand afar off and look upon 
 our best companies with distrust." 
 
 To the wise forethought and untiring efforts of 
 the Hon. Elizur Wright, the eminent actuary and 
 distinguished Insurance Commissioner of Massa- 
 chusetts, American life insurance is indebted for 
 the legal reserve requirement, and non-forfeiture 
 law, and no authority is more frequently quoted 
 than this forceful advocate of correct practices. 
 In pointing out the necessity of short periods of 
 division of surplus, and the dangers of overac- 
 
 39 
 
cumulation, Elizur Wright, in his reports covering 
 the period of 1858-1867, says : 
 
 "When surplus accumulates rapidly, there seems 
 no conclusive reason against distributing it an- 
 nually." 
 
 "While the surplus is kept accumulating, the 
 members who have contributed to make it are con- 
 stantly passing away. Hence the importance of 
 frequent periods of distribution." 
 
 "This surplus, in the case of mutual companies, 
 belongs to the insured, from whose premiums it 
 has accrued. If it should not be divided, but con- 
 tinue accumulating till those who were the first 
 contributors to it, and for that reason probably are 
 the most largely interested, have dropped away by 
 death, or the lapse or surrender of policies, a wrong 
 will be done which, though not so frightful as 
 bankruptcy, may be as extensive in its transfer of 
 property from the hands of its owners to those of 
 strangers." 
 
 By returning the overpayment, and profit, at the 
 end of the year, the policyholder is placed where 
 he would have been had such cost been determin- 
 able at the beginning of the year, and such was the 
 practice of the companies, as shown by their sworn 
 statements, in compliance with true mutuality and 
 actual cost, until the "Equitable" in 1869 presented 
 its Tontine plan of insurance, which was immedi- 
 ately followed by the enactment of Section 1952. 
 
 And this, too, is the requirement of the Prussian 
 Government. No American life insurance com- 
 pany can there issue anything else but an annual 
 dividend contract, and so zealous is the Govern- 
 ment that perfect equity be maintained among the 
 
 40 
 
Prussian policyholders that the companies in mak- 
 ing the annual distribution of surplus are required 
 to divide the policyholders into two divisions, so 
 that in the distribution of such surplus the older 
 policyholders may not have their profits decreased 
 by the cost of obtaining the new business, and 
 under which requirement the new policies are 
 made to bear their own cost. 
 
 American companies there comply with these re- 
 quirements, and such practice would also have been 
 continued here by compliance with the provisions 
 of Section 1952. 
 
 This law will not permit of a forfeiture of the 
 surplus accumulation to which a policyholder is en- 
 titled without specific agreement and consideration. 
 The vague and indefinite provisions in the contract 
 as to the deferred distribution, with the conditions 
 as to the acceptance of the company's determina- 
 tion of such apportionment, when compared with 
 the explicit definite provision in the annual divi- 
 dend contract, with nothing to hide or conceal, 
 clearly shows that language is adroitly used to 
 conceal from the policyholder the forfeiture the 
 company thereby seeks to enforce, when conditions 
 arise which are beyond the control of the insured. 
 
 Non-forfeiture laws from their inception would 
 have been applied to surplus accumulation, as well 
 as to the reserve, but for the fact that the general 
 practice among all companies, conducted on the 
 mutual plan, was that of short period accounting to 
 the policyholder. 
 
 It required but a comparatively few years 
 after the adoption of the legal reserve re- 
 quirement, to bring about a legislative recogni- 
 
tion of the injustice of the forfeiture of the reserve, 
 carried on each policy and contributed by each 
 policyholder, by the enactment of the non-forfeit- 
 ure law ; yet while but eight States placed this law 
 on their statute books, so glaringly unjust was such 
 a forfeiture, that all companies in all States were 
 compelled to grant such paid-up, or extended in- 
 surance in the event of lapse, as the reserve on the 
 policy would purchase. So explicit is the law of 
 Massachusetts the first State to enact the law 
 that no waiver agreement with the policyholder is 
 permitted, and applies not only to the reserve, but 
 all dividend additions; while in New York, the 
 waiver of the provisions of this law is not per- 
 mitted without a specific agreement in the applica- 
 tion, and notice of such waiver must be written or 
 printed in red ink on the margin of the first page of 
 the policy, so that the special attention of the in- 
 sured may be directed to the waiver. 
 
 True, competition largely aided in doing away 
 with such reserve forfeitures, but that was possible 
 only, because of the general education of the people 
 who insured as to the necessity and security of a 
 reserve on each policy, and this being understood 
 as meaning the payment of a higher premium, the 
 forfeiture was more readily appreciated and keenly 
 felt, while the gradual growing away from the an- 
 nual or short period accounting to the policyholder 
 as to surplus, and attendant forfeiture, has been 
 obscured by the "half-a-loaf benefit" which the 
 non-forfeiture law provisions were instrumental in 
 securing. Had there been an enforcement of the 
 provisions of Section 1952 on all companies, with 
 the requirement of an annual or periodical state- 
 
 42 
 
ment to each policyholder, there would have long 
 since been a specific law, or decision of the courts, 
 on non-forfeiture of surplus accumulations. 
 
 And the forfeiture of surplus accumulation is 
 even more vicious than was that of the reserve, for 
 it represents overpayments that sum which is 
 more than needed to meet all requirements the 
 return of which in a mutual company secures to 
 the policyholder his protection at actual cost, and, in 
 thousands of cases, the use of which, would tide 
 over financial embarrassment in the payment of 
 premiums and keep the policy in force to protect 
 the family. While prior to the adoption of the non- 
 forfeiture law as to reserve, American life insur- 
 ance was in its infancy, largely in an experimental 
 stage, groping its way, one company alone to-day 
 having ten times as many policies in force as were 
 in force all told at the time of the adoption of the 
 non-forfeiture law by Massachusetts, while the 
 surplus carried to-day by life insurance companies 
 is nearly twenty-two times greater than was the 
 sum total of the reserves of all companies at that 
 time, so that the evils of the forfeiture of surplus 
 accumulations to-day are greater and more wide- 
 spread, and with the experience of the business, 
 more unjustifiable. 
 
 A conservative estimate would place the equity 
 of Wisconsin policyholders in this fund at Ten 
 Millions of Dollars; so that this amount of sur- 
 plus, which under the law belongs to citizens of 
 the State of Wisconsin, constitutes taxable prop- 
 erty as much as any other kind of property tax- 
 able under the laws of that State. If the companies 
 are wrongfully withholding this property from its 
 
 43 
 
owners, they become liable. If it is possible for 
 the owners to agree to leave their accumulations 
 with the companies, then each owner is taxable on 
 the amount due him or to his credit, exactly as if 
 the sum were in his possession, under his control. 
 
 The accumulation is not in any way, shape or 
 manner a part of the insurance, and it will not hold 
 to contend that to tax this accumulation would be 
 to tax the insurance taken for the protection of the 
 family. 
 
 Example: Two men, each 31 years of age, 
 living in the city of Madison, each carries $10,000 
 of insurance on his life, which has been in force for 
 seven years. One of these men knew enough to 
 insist on an annual dividend contract, and in the 
 course of seven years the company has returned 
 him $500 in dividends, which he has invested in a 
 small lot in Madison, or in personal property, upon 
 which he is compelled to pay taxes. 
 
 The other man, to whom a deferred dividend 
 policy was delivered, has also had an accumulation 
 of $500 on his policy, which belongs to him, though 
 the company is holding it for him. Can exemption 
 from taxation be claimed for this $500? 
 
 Not only can the State of Wisconsin tax all such 
 deferred surplus accumulation, but every other 
 State, in which a Wisconsin company is transacting 
 business, can tax the accumulation on the policies 
 held in such State. 
 
 Another phase of this question is this : A man 
 has a deferred dividend policy of life insurance for 
 which he pays an annual premium of $150, which 
 policy is made payable to his wife and children. 
 On this policy, in the course of time, there has 
 
 44 
 
been an accumulation of, say, three hundred dol- 
 lars, which absolutely belongs to him, and which 
 under Section 1952 he can demand; a creditor se- 
 cures a judgment against him; can it be claimed 
 that this accumulation is exempt from execution? 
 
 As the law of the State does not exempt such an 
 accumulation, there can be no such claim for ex- 
 emption under the Bankruptcy Act of the United 
 States. Not even the rule (Steele vs. Bull 104 
 Fed. 968) as to cash surrenders will here apply, 
 since the taking of the cash surrender of a policy 
 to apply to the claims of creditors voids the entire 
 policy and nullifies the protection it afforded the 
 family; while the surplus accumulation is not an 
 integral part of the life insurance policy, but a 
 profit beyond it, and which under Section 1952 the 
 policyholder can claim as his own, without voiding 
 in any manner the original contract. 
 
 Then there is the question of the assignment of 
 such a deferred dividend policy. Will it not be 
 necessary, when there is such a deferred accumu- 
 lation, to specially include such accumulated sur- 
 plus, since under Section 1952 it is something dis- 
 tinct and separate from the policy, and under the 
 law belongs to the insured, and an assignment of 
 the policy will not carry with it such accumulated 
 profits, any more than it would a house and lot, 
 except specifically mentioned. 
 
 Section 1952 not only determines when the ap- 
 portionment of surplus shall be made beyond 
 which the apportionment of dividends cannot be 
 deferred but it also determines what constitutes 
 surplus. 
 
 45 
 
Nor can there be a waiver of this statutory pro- 
 vision on the part of the insured : 
 
 "Now the law is well settled, that where a stat- 
 ute is well founded upon public policy, a party can- 
 not waive its provisions even by express contract. 
 The contracts of private persons cannot alter a rule 
 established on grounds of public policy." 
 43 Wisconsin 457. 
 
 "A contract between a life insurance company 
 and the insured whereby the latter waives his statu- 
 tory rights is ultra vires and void." 
 
 Griffith vs. New York Life Ins. Co. 101 Cal. 627. 
 
 "A corporation cannot by stipulations in its con- 
 tract avoid or withdraw the operation of a statute 
 of the place where it does business." 
 Fletcher vs. New York Life Ins. Co. 13 Federal R. 528. 
 
 No such waiver by express agreement has been 
 attempted, nor has the insured entered into any 
 specific agreement to permit a forfeiture of the sur- 
 plus to which he is entitled under the law. The 
 courts will not enforce a forfeiture without such 
 an agreement and without consideration, the en- 
 forcement of which may nullify the very purpose 
 for which the insurance was taken. 
 
 "In a doubtful case that construction is preferred 
 which will save the contract, rather than one which 
 will destroy it." 
 
 47 Wisconsin 89, 101. 
 49 Wisconsin 389. 
 
 "To prevent forfeitures courts are bound to con- 
 strue policies as strongly against insurer and as 
 favorably for insured as their terms will reasonably 
 permit." 
 
 74 Wisconsin 470. 
 
 82 Wisconsin 112. 
 
 4 6 
 
"Forfeitures are only enforced when the contract 
 plainly discloses that it gives that right." 
 39 Wisconsin 397. 
 88 Wisconsin 589. 
 
 Not only therefore must the contract plainly and 
 specifically confer the right of forfeiture, but the 
 company must first do perfect equity to the policy- 
 holder by compliance with Section 1952, the pro- 
 visions of which cannot be waived. The justice of 
 the enforcement of this statutory provision is again 
 shown by the statement that the estimated equity 
 of ten millions of dollars, in the vast and un- 
 necessary surplus, which the citizens of Wisconsin 
 have absolutely acquired under the provisions of 
 this law, if applied as reversionary additions, would 
 add something like Twenty-five Millions of Dol- 
 lars in paid-up insurance to the policies to which 
 the accumulation is applicable. 
 
 If, however, this violation of Section 1952 is to 
 be continued, the value of this equity may be re- 
 alized when it is understood that "this stupendous 
 surplus is accumulated by the deferral of dividends, 
 mostly for twenty years, on policies that do not 
 remain in force for ten years on the average, so 
 that the average insurant comes no nearer than 
 within ten years of a dividend and never sees one." 
 
 Few men below the age of 30 see the need, or 
 are financially able, to take any considerable 
 amount of life insurance; so that the great ma- 
 jority of policies are written on men between 30 
 to 55 years of age, and as the greater portion of 
 these policies, when issued by the deferred divi- 
 dend companies, are written upon a twenty-year 
 distribution plan, lapse and death leave but a com- 
 
 47 
 
paratively small number fortunate enough "to 
 come unto their own" when between 50 and 75 
 years of age. 
 
 This evil of accumulation, and this withholding 
 of the surplus from its owners, on the part of the 
 officers of these purely mutual corporations, has 
 grown to such enormous proportions, until this 
 fund beyond all needs and requirements amounts 
 to more than Three Hundred Millions of Dollars. 
 
 And yet Section 1952 was enacted to enforce 
 such equity and mutual simplicity, which alone 
 gives the protection that life insurance affords at 
 the lowest possible cost, and which, in the very 
 nature of the organization, should prevail to guard 
 the interests of the policyholders, who form and 
 are the company. 
 
 The intention of the Legislature in the enact- 
 ment of Section 1952 must have been : 
 
 TO PREVENT A DEPARTURE FROM SHORT PERIOD 
 ACCOUNTING TO THE POLICYHOLDER ; 
 
 the only other interpretation of its purpose would 
 be that': 
 
 ITS PASSAGE WAS INSTIGATED TO ENABLE COM- 
 PANIES TO EXTEND THE DISTRIBUTION OF SURPLUS 
 AND ACCOUNTING TO FIVE-YEAR PERIODS. 
 
 In either case the violation is equally great and 
 indefensible, as evidenced by present practices and 
 policy conditions. 
 
 Of the thirty-six life insurance companies at 
 present authorized to transact business in Wiscon- 
 sin, twenty-four were organized prior to 1870. 
 The Travelers Insurance Company of Hartford 
 and the National Life Insurance Company of the 
 U. S. of A. were purely stock corporations, issuing 
 
purely stock contracts, and the "Travelers" has 
 so continued. The other twenty-two companies 
 at the time of the passage of the law, and prior 
 to 1870, complied strictly with an annual or 
 short period distribution of surplus and account- 
 ing to policyholders ; only five of these companies 
 at the present time comply with the requirements 
 of the law, while the general practice of the other 
 twenty-two, and of the other twelve companies 
 since organized and admitted, has so changed, 
 that each company now has various periods of dis- 
 tribution, varying from an annual, to thirty-year 
 periods, although the ten, fifteen and twenty year 
 periods are most common, so that in fact, eighty 
 per cent, of all insurance written for a number of 
 years has been on such deferred dividend plans. 
 
 The result has been that not only do fewer pol- 
 icyholders receive any dividend at all, but those 
 who do receive them are deprived of much to 
 which entitled, by reason of the extravagant ex- 
 penditures which followed the deferral of divi- 
 dends as a natural consequence. 
 
 Prior to 1870, when all mutual companies ad- 
 hered to the practice of short period accounting, 
 the commissions for obtaining the business ac- 
 cording to the sworn statements of the companies 
 varied from 10 per cent, as the lowest, to 25 per 
 cent, as the highest commission paid, with an 
 extra 10 per cent, in some companies for brokerage 
 business. Since the deferral mostly for twenty 
 years of the accounting to the policyholder, it 
 has been a common practice for commission pay- 
 ments in deferred dividend companies to vary from 
 70 per cent, to 95 per cent., and instances have been 
 
 49 
 
numerous where the agent received 100 per cent, 
 and a bonus for the business. 
 
 It would require too much space to give all the 
 various policy provisions as to distribution of sur- 
 plus, and comparison is therefore only made with 
 the General Form employed by the Annual Divi- 
 dend Companies, with the most common forms of 
 the Deferred Dividend Companies. 
 ANNUAL DIVIDEND COMPANY: 
 
 No conditions in application as to waiver or for- 
 feiture of surplus. 
 
 Policy provisions : 
 
 "Distribution of Surplus. This policy is written 
 upon the annual dividend plan, and beginning with 
 the end of the second year will participate annually 
 in profits as apportioned by the company, dividends 
 being due and payable only upon the payment of 
 the next succeeding year's premium. Dividends 
 may be applied by the insured in any one of the 
 following ways : (i) In reduction of the premium 
 for the succeeding year. (2) In cash, if all pre- 
 miums required under the terms of the policy have 
 been paid. (3) In purchasing paid-up additions to 
 the policy, payable with the policy." 
 
 "Note. The additions are non-forfeitable and 
 share in the profits of the company, and in case 
 this policy is surrendered and a paid-up taken, the 
 additions will be added to the amount of the paid- 
 up insurance stipulated in the policy. If extended 
 insurance is taken instead of paid-up insurance, the 
 reserve value of the additions will be added to the 
 reserve value of the original policy in calculating 
 the term of extended insurance. The additions of 
 past years may, at the option of the insured, be 
 
 50 
 
reconverted at any time into cash; the same to be 
 applied toward the reduction of the current year's 
 premium, if any." 
 DEFERRED DIVIDEND COMPANY : 
 
 Conditions in application : 
 
 "That the entire contract contained in the said 
 policy and in this application, taken together, shall 
 be construed and interpreted as a whole, and in 
 each of its parts and obligations, according to the 
 charter of the said company and the laws of the 
 
 State of , the place of the contract being 
 
 expressly agreed to be the principal office of the 
 said company in the City of ." 
 
 "That in any distribution of the surplus the 
 principles and methods which may be adopted by 
 the company for such distribution, and its deter- 
 mination of the amount equitably belonging to the 
 said policy, shall be and are hereby ratified and ac- 
 cepted by and for every person who shall have or 
 claim any interest under the contract now pro- 
 posed." 
 
 "That all right or claim to any surrender value 
 for the policy hereby applied for, other than such 
 as may be stipulated in the policy, is hereby ex- 
 pressly waived and relinquished, whether provided 
 for by the statute of any State or not." 
 
 The majority of deferred dividend companies 
 make no attempt of any kind as to a waiver or for- 
 feiture provision as to surplus in the application. 
 
 Policy conditions : 
 
 Form I. "If the assured be living, and this 
 
 policy is in force on the day of , nineteen 
 
 hundred and - , the society will pay to the 
 assured, or assigns, a cash dividend, consisting of 
 
 51 
 
the policy's full share of surplus profits, as deter- 
 mined by the actuaries of the society, and this pol- 
 icy may then be continued or surrendered by said 
 assured, or assigns, etc." "Until said date no such 
 cash dividend shall be apportioned to this policy." 
 
 Form 2. "This policy is issued on the Semi- 
 Tontine Plan, and its Tontine Dividend Period is 
 twenty years." 
 
 "This policy shall, if kept in force, share in the 
 surplus, according to the company's usage, at each 
 distribution after twenty years from date hereof, 
 until all contributions to the surplus fund in the 
 course of making such distributions to have arisen 
 from this policy shall have been returned; but no 
 dividend shall be payable at or after the time de- 
 fault may be made in payment of any premiums." 
 
 "No dividend shall be allowed or paid upon this 
 policy, unless the insured shall survive the com- 
 pletion of the Tontine Dividend Period and unless 
 the policy shall then be in force." 
 
 Form 3. "Participation in Profits This policy, 
 while in force, under its original terms and condi- 
 tions, will participate annually in the surplus of 
 the company as herein provided, which dividends 
 or profit shall be retained by the company and ac- 
 cumulated until the expiration of twenty years 
 from the first day of February, nineteen hundred 
 and two, at which time only, if the insured be liv- 
 ing and the whole of the premiums to that date 
 have been duly paid, such accumulation shall be- 
 come due and payable to the insured, in accordance 
 with one of the following dividend-endowment 
 options." 
 
 52 
 
Form 4. The Accumulation Period hereunder 
 ends on the fifteenth day of May, nineteen hundred 
 and twenty-two. If the assured is then living, and 
 if the premiums have been duly paid to that date, 
 and not otherwise, the Society will then apportion 
 hereto the share of the profits to which this policy 
 may then be entitled." 
 
 The following additional provision appears in 
 the policy in connection with Form 4 : "And it is 
 further understood and agreed, as a condition pre- 
 cedent to the acceptance of this contract, that the 
 minds of the contracting parties as to the said de- 
 termination and apportionment of profits have 
 fully met, anything to the contrary notwith- 
 standing/' 
 
 Form 5. "If this policy is in force on the 
 
 day of 19 (twenty years from date ot 
 
 policy), it will be entitled to a return of the sur- 
 plus accumulated from the premiums paid on this 
 policy as computed by the Society, etc." 
 
 Form 6. "The first distributive share of sur- 
 plus shall be apportioned to this policy at the ex- 
 piration of twenty years from date, provided the 
 premiums are duly paid and the insured is then 
 living, etc." 
 
 The contract is prepared by the officers, and 
 while it is their duty to fully specify all the rights 
 of the company, they cannot take advantage of 
 vague and indefinite forfeiture allusions, to which 
 the insured never consented and for which he has 
 received no consideration, and the enforcement of 
 which may nullify the very purpose for which the 
 insurance was taken. When urged by the agent to 
 sign the application, the insured has presented to 
 
 53 
 
him the benefits to be derived from the company's 
 surplus and is led to believe in a return to him of 
 dividends, but nothing is said of the forfeiture of 
 his overpayments and profits. 
 
 Forfeiture is repugnant to the very nature of an 
 organization in which there should be the strictest 
 equity and a minimum of gambling element, and in 
 which none should benefit by the misfortune of 
 the other. 
 
 No deferred dividend provision in any such 
 policy contains a specific waiver of statutory pro- 
 visions, or contains a specific agreement with the 
 insured as to the forfeiture of his surplus ; the only 
 indirect reference to forfeiture is in the phrase: 
 "If this policy is in force," or "if the insured be 
 living and the premiums have been paid." 
 
 The perfect equity which mutuality enjoins must 
 lead to the further conclusion that a purely mutual 
 company cannot under any circumstances issue a 
 non-participating contract ; if the premium is more 
 than sufficient to carry the risk, an injustice is done 
 the insured if insufficient, it places an unfair bur- 
 then on the other policyholders. On the other 
 hand, a stock company, conducted on the mutual 
 plan, can only issue such a non-participating con- 
 tract by a specific agreement with the insured that 
 "for and in consideration of the reduced premium 
 on this form of policy which is guaranteed by the 
 capital stock of the company and not by the contri- 
 butions of the participating policyholders the in- 
 sured waives all rights and interest in the partici- 
 pation of the profits of the company." 
 
 The Penn. Mutual has the following provision in 
 its non-participating contracts : 
 
 54 
 
"In consideration of the reduced rate of pre- 
 mium upon this policy, all claim for distribution 
 of surplus is waived by the claimants hereunder, of 
 which waiver the acceptance of the policy is due 
 and sufficient acknowledgment." 
 
 The Mutual Life of New York has this provision 
 in its non-participating contracts : 
 
 "This policy is issued on the non-participating 
 plan at a reduced rate of premium, and no surplus 
 shall be apportioned to it at any time." 
 
 Other companies issuing this form of contract 
 either make no reference to dividends or surplus, 
 or refer to the non-participation by the statement : 
 "This policy shall not participate in any distribu- 
 tion of surplus," while others are content to insert 
 the words "without participation in surplus or 
 dividends," "without profits," or "non-participat- 
 ing;" neither the application nor contract contain- 
 ing any specific agreement as to waiver of overpay- 
 ments and profits on the part of the insured. 
 
 The mere statement in the policy "This policy 
 shall not participate in any distribution of surplus" 
 is not a waiver on the part of the insured, and does 
 riot authorize a company, conducted on the mutual 
 plan, to withhold from the insured the excess pay- 
 ments and the equitable share of the profits of 
 this class of policies. This is true, not only for the 
 reason that in such a company all policyholders 
 without special agreement and consideration have 
 equal rights and are entitled to equitable benefits, 
 but also because the mere amount of the premium 
 paid is not the factor controlling participation. 
 There are, for example, the Participating Term, 
 Renewable Term and Convertible Term contracts of 
 
 55 
 
some companies, which are issued at a premium 
 rate of nearly thirty per cent, less than is the ordi- 
 nary life non-participating rate of other companies 
 conducted on the mutual plan; while the reserve 
 requirements on these contracts differ, it is never- 
 theless true that the premium on each form has a 
 margin of saving and profit, and that the amount 
 of the premium of itself does not control participa- 
 tion. To make the amount of the premium the 
 consideration for non-participation, its sufficiency 
 must be guaranteed by something beyond the pre- 
 miums of the other policyholders. 
 
 Non-participating policies bring out more glar- 
 ingly the injustice done the participating policy- 
 holder in withholding surplus accumulations. 
 
 * "The record shows that the average dividend 
 paid to the policyholders in 1901 by the life insur- 
 ance companies in this country on partici- 
 pating policies was under eight per cent. 
 The mutual (or participating) rate for pre- 
 miums is in most cases more than twenty- 
 two per cent, higher than the minimum non-par- 
 ticipating rate which may be safely charged. It is 
 true that the 'deferred dividend' device puts off 
 the day of reckoning somewhat, but it must come 
 all the same. Using the money accumulated from 
 large premium payments to get business at extrava- 
 gant rates of expenditure, under the delusion that 
 'after us comes the deluge,' will not always be 
 tolerated by the intelligent insuring public." 
 
 It would strike an interested observer that if the 
 average participating rate charged is twenty-two 
 per cent, higher than the insurance can be obtained 
 *The Insurance Herald. 
 
 56 
 
on the non-participating plan, the average dividend 
 returned to the participating policyholder should be 
 at least twenty-two per cent. ; if this is not done, the 
 rate for the non-participating policies is either too 
 low or the company is withholding the dividend to 
 which the participating policyholder is entitled. 
 
 The record also shows that the increase in sur- 
 plus accumulations during the year 1901 was 
 twenty-four millions of dollars. 
 
 In the deferred dividend companies transacting 
 business in Wisconsin, 30,470 policies were lapsed 
 in that State during the past six years, and fully 
 eighty per cent, of the 77,910 policies in force in 
 these companies in that State are on some deferred 
 dividend plan. 
 
 Had life insurance companies adhered to their 
 original teachings and practices, laws taxing pre- 
 mium income would never have so favorably ap- 
 pealed to the legislator; but it is difficult for the 
 average man to understand that these companies, 
 with their extravagant expenditures and forfeiture 
 impositions, are conducted solely in the interest "of 
 the policyholders, and that there can be equity and 
 mutuality in withholding from its owners more 
 than three hundred millions of dollars not neces- 
 sary for the conduct of the business. 
 
 Failure on the part of the directors of companies 
 to exercise the option of extending the period of 
 distribution of surplus to two, three, four or five 
 years cannot excuse the evasion of an annual dis- 
 tribution. The question naturally arises how such 
 annual dividend is to be treated in connection with 
 one-year policies on which the lapse ratio is very 
 great, as well as the effect of a declared dividend 
 
 57 
 
where the policy provisions provide for a dividend 
 after two, three or five years. 
 
 Dividends declared are payable on the date upon 
 which the next year's premiums fall due ; and hav- 
 ing been declared, will the company not be com- 
 pelled, if the premium should not be paid, to carry 
 the policy along for such length of time as the divi- 
 dend to the credit of the insured will continue it 
 before the policy can legally lapse. And, there 
 being no obligation on the part of the insured to 
 continue payments of premiums, cannot such in- 
 sureodemand the payment of the declared dividend, 
 even though the policy is not continued in force by 
 premium payment ? 
 
 "The insurer cannot add the condition 
 that the insured shall renew his policy by 
 paying the next installment to become due 
 before it will allow him to participate in 
 the surplus already earned by the class to 
 which his policy belonged." 
 
 Aetna Life Ins. Co. v. Hartley Court of Appeals, Ky., 67, 
 SW. R. 19. 
 
 Since the cost of life insurance is the difference 
 between the premium and the dividend, the dec- 
 laration of the amount of the dividend fixes the 
 amount of the overpayment by the insured, and the 
 mere fact that he does not desire to continue the 
 insurance does not authorize depriving him of the 
 amount which the company by its declaration stated 
 was more than required during the time the risk 
 was carried. 
 
 As the factors which make up the cost are deter- 
 mined annually, it cannot even be claimed that Sec- 
 tion 1952 is too stringent a requirement to impose 
 
 58 
 
on the companies, since it grants to the directors 
 instead of leaving it to a determination by the mem- 
 bers the option of extending the distribution to 
 five-year periods, whereas the interest of the pol- 
 icyholder would be best served by confining its re- 
 quirements entirely to an annual accounting. 
 
 With such an accounting economy and results to 
 the policyholder will be the only factors to deter- 
 mine the merit of the company. 
 
 59 
 
IV. LARGE SURPLUS ACCUMULATIONS 
 NOT NECESSARY. 
 
 A large surplus is not the evidence and guaran- 
 tee of strength, but a small surplus may be the 
 evidence of the fair treatment accorded policyhold- 
 ers ; while the large surplus must be an evidence of 
 the withholding for a long period the overpayments 
 and profits which should rightfully be returned to 
 . the members of the company. 
 
 The theory that surplus may not be safely re- 
 duced to a minimum is entirely fallacious. How 
 little of reason in the strenuous contentions for a 
 large surplus "to guard against unforeseen con- 
 tingencies" is shown by an examination of the con- 
 ditions pointed to "as possible to arise." 
 
 These conditions are said to be: 
 
 First Depreciation of assets. 
 
 Second Interest below rate assumed. 
 
 Third Abnormal death rate. 
 
 These three contingencies, and these three alone, 
 are pointed to and would justify a large accumu- 
 lation of surplus, yet if we examine the experience 
 of the companies we find in them but little to sus- 
 tain the advocates of a large accumulation. 
 Depreciation of Assets. 
 
 There is little danger of actual loss from depre- 
 ciation of assets; in fact, judicious management, 
 and investments in the class of securities in which 
 life insurance funds may be placed, shows that fluc- 
 tuation will rather exceed loss from depreciation 
 in every well conducted company. 
 
 '60 
 
The experience of twenty-five companies report- 
 ing to the Insurance Department of Massachusetts 
 for a period of twenty-two years 1880-1901 in- 
 clusive shows this result as to danger from de- 
 preciation : 
 
 Net gain by investments : 
 
 1880 to 1889 inclusive $13,835,011 oo 
 
 1890 to 1899 inclusive 23,662,685 oo 
 
 For year 1900 8,955,301 oo 
 
 For year 1901 8,500,322 oo 
 
 Total gain by investments, 22 years. $54,953,3 19 oo 
 Interest Below Rate Assumed. 
 
 The law requires each company to accumulate a 
 reserve on each policy, and this reserve is derived 
 from the premiums paid by the policyholder, and 
 such a reserve, calculated in accordance with the 
 experience of mortality tables, compounded at a 
 certain rate of interest, makes possible a fixed, or 
 level premium; for, as the risk increases with in- 
 creasing age, the accumulating reserve is decreas- 
 ing the liability of the company, so that the reserve 
 is really the equalizer between the premium fixed 
 at entry, and the increasing hazard of increasing 
 age. Such scientifically correct reserve requires in 
 its accumulation a certain rate of interest, which 
 the law fixes at not exceeding four and one-half 
 per cent. ; few companies, however, assume a high- 
 er rate than four per cent, on old business, while 
 the reserve on new business is calculated on a three 
 and one-half, or three, per cent, basis. Should, 
 therefore, a company not realize the interest rate 
 assumed in compounding its reserve, there would 
 
 61 
 
be a deficit, which could be met only by a draft on 
 surplus to prevent impairment. 
 
 The average annual rate of interest earned on 
 mean invested funds during- the period 1882-1901 
 inclusive was 5.01 per cent. Taking the experience 
 of the twenty-five companies reporting to Massa- 
 chusetts, we find that during the period 1880-1901 
 inclusive, the interest earnings over and above the 
 requirements of the reserve to have been as fol- 
 lows: 
 
 1880 to 1889 inclusive $84,399,671 oo 
 
 1890 to 1899 inclusive 138,789,291 oo 
 
 For year 1900 17,919,412 oo 
 
 For year 1901 19,303,486 oo 
 
 Total gain from interest in ex- > $2(5o g6o ^ 
 
 cess of reserve requirements. \ T 
 Abnormal Death Rate. 
 
 By an abnormal death rate is meant death losses 
 beyond those expected by the table of mortality 
 upon which the premium has been calculated. No 
 conservatively managed old line company has suf- 
 fered from an abnormal death rate. Improved 
 sanitary conditions and improved methods in the 
 treatment of disease, with the fact that a com- 
 pany deals only with selected lives, have given the 
 companies a large gain on the mortality charge 
 calculated on mortality tables formulated over 
 forty years ago. With an accumulating reserve to 
 decrease the liability of the company, and a mor- 
 tality charge in excess of requirements, there is 
 little danger from an abnormal death rate. 
 
 The experience of the twenty-five companies re- 
 porting to Massachusetts shows savings in mor- 
 
 62 
 
tality and lapse gain, for twenty-two years, as fol- 
 
 lows : 
 
 1880 to 1889 ................... $79,177,678 oo 
 
 1890 to 1899 ................... 151,398,680 oo 
 
 For year 1900 .................. 19,298,439 oo 
 
 For year 1901 .................. 16,116,553 oo 
 
 } 
 
 ^5,991,350 
 
 We find, therefore, that these "unforeseen con- 
 tingencies," offered as the excuse for large surplus 
 accumulations, have given the following gains dur- 
 ing the past twenty-two years: 
 Gain from investments .......... $54>953>3 J 9 
 
 Gain from interest, above reserve 
 
 requirements .............. 260,411,860 oo 
 
 Gain from mortality including 
 
 lapse gain ................. $265,991,350 oo 
 
 Total gain $5^1,356,529 oo 
 
 It would almost seem that the advocates of large 
 surplus accumulations would be compelled to offer 
 some other dangers to prevent the distribution of 
 'be surplus to its owners. Most any other business 
 would welcome just such "unforeseen contin- 
 gencies," and the above figures represent only the 
 results of twenty-five companies twenty of which 
 transact business in Wisconsin while seventy- 
 four companies are now transacting business in 
 the United States. 
 
 If the Equitable Life were to distribute its en- 
 tire surplus of $71,160,385.56 and the apportion- 
 ment was made to the policyholders, the entire 
 clerical force of the company could not issue the 
 
checks, address the envelopes and place them in 
 the mail, before the company would again be ac- 
 cumulating a surplus, notwithstanding "unfore- 
 seen contingencies." 
 
 If the Northwestern Mutual Life should return 
 every dollar of the $30,209,545.85 of policyhold- 
 ers' surplus, and then, from every possible and im- 
 possible contingency, should incur an impairment 
 of twenty-five per cent, on its reserve, the profits 
 from the "unforeseen contingencies" interest, 
 lapse and mortality would make up the impair- 
 ment in less than six years, if the company did not 
 issue a single additional policy. With such re- 
 cuperative powers under such extreme and impos- 
 sible conditions, no harm can come from applying 
 the provisions of Section 10,52. 
 
 "Premiums are purposely fixed on a higher scale 
 than is necessary to meet the actual conditions of 
 the business so far existing, in order that more ad- 
 verse conditions may be met if they should chance 
 to arise in the future." 
 
 In no year in the history of any American life 
 insurance company complying with the require- 
 ments of the legal reserve and investment laws, 
 has there been such depreciation of assets, but 
 what interest earnings and savings in mortality 
 more than overbalanced any possible loss. Nor 
 has any company complying with these laws ever 
 become impaired by reason of an annual distribu- 
 tion of the surplus. 
 
 If life insurance companies in their early history 
 were enabled to make an annual distribution, when 
 there was more danger from impairment and "un- 
 foreseen contingencies," how much better able are 
 
 64 
 
the companies to do so now, with the experience 
 of nearly fifty years of application of the legal re- 
 serve and non-forfeiture laws. 
 
 When the policyholder once realizes the possi- 
 bilities of "unforeseen contingencies" and invokes 
 the strong arm of the law, there will be an end to 
 enormous surplus accumulations, and that, too, 
 will end the extravagant expenditures in the pur- 
 suit of business that have been for years a scandal 
 and a reproach to the companies. 
 
 The right of the State to repulate and supervise 
 and to prescribe conditions to all corporations de- 
 siring to transact business within its bounds has 
 been settled beyond question : 
 
 "A corporation is an artificial person created by 
 a sovereign. It has no functions except those de- 
 fined by its creator and no sphere of operation out- 
 side of the boundaries of his power." 
 
 U. S. Supreme Court Bank of Augusta vs. Earle, 13 
 Peters 519. 
 
 "Corporations have no right of recognition in 
 other States, except under the laws of such other 
 States." 
 
 Liverpool & London vs. Oliver, 10 Wallace 566. 
 
 It is the true function of government to encour- 
 age that which is right and just, and to prohibit 
 anything which is wrong and injurious, and in the 
 enactment of its laws it should aim only in secur- 
 ing justice to its citizens. 
 
 If, however, a reasonable amount of surplus is 
 necessary for a life insurance company, the law 
 should be amended to permit such a reasonable ac- 
 cumulation, and in the determination as to what 
 constitutes a reasonable surplus, taxation properly 
 applied will offer the solution. 
 
 65 
 
Aside from surplus, a life insurance company 
 has absolutely nothing except what the laws com- 
 pel it to have ; its assets are offset by its liabilities. 
 Aside from surplus, of which a large accumulation 
 is unnecessary, the payments or funds of the pol- 
 icyholders pass to the company only to be held in 
 trust until payment can be made to the dependents 
 of these policyholders, and in this manner the small 
 contributions of the many are returned to the 
 channels of taxation in larger payments, the com- 
 pany forming only the medium for the transaction. 
 
 When the legislator once understands what is 
 meant by mutuality and actual cost in life insur- 
 ance, then the only proper tax to impose upon a 
 company, conducting its business on the mutual 
 plan, will be a tax on surplus accumulations upon 
 the same basis as all other property is taxed. 
 
 Life insurance has become so necessary a factor 
 in our social economy and so powerful an aid to 
 the well-being of the people and every community 
 that its conduct and growth should be encouraged 
 and enforced by the State only along correct lines, 
 so that its greatest good may come to the greatest 
 number, and any means that will lessen the cost, by 
 bringing about a competition of economy of man- 
 agement, and thus bring it nearer to the people, 
 must be welcomed as a great and lasting reform. 
 
 The enforcement of Section 1952 and compelling 
 a short period accounting would place all com- 
 panies, large and small, old and new, on an equal 
 footing in the competition for business, and all 
 rivalry between companies would be wholly in the 
 interest of the policyholder and give to him PER- 
 FECT EQUITY AND ACTUAL COST. 
 
 66 
 
V. TAXATION. 
 
 As reference has been made to the possibility of 
 taxation under the law governing the distribution 
 of surplus, it may be well to explain why such a 
 tax is the only proper one to impose upon life in- 
 surance. 
 
 A tax upon the premiums of a life insurance 
 company, conducted on the mutual plan, is a tax 
 not only upon the amount received, but also upon 
 the amount distributed for losses. It is a tax upon 
 the thrift of the citizens of the State, who, because 
 of their wise forethought and love of family, are 
 insuring themselves, thus not only relieving the 
 State from the support of dependents, but by rea- 
 son of such insurance are enabling such depend- 
 ents to become tax contributors for the support of 
 the State. 
 
 Setting aside all sentiment about the blessings 
 and beneficence of life insurance, the man who 
 carries life insurance is a better citizen of the State 
 than the man who does not insure. Poorhouses 
 and homes for the friendless are not peopled by 
 the dependents of the man who carried life insur- 
 ance, but the prudent man by a tax on life insur- 
 ance premiums is taxed for being prudent, and 
 then he is again taxed for the public support of the 
 dependents of those who were not prudent. 
 
 A tax imposed upon any part of the premium is 
 most unequal and unjust. The premium is com- 
 posed of the INSURANCE ELEMENT made up of 
 the reserve and mortuary charge and the EX- 
 PENSE ELEMENT. 
 
 67 
 
The law requires each company to accumulate 
 a reserve and compound it at a certain rate of in- 
 terest ; every dollar of this reserve is a liability and 
 is so declared by law. Having, therefore, by law 
 compelled its creation, it is manifestly unfair to 
 impose the additional burthen of a tax on this re- 
 serve, the very purpose of which is to insure to 
 the dependents of the policyholders an independent 
 support. 
 
 The injustice of a tax upon the mortuary charge 
 of the premium finds peculiar recognition in the 
 laws of Wisconsin, and in the political platforms of 
 both the Republican and Democratic party, where, 
 in the declaration in favor of a just and equal 
 method of taxation, fraternal orders and associa- 
 tions are especially exempted. 
 
 The funds of these organizations being only 
 Mortuary and Expense, with no provisions for 
 future losses, they are exempt from taxation 
 simply and solely because of the bond of mutual- 
 ity, by means of which they conduct their transac- 
 tions, and which constitutes their greatest strength. 
 The legislator without difficult^ can readily under- 
 stand that such an organization is simply the band- 
 ing together of a large number of individuals to 
 protect each other and their dependents by mutual 
 contributions, and that in the very nature of the 
 organization there can be no profit in a commercial 
 sense to any one. If the legislator cannot under- 
 stand the scope of such an organization, the very 
 mutuality commences a practical illustration of its 
 power and becomes a political factor. 
 
 Yet life insurance companies are not essentially 
 different their purpose is the same and by the 
 
 68 
 
application of true mutuality would differ only in 
 that, recognizing an increasing death rate must 
 come with increasing age, they gauge the cost of 
 protection on mortality tables and provide in the 
 insurance element of the premium for a fund 
 called Reserve, to meet the future increasing cost ; 
 so that a life insurance company practicing the 
 equity enjoined by mutuality is enabled to grant a 
 fixed amount of protection at a decreasing cost, 
 while the fraternal organization, without such a 
 Reserve, can only grant protection at an increasing 
 cost. 
 
 Mutuality dictates that all policyholders have 
 equal rights and share equitably in all the burthens 
 and advantages which such a community of inter- 
 est imposes, and where a life insurance company is 
 conducted on these lines, it differs only from the 
 fraternal organization, so far as the legal reserve 
 gives to the company financial strength and per- 
 manence. 
 
 Even if a tax could be imposed on the Expense 
 Element of the premiums alone, it would be no less 
 unjust than when imposed on the Insurance Ele- 
 ment. The inequality of such tax is shown when 
 it is understood that the Expense Element is a per- 
 centage loading, varying from ten to forty per 
 cent, according to the different forms of policies, 
 so that in a company, issuing twenty forms of poli- 
 cies, twenty men, even of the same age, each taking 
 a different form of policy but all carrying a like 
 amount of insurance, every one of these men would 
 contribute to such a tax in varying amounts; and 
 again, the premium being lower for younger ages, 
 the young man contributes less toward such a tax 
 
 69 
 
than would the older man for the same amount of 
 insurance. 
 
 A tax, therefore, upon the premium, or any part 
 of it, is unjust, unfair and unequal, while a tax 
 upon annual surplus accumulation, would be just, 
 fair and uniform. 
 
 The reserve of a company is a liability, and, with 
 the premiums paid, necessary for the payment of 
 losses, but the excess of the premium payments 
 and profits constitute the surplus, and upon this 
 the same tax should be imposed as on all other 
 property. If there is no surplus there should be 
 no tax, for to impose it then, would be an encroach- 
 ment on the very fund which the State insists 
 must be held to maintain solvency. 
 
 A tax upon present surplus accumulations, with 
 its attendant requirements, would no doubt result 
 in a return to the policyholders of the needless and 
 unnecessary surplus, but even in such case, it would 
 not disappear from the channels of taxation, while 
 the taxation of annual surplus accumulation is a 
 method so correct and just that not even the offi- 
 cers of the companies could object. If from the 
 joint contributions of the policyholders not only 
 the protection of insurance can be provided, but a 
 profit realized, there is no good reason why such 
 excess and profit shall not contribute to the same 
 burthen of taxation all other property is called 
 upon to bear. 
 
 Even if the State should not receive so large an 
 income as from a tax upon gross premiums, a tax 
 upon annual surplus accumulation is the only just 
 and uniform tax which can be imposed without dis- 
 crimination between organizations furnishing life 
 
 70 
 
insurance, and without making the insured un- 
 equally contribute toward a tax for the privilege 
 of carrying life insurance for the protection of de- 
 pendents. Besides being the only correct method 
 of taxation for life insurance companies, it offers 
 also to the policyholders a means by which to en- 
 force that mutuality by which alone the best results 
 at the least cost may be obtained. 
 
 In no other manner can life insurance be con- 
 ducted than on the mutual plan, except, at a greater 
 cost than those who are insured could by mutual 
 reciprocal relationship themselves provide the pro- 
 tection. 
 
VL LEGISLATION. 
 
 Wisconsin is^the only State in which there is a 
 law regulating the distribution of surplus; every 
 effort made in other States to secure such an en- 
 actment, has been met by the determined opposition 
 of the lobby representing the officers of the de- 
 ferred dividend companies, and yet no requirement 
 which can be imposed will do so much real good 
 or be of greater benefit to the policyholders. 
 
 At the time the law was enacted in Wisconsin 
 no more detailed regulation was required, and the 
 enforcement of its provisions will secure, in that 
 State, the equity to which the policyholder is right- 
 fully entitled. Such enforcement will also direct 
 the attention of policyholders in other States to the 
 remedy which will place a check on forfeiture and 
 extravagance and make economy and equity, 
 rather than size and volume, the factors to deter- 
 mine the merit of a company. 
 
 There are too many millions of dollars involved, 
 represented by policies now carried which may be 
 saved to thousands of families, for the State to 
 permit a continuance of present methods, when a 
 few simple regulations will make every dollar of 
 insurance more secure and give to the insured their 
 protection at less cost. 
 
 It is not only the right, but the duty of the State 
 to enforce equity between the members of these 
 corporations, and legislation, in other States, will 
 alone bring about such a result. 
 
 Such a law should contain the following pro- 
 visions : 
 
 72 
 
That every life insurance corporation conducted 
 on the mutual plan, or in which the policyholders 
 share in the profits or surplus, shall make an annual 
 distribution of its surplus, in which all policyhold- 
 ers shall participate, and of which apportionment 
 each policyholder shall receive notice as soon as 
 the dividend has been declared. 
 
 That, for the purpose of making the annual dis- 
 tribution, the company shall classify the policies 
 into two divisions, or groups, viz.: i. Policies of 
 one year standing, and 2, policies which have been 
 in force more than one year; and the surplus ac- 
 cumulated shall be apportioned according to such 
 classification. 
 
 That all dividends declared shall be payable in 
 cash on the date the next annual premium or in- 
 stallment falls due, except, that where the insured 
 entered into an agreement with the company, the 
 dividend may be applied to a reduction of the pre- 
 mium, or may be added to the policy as reversion- 
 ary additions. 
 
 That there shall be no legal lapse of a policy of 
 life insurance for non-payment of any premium 
 or installment due, until after all dividends declared, 
 and the cash value of all reversionary additions 
 credited to the policy, shall have been applied in 
 keeping the policy in force for its face value, and 
 that when all dividends and reversionary additions 
 have been so applied, and the insured, upon due 
 notice, fails to resume payment of premiums, the 
 reserve held on such policy, shall be applied to con- 
 tinue the policy in force as extended insurance, 
 paid-up insurance, or be cancelled for such sur- 
 render value as the policy may provide. 
 
 73 
 
That the provisions of such law shall apply to all 
 policies of life insurance, except, purely stock con- 
 tracts issued by a stock company for a reduced 
 premium, which reduction of premium is guaran- 
 teed by the capital stock of the company and not by 
 the contributions of the other policyholders. 
 
 That, in determining the amount of surplus to 
 be distributed, there shall be reserved an amount 
 sufficient to meet the liabilitv of the company for 
 all pending death claims, together with an amount 
 not less than the aggregate net value of all out- 
 standing policies, said value to be computed by the 
 American or the Actuaries' Experience Table of 
 Mortality, with interest not exceeding four per 
 cent. ; the excess of the company's funds shall con- 
 stitute the surplus. 
 
 That no such company shall be authorized to 
 pay for securing new business, a commission in ex- 
 cess of two per cent, of the face of the policy writ- 
 ten and delivered. 
 
 That, in lieu of all other taxes, except taxes on 
 real estate, each company shall, on the amount of 
 the annual surplus accumulation on the policies 
 in the State, before the same has been declared as 
 dividends, and on the amount of surplus held and 
 accumulated on contracts entered into prior to the 
 enactment of the law and in force in the State, pay 
 as an annual license fee, the same percentage tax 
 as all other property is subjected to under the laws 
 of the State. 
 
 No harm can come to a single company from 
 the enactment of such a law; on the contrary, if 
 the law required of every mutual company an an- 
 nual accounting and distribution of excess pay- 
 
 74 
 
ments and profits, and restricted the amount which 
 such companies could pay for new business, so that 
 new policies would pay their own cost, every pol- 
 icyholder would in the future receive a greater and 
 more equitable return, for then there could be such 
 competition only as would give to each the most of 
 saving and profit by conducting the business on the 
 most economical basis. 
 
 Such are the requirements imposed on American 
 companies by the government of Prussia for the 
 protection of its citizens, and requirements to which 
 the New York Life and the Germania Life submit 
 in Prussia, can hardly become a burden when im- 
 posed in the United States. 
 
 The restriction as to the cost for obtaining new 
 business is one of these requirements, and a limita- 
 tion, not to exceed two per cent, of the face of the 
 policy, would permit an average maximum com- 
 mission of fifty per cent, of the first year's pre- 
 mium, and by classifying policies into two groups, 
 before making the annual distribution of surplus, 
 the one-year policies bear their own cost, but this 
 is again equalized by the low death rate among 
 such policyholders. 
 
 The life companies reporting to the New York 
 Insurance Department during the year 1901 paid 
 on account of policy contracts $183,393,528, while 
 the cost of management was $103,787,516, or near- 
 ly three-fifths of their payments on account of pol- 
 icy contracts and nearly two-fifths of their total 
 premium receipts. Commissions alone account for 
 $49,970,852, or nearly one-half of the entire cost of 
 management. During the ten-year period, 1892- 
 1901, inclusive, the companies reporting to the 
 
 75 
 
New York Insurance Department wrote a total of 
 $10,731,568,590 of insurance, and during that pe- 
 riod $7,149,767,534 terminated,* leaving a net gain 
 f $3,581,801,056, or a little over 32 per cent, of 
 the amount written. 
 
 The eagerness to outclass competitors in the vol- 
 ume of business written, or a desire to stay in the 
 race, has caused most companies to pay excessive 
 commissions and bonuses, and has led them to ac- 
 quire a volume of business which there never was 
 a reasonable prospect of keeping. The deferred 
 accounting to the policyholder, and the forfeiture 
 impositions, made possible the extravagance which 
 has characterized these wasteful methods for which 
 alone large surplus accumulations are necessary. 
 As a result about 70 per cent, of the total insurance 
 terminated has, on the average, annually gone off 
 the books by the lapse and surrender route, while 
 salaries to officers have not decreased in the same 
 ratio as have dividends to policyholders. 
 
 The Gain and Loss Exhibit placed in the Insur- 
 ance Department blank in 1895, and which shows, 
 when properly prepared, the true condition, merit 
 and weakness of a company, through extraordinary 
 efforts of the officers of deferred dividend com- 
 panies, failed to appear in any of the department 
 reports except Wisconsin, Connecticut and Illinois, 
 and the opposition has been so continuous, that this 
 exhibit has been entirely eliminated from the 
 
 *By death, $695,015,836; by maturity, $131,101,074; by 
 expiry, $377,413,427. Total, $1,203,530,337. 
 
 Lapse, $2,943,744,162; surrender, $1,142,588,868; not 
 taken, $1,465,281,286. Total, $5,551,614,316. 
 
 76 
 
blank, and will in all probability disappear from all 
 reports except Minnesota. 
 
 And yet the purpose of the Exhibit is only to 
 show what the margins or loading on net pre- 
 miums amount to, in order that a comparison of 
 the company's expenses of management may be 
 made therewith ; what the tabular or expected mor- 
 tality was, in order to compare therewith the 
 actual death losses incurred; what amount of in- 
 terest has been earned in excess of the amount 
 required to maintain the legal reserve; what was 
 the amount of the reserve held by the company 
 on policies terminating otherwise than by death, 
 maturity or expiry, and the amount paid upon sur- 
 render of such policies; what gains or losses are 
 incurred in the sale of any assets ; what dividends 
 have been declared ; in short, to disclose the results 
 of the company's methods upon the interests of the 
 policyholders information which in every well- 
 regulated company is, or should be, annually pre- 
 pared as a test of assumptions and for the guidance 
 of the officers. That there should be such opposi- 
 tion to publicity on the part of the officers of com- 
 panies which the policyholders are said to own 
 can be explained by the fact that such exhibit ex- 
 poses extravagance, illiberality and poor manage- 
 ment; but just why insurance commissioners 
 should permit the useful information given by this 
 exhibit to disappear from the statements of com- 
 panies, is difficult to understand. 
 
 The information obtained showed that the com- 
 panies were exceeding by more than two million 
 dollars the entire policy loadings for expenses ; one 
 company, which immediately prior to the adoption 
 
 77 
 
of the gain and loss exhibit made a net gain of 
 one million five hundred thousand dollars on lapsed 
 and surrendered policies in one year not bad for a 
 purely mutual company and which strenuously 
 objected to the use of the exhibit, immediately 
 liberalized its policies. It is to be regretted that 
 tne use of this exhibit was not made a statutory 
 requirement, but as soon as legislation is suggested, 
 we are told that there is too much legislation al- 
 ready, that companies should be permitted to work 
 out such reforms; and they generally work out of 
 them, just as they did on the gain and loss ex- 
 hibit. 
 
 Legislation is, has been, and always will be the 
 hope and safeguard of the policyholders, and must 
 be, in the very nature of the organization, acting 
 as the medium for the transaction of the business. 
 To transact the business of life insurance requires 
 a large number of individuals to contribute to a 
 common fund; but so large a number cannot, in 
 the interest of the company, be localized, and the 
 membership must necessarily be spread over large 
 territory, so that personal supervision and inspec- 
 tion, or participation in the selection of officers and 
 management, becomes impossible. The member- 
 ship, though united by a common bond of interest, 
 are separated by distance and unknown to each 
 other, and rely largely upon the supervision of the 
 State, and legislation, for the protection of their 
 interests. 
 
 The law fixes the character of the investments 
 and regulates the solvency of the company. The 
 law has given to the policyholder every right and 
 privilege which he to-day enjoys in life insurance, 
 
 78 
 
and with the great interests involved, reaching out 
 into every community and every family, so vitally 
 affecting the widow and the fatherless in whose 
 well-being lies the interest of the State, demand not 
 only the sheltering arm of the law, but all the 
 power it can exercise to enforce equity and dis- 
 courage forfeitures. 
 
 No one life insurance company enjoys a special 
 privilege; neither is there a combination among 
 companies to fix the price or control the cost of life 
 insurance; but no Trust in the world has the ac- 
 cumulated wealth of five o-reat life insurance com- 
 panies, nor the power through their method and 
 conduct of the business, to throttle and wreck their 
 young and small competitors. 
 
 There are all of thirtv-five small companies in 
 this country, fighting an uphill fieht for a foothold 
 and success ; they are making use of every effort, 
 and, too often, of every makeshift which human 
 ingenuity can devise, to stand a chance in the com- 
 petition for business, and if present methods and 
 conditions continue, the large majority are doomed 
 to failure, not by reason of a lack of honesty, en- 
 ergy and perseverance, but by an inability to com- 
 pete with the extravagant methods employed to 
 secure new business. 
 
 The only purpose of a large surplus is to hide 
 large and extravagant expenditures. Large sur- 
 plus accumulation is unnecessary, and has not been 
 the means of good to life insurance. Deferring 
 distribution for long periods, instead of returning 
 the overpayment and profit as soon as the cost can 
 be determined, has deprived thousands of what was 
 justly due them. 
 
 79 
 
Legislation, demanding that perfect equity pre- 
 vail in the conduct of the business of life insur- 
 ance, cannot impose hardship upon a single com- 
 pany, while for the policyholders and beneficiaries 
 it will be of great value and benefit. 
 
 Ordinary common honesty can hardly be herald- 
 ed as a new discovery. 
 
 80 
 
SIMILAR LAWS. 
 
 Illinois and Oklahoma have laws exactly identi- 
 cal with Section 1952 of Wisconsin, and on these 
 laws the same interpretation will apply : 
 
 ILLINOIS. 
 
 "DIVIDENDS BY MUTUAL COMPANIES. Life insurance companies 
 doing business in this State, which do business upon the principal 
 of mutual insurance, or the members of which are entitled to share 
 in the surplus funds thereof, may make distribution of such surplus 
 as they have accumulated annually, or once in two, three, four or 
 five years, as the directors thereof may, from time to time, deter- 
 mine. In determining the amount of the surplus to be distributed 
 there shall be reserved an amount not less than the aggregate net 
 value of all outstanding policies; said value being computed by 
 the 'combined experience' or 'actuary* rate of mortality, with in- 
 terest not exceeding four per cent." Act 1869. 
 
 OKLAHOMA. 
 
 "Life insurance companies, doing business in this Territory, 
 which do business upon the principle of mutual insurance, or the 
 members of which are entitled to share in the surplus funds there- 
 of, may make distributions of such surplus as may have accu- 
 mulated, annually, or once in two, three, four, or five years, as 
 the directors thereof may from time to time determine. In deter- 
 mining the amount of the surplus to be distributed, there shall be 
 reserved an amount not less than the aggregate net value of all 
 outstanding policies, said value being computed by the combined 
 experience or actuary rate of mortality, with interest not exceeding 
 four per cent." Ins. Laws 1893. 
 
 Missoiiri and North Dakota have similar laws 
 applicable to Domestic mutual life insurance com- 
 panies : 
 
 MISSOURI. 
 
 "SECTION 7881. DISTRIBUTION. All life insurance companies 
 organized under the laws of this State may make distribution 
 among such policyholders thereof, who may be entitled to share in 
 the profits of such companies, of such surplus as such companies 
 may accumulate, or any part thereof' which distribution shall be 
 made out of actual surplus profits only, and may be declared an- 
 nually, or once in two, three, four or five years, as the board of 
 directors or other officers charged with the management of the 
 company's affairs may from time to time determine. Each com- 
 pany, in determining the amount of surplus profits, shall reserve 
 out of its assets, including capital stock, if any: First, an amount 
 sufficient to provide for all losses, expenses and liabilities of such 
 company; second, an amount not less than the aggregate net value 
 of all its outstanding policies, said value to be computed as directed 
 for the valuation of policies by section 7882. Such companies, in 
 
 81 
 
making any such distribution of profits among their policyholders, 
 may apportion the amount so set apart for distribution in propor- 
 tion to the sums of money which each policyholder has contributed 
 to the assets of the company, making a just and equitable allow- 
 ance for interest thereon. Policies waich have become payable be- 
 fore the time when such distribution is made, and after the date 
 of the last previous distribution of surplus, may share in the same 
 equitably and proportionally." R. S. 1889, sec. 5840. 
 
 NORTH DAKOTA. 
 
 "SECTION 3111. DISTRIBUTION OF SURPLUS ON LIFE POLICIES. 
 Every domestic mutual life insurance company shall annually, or 
 once in every two, three, four or five years, as it shall determine, 
 and as may be conditioned in its policies, make distribution of all 
 surplus it may have accumulated since its last dividend of surplus. 
 B'y such surplus is here intended all accumulations since its last 
 distribution of surplus above its debts and reserve computed as 
 provided in section 3095. The distribution shall be unon what is 
 known as the contribution plan, and each member upon whose 
 policy no premium is overdue and unnaid shall be entitled to the 
 amount contributed by his policy to such surplus. Policies which 
 have become payable before the time when such distribution is 
 made, and after the date of the last previous distribution, shall 
 share in the same equitably and proportionally." S. 1898. 
 
 Massachusetts also has a similar law governing 
 the distribution of surplus of Domestic mutual life 
 insurance companies, with the addition of permit- 
 ting 1 the companies to retain a percentage of the 
 surplus as a safety fund, but in the event of death, 
 or the maturity of the policy, provides for a return 
 of the policy's equity in this safety fund, as a spe- 
 cial dividend, payable with the face of the policy. 
 The law is as follows : 
 
 "SECTION 75. Every such domestic life company shall an- 
 nually, or once in every two, three, four or five years, as it shall 
 determine, and as may be conditioned in its policies, make dis- 
 tribution of all surplus it may have accumulated since its last 
 dividend or surplus. By such surplus is here intended all accu- 
 mulations since its last distribution or surplus above its debts and 
 reserve computed as provided in section eleven. The distribution 
 shall be upon what is known as the contribution plan, and each 
 member upon whose policy no premium is overdue and unpaid 
 shall be entitled to the amount contributed by his policy to such 
 surplus. Policies which have become payable before the time 
 when such distribution is made, and after the date of the last 
 previous distribution, shall share in the same equitably and pro- 
 portionally: provided, that, besides the aggregate market value 
 margin in excess of par of all bonds held by a company, and not 
 included in its reserve, any such company may accumulate from 
 
 82 
 
its surplus and hold as a safety fund an amount not larger than 
 ten per cent, of its required legal reserve. Such safety fund, or 
 any part thereof, may be applied to supply any deficiency in the 
 reserve caused by depreciation of assets or losses and expenses be- 
 yond the ability of the company to otherwise provide for. Upon 
 termination, by reason of death or maturity, of any policy here- 
 after issued upon which there has been no default in payment of 
 premium, the amount payable thereon shall include, as a special 
 distribution of surplus, such portion of the company's safety fund, 
 if any, as may be determined by the following rule, viz.: If the 
 company's surplus, as shown by the last report of the insurance 
 company, as made to the insurance commissioner, prior to the 
 termination of the said policy, was a greater amount than was 
 shown by the first report of the insurance company after the policy 
 was issued, it shall be ascertained what percentage the net increase 
 in surplus during that time is on the company's total distributions 
 during the same interval, and the same percentage of the sum of 
 all the distributions already paid on said policy shall constitute the 
 special dividend." 
 
 It could hardly have been the intention of the 
 Legislature, by the insertion of the word "Do- 
 mestic," appearing in the law of Missouri, North 
 Dakota and Massachusetts, to place restrictions 
 upon companies organized in these States and thus 
 grant greater privileges to corporations of other 
 States, but whether this was the intention or not, 
 the chief fact which this law of Illinois, Massa- 
 chusetts, Missouri, North Dakota and Oklahoma 
 emphasizes, as does Section 1952 of Wisconsin, is, 
 that the distribution of surplus be made annually, 
 unless the board of directors have made use of 
 the option to extend the distribution to two, three, 
 four or five year periods, and by such restriction 
 minimizing the evils of forfeitures. Massachusetts 
 companies have never attempted to issue policies 
 on which the apportionment of surplus was to be 
 deferred beyond a period of five years, owing to 
 the requirements of this law. These companies, 
 and annual dividend companies of other States, 
 have not been able, on account of the enforced 
 short period accounting to policyholders, to enter 
 
 83 
 
the mad competition for large volumes of business 
 at extravagant commissions and bonuses, but 
 rather compelled to make it "a cardinal principle 
 that all the brains, all the experience, all the skill, 
 all the industry obtainable be applied" to a con- 
 servative conduct of the business and by an eco- 
 nomical management returning to the policyholder 
 his overpayments as soon as the cost of the insur- 
 ance could be ascertained. Only then does each 
 policyholder receive his equitable share of the sur- 
 plus and his insurance at cost, when the distribu- 
 tion is made at such short periods as will incur 
 forfeiture to the least number, and the sole purpose 
 of these enactments must have been to enforce such 
 short period accounting as a "cardinal principle" of 
 mutual life insurance. 
 
A T ~"~