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MILES MENANDER DAWSON, 
 
ELEMENTS 
 
 LIFE INSURANCE, 
 
 MILES MENANDER DAWSON. 
 V 
 
 New York : 
 THE SPECTATOR COMPANY. 
 
 1896. 
 
<^ 
 
 Copyright, 1892, 
 
 BY 
 
 Miles M. Dawson. 
 
 GENERAL 
 
ELEMENTS bF LIFE INSURANCE. 
 
 INSURANCE IN GENERAL. 
 
 Insurance is the equalization of fortune. By its pro- 
 visions, a large number of men arrange to lose small 
 sums in order that none of them may lose a great 
 sum in a specified way. Thus it is the alhance of 
 prudent men against misfortune, the most important 
 because the most vital invention of civilization. In 
 so far as insurance is applied — and its field grows 
 wider day by day — it transfers the burden of ill for- 
 tune from the shoulders of the individual to society, 
 thus serving to protect the whole. Freed from the 
 dread of disaster, the individual finds broader oppor- 
 tunities, and dares accept them. 
 
 This beneficent alliance has been brought about, 
 not bj^ an appeal to sentiment, but by a direct appeal 
 to business men in a business way. The fundamental 
 idea is indemnity, the replacing, in whole or in part, 
 in kind or in equivalent, that which is lost. To give 
 more than the amount lost subverts the very princi- . 
 pies of insurance, in that it no longer merely protects 
 the individual from disaster, but places before him 
 the hope of gain. Insurance undertakes to warrant 
 to a man the continued possession of that which he 
 has; it is contrary to its purpose to cause him to wish 
 to lose what he has in order to possess himself of the 
 proceeds of the insurance. 
 
 Originally men insured only against those disasters 
 which were least understood and most dreaded, such 
 
 100794 
 
as loss of ships at sea, of life on a long journey or 
 Yoyage, of limb or time by railway accident. The 
 common, e very-day risks were beheld with indiffer- 
 ence, even if such misfortune were not met with equa- 
 nimity. A single exception was that of insurance 
 against fire, a not unusual occurence, but one pecul- 
 iarly feared. Particularly where conflagrations 
 might ensue ^were the disasters because of fire dreaded, 
 and in conseqvience ^was fire insurance in demand. 
 
 The fixing of premium rates for insurance was at 
 first largely a matter of guesswork; but the principle 
 was that of averages, and in due time the rules of 
 average applied. As statistics were compiled, classi- 
 fications of hazard took place, and rates were more 
 accurately calculated. 
 
 In almost all sorts of insurance the hazard on a 
 given subject may vary at different times and for 
 various reasons. The risk of fire upon a building 
 may vary because of new or changed exposures, 
 because of alterations or new occupancies in the 
 building itself. The risk of accident to an individual 
 may vary because of change of occupation. But in 
 neither of these does there occur a constant change of 
 hazard characteristic of the subject of insurance. 
 
 In that respect as in many others, two sorts of in- 
 surance form a class, the insurance of individuals 
 against death and against illness. The latter is as 
 yet in its infancy, and is besides foreign to the subject 
 in hand. But in common with life insurance, it cov- 
 ers a hazard which varies regularly, because of the 
 inherent character of physical man. In life insurance, 
 a gradual but increasing tendency to greater hazard 
 
appears as the person insured grows older, resulting, 
 finallj', in a certainty of death. 
 
 Really there can be no such thing as insurance 
 against death without any modification. A man 
 would be accounted a fool who would wager a thou- 
 sand dollars that another would never die. Insurance 
 against immediate death or against premature 
 death is another matter; and, in fact, that is all that 
 any company really furnishes, notwithstanding 
 appearances. For the rest, a ''self-assurance fund" 
 or reserve is accumulated to pay the loss if the insured 
 life survive until the time when death is accounted 
 certain. The usual life policy, therefore, provides, 
 first, for an insurance in the ev^ent of premature death, 
 and, second, for an estate certain accumulated from 
 the insured's own savings in event of death in the full- 
 ness of years. 
 
 Owing to these peculiar considerations, the study, 
 of the science of life insurance has been attended 
 b}^ greater difficulties than the study of other 
 branches of insurance. Fortunately the statistics of 
 hazards of lives are more complete than any 
 other statistics employed in insurance. Without 
 complete and tolerably accurate vital statistics, it 
 w^ould be a dangerous speculation to attempt to 
 estimate the hazards of lives. 
 
 Another consideration would add not a little to 
 this perplexity. In the nature of things it would not 
 do to permit a life insurance company to cancel at 
 will a contract entered into by it; nor is it commonly 
 deemed wise to leave the company free to renew the 
 same or not at pleasure. Since these rights, comn on 
 to all other forms of insurance, are b^^ the vt^ry 
 
nature of life insurance denied the insurers, it 
 behooves them to be very careful, indeed, as to what 
 contracts they give. 
 
 For the same reasons the insurers of lives are com- 
 pelled to be cautious in granting such insurance, and 
 to require evidence that the life to be insured is at 
 least up to the average in apparent chance to reach 
 old age. To this end an examination by a physician 
 is required, and a large and not yet fully digested 
 mass of statistics has been collated, bearing on the 
 importance of the various answers recorded concern- 
 ing the applicant's present physical condition, and 
 personal and family history. The tendency in this 
 country, owing largely to the mutual or participat- 
 ing system, has been to discriminate more and more 
 closely. In England the current has set the other 
 way, even to the point of accepting risks without ex- 
 pert examination at all. There is danger in both 
 extremes, for insurance should not be lightly denied 
 the average man, conscious of no ill health and equal 
 to his responsibilities; to refuse insurance to such is 
 to defeat its purpose. On the contrary, men fully 
 equal to the average in health and strength, will be 
 found unwilling to pay beyond the measure of their 
 own hazard; and a company requiring no examina- 
 tion is likely to find itself with impaired lives only 
 upon its books. 
 
 A thorough overhauling of the more or less crude 
 statistics now attainable would perhaps result in a 
 classification of risks which would admit a larger 
 number to the benefits of life insurance, while at the 
 same time giving to the better risks the full advan- 
 tage due them. Various plans have been already 
 
devised for this purpose and one plan of dividing 
 surplus, known as tontine, automatically discrimi- 
 nates in favor of those of superior vitality. 
 
 The principle of indemnity must not belost sight of 
 in life insurance. The beneficiary in a life policy 
 should have an interest in the life insured. Else the 
 contract is a speculation, a form of gambling and 
 utterly opposed to true insurance, which is meant to 
 defeat the spirit of taking chances, not to foster it. 
 
 For the same reason the amount of the insurance 
 should be within the financial value of the life to the 
 beneficiary. This question, because of the overesti- 
 mate placed upon a life by those who love the man as 
 husband and father, as well as because few men ex- 
 ceed or even approach their actual value in insurance, 
 has not received the attention given to it in other 
 lines of insurance. Yet it is of paramount importance, 
 because of public policy. One case is now in the 
 courts (and others have been), in which murder for 
 the amount of the insurance is charged. Standards 
 whereby to measure the value of a human life are not 
 lacking in life insurance offices; and eventually, 
 doubtless, more attention will be demanded by this 
 phase of the problem. Meanwhile, the natural course 
 of a life policy (and still more of a limited payment 
 life or endowment) is to reduce the amount of insur- 
 ance as the insured grows older, and to a minimum , 
 in old age. Thus a gradual and natural decrease 
 takes place, adjusting the insurance to the diminish- 
 ing value of the life. This is accomplished by the ac- 
 cumulation of the reserve for the estate-certain, which 
 reduces by its whole sum the actual insurance car- 
 ried. 
 
VITAL STATISTICS. 
 
 To know what statistics show to be the average 
 risk of fire on a certain class of property during the 
 previous year is enough for the fire underwriter. His 
 contract covers but one year ahead or, if a longer 
 period, he has at all times the right to cancel when- 
 ever in his judgment the risk has increased. If he 
 were by the nature of the contract and, in fact, of the 
 business required to warrant a price for the insurance 
 indefinitely and practically without the right to can- 
 cel before a loss or contest after one, it is probable 
 that he would require much more definite information 
 about the risk he was assuming. 
 
 In very few cases, indeed, would a man accept alife 
 insurance policy about the renewal of which the com- 
 pany should reserve a choice. Even an option of 
 fixing a new rate according to the hazard would 
 make a life policy undesirable. So firm is the public 
 demand for a closed contract that even to dispute a 
 claim for fraud, if death has actually taken place, is 
 an unpopular move. No one would even consider a 
 policy which reserved the right to cancel at will. 
 When the rate is not a level one for life, Hie public 
 requires a definite limit to be placed upon future pre- 
 miums. The only apparent exception is assess- 
 ment insurance, and even then the company has not 
 the right to arbitrarily fix the rate. Men usually en- 
 ter such societies for cheap, temporary insurance ; if 
 they expect permanent insurance, they have been led 
 to believe that the cost cannot exceed a certain figure. 
 
In any case, all regular companies are by the nature 
 of things required to guarantee their rates through- 
 out the term of the policj- — commonly for life. 
 
 If life insurance companies could at their option 
 refuse to renew their policies each year, even waiving 
 the right of cancellation during the year, the rates 
 for insurance could be greatly reduced. In that case 
 the stud^^ of vital statistics would be simplified into 
 the mere question of in what ratio men begin- 
 ning the year in perfect health die before its expira- 
 tion. The deeper and more intricate problem of the 
 average risks of average lives, the course of a gener- 
 ation of men succumbing to disease and thinning 
 out as the years proceed until the last old patriarch 
 is in his grave, would not call for solution. 
 
 But the life insurance company must provide in its 
 calculations not onty for the inevitable increase of 
 cost because of increasing age, but also for the 
 change from healthy conditions proven by exami- 
 nation to the average condition of mankind. While 
 the matter is not yet considered definitely settled, the 
 actuaries have brought forward figures to show that 
 the benefit of selection is lost in about five years; or, 
 in other words, that in five jears the men this year 
 admitted into the company after strict examinations 
 will not be better risks than the average of men at 
 their then ages. In any case it is certain that, aside 
 from discrimination because of ancestry, the benefit 
 of selection is very soon lost; and therefore is it that 
 no company dares base its calculations on the assump- 
 tion that it will have a better experience than the 
 ordinary. It would not do for a company to base its 
 rate for ten years hence for a policj^ taken at age 40 
 
10 
 
 upon its present experience on new policies taken out 
 at age 50. 
 
 In short, insurance companies must expect a death 
 rate approximating the average death rate of a 
 similar lot of people taken at random from the popu- 
 lation. If there be any gain after the bloom of fresh 
 selection is over, it v^ill be because of freedom from 
 hereditary taint or tendency to disease. But such 
 companies must not make their calculations upon 
 statistics materially more favorable than the general 
 mortuary experience of the country. 
 
 In order then to insure a single person for his whole 
 life, whether on level premium, limited payment or 
 natural premium plan, it is necessary for a company 
 to fix in advance the rate for each succeeding j^ear; 
 and, to accomplish that, the company must have 
 accurate information as to the hazard at each succeed- 
 ing age until the ultimate limit of life. To obtain 
 such information tables must be made from statistics 
 covering a very large number of lives. These tables 
 will show the actual percentage of hazard at each 
 succeeding age; or, if more convenient for the calcula- 
 tion, v^ill show the actual cost, had each life been 
 insured. A year's statistics of the mortality of this 
 nation would exhibit all ages and would enable one 
 to construct a table showing in what order the lives 
 of a generation now setting out would fail. The 
 gathering and classification of such statistics are no 
 light undertaking even now in this age of statistics. 
 In the infancy of life insurance, the undertaking was 
 indeed an heroic one. 
 
 August Meitzer in his excellent work on ''The 
 History, Theory and Technique of Statistics " gives a 
 
11 
 
 full though concise account of the genesis of mortality 
 tables. The baptismal and death records, begun to 
 be kept in London about the beginning of the seven- 
 teenth century, served as the basis for the first calcu- 
 lations made by John Graunt in 1662. Meitzer says: 
 * 'He calculates that of 100 persons born, 36 die in the 
 next 6 years, 24 in the next decade, 15 in that follow- 
 ing, and then 9, 0, 5, 4, 2 and 1." This would place 
 the ultimate limit of life at 86, considerably below 
 the age now used in any table. 
 
 More complete tables were constructed by Edmund 
 Halley, in 1693, from the statistics of the city of 
 Breslau. This work also comprised what the author 
 called *' an attempt to ascertain the price of annuities 
 on lives." He calculated approximately the average 
 expectation of life at each age; for the * 'expectation" 
 was originally the basis for premium computations. 
 Insurance of lives from the dangers of distant and 
 hazardous journeys and voyages was already well 
 known. Some men, more daring than others, had 
 also undertaken to insure lives for the term of life. 
 Premiums were crudely constructed from the premise: 
 ''He's good for ten jxars yet," orthe like. ^"Expecta- 
 tion" was regarded the matter of prirhe importance J 
 
 In 1742, after several life insurance companies haa 
 already begun operations, Johann Peter Siissmilch 
 gathered together in a comprehensive review all the 
 valuable vital statistics then available. At the 
 initiative of the philosopher Menander, Sweden the 
 preceding year had begun the registration of births, 
 marriages and deaths, thus becoming the pioneer in 
 national statistics of that sort. In 1765 the Equi- 
 table Life Insurance Institution was founded at Lon- 
 
don, the first to operate on the mutual or participa- 
 ting principle. During all this time, and in fact until 
 after the beginning of the present century, the com- 
 panies made their rates from the fragmentary data 
 furnished by Siissmilch. Wide differences therefore 
 occured in the rates of the companies, even where 
 intelligent management prevailed. Elsewhere the 
 fatuity which again presented itself a few years ago 
 in assessment concerns, and is even now prevalent in 
 endowment bond swindles, led scores of institutions 
 into bankruptcy. 
 
 To avoid such perils, it was found necessary to 
 obtain definite statistics showing what the average 
 death rate is at each age, so that, when one under- 
 took an insurance upon a life, it could be demon- 
 strated whether the present resources and future 
 premiums balanced the risk. For this purpose, about 
 1815, Milne tabulated the mortality of Carlisle city 
 from 1779 to 1787 and from it framed the ''Carhsle 
 Tables," which became very popular. The "Actuaries' 
 or Combined Experience Tables" w^ere at a later date 
 deduced from the experience of seventeen English 
 companies and in most quarters supplanted the Car- 
 lisle. "The American Experience Tables" are the 
 w^ork of Shephard Homans, then the actuary of the 
 Mutual Life Insurance Company of New York, and 
 were deduced from the experience of that company. 
 These two latter tables have been made authoritative 
 in this country. Nearly all the States employ the 
 actuaries' tables; the State of New York uses the 
 American. In England the "Carlisle Tables" still 
 divide the honors with the "Combined Experience." 
 
 There is no very great variance between the three. 
 
13 
 
 The widest difference arises from the placing of the 
 ultimate limit of life at age 95 in the American tables; 
 the other tables place the limit at age 100. This is 
 really arbitrary, however, and by no means signifies 
 that the limit of life in America is lower than in 
 England. The figures given at the older ages — from 
 75 on— are in all tables rather the result of logic than 
 calculation. Complete and full statistics at those 
 ages are wanting; and the best that the actuaries 
 have yet been able to do is to arrive at such figures 
 in the tables by an abstruse geometrical calculation, 
 w^orkingfrom what is known as the curve ofmortality, 
 the sweep and direction of which is easily demon- 
 strated by the facts known concerning mortality at 
 younger ages. The ultimate or extreme limit of life, 
 taken together with the sweep of this curve, deter- 
 mines the speed or slowness with which the remain- 
 ing lives fail. 
 
 The experiences of nearly all the American com- 
 panies were combined a few years ago to form -a new 
 set of tables, one for male lives and one for female. 
 Various statistics dealing with mortality by States 
 and even counties, and also v^ith the various causes 
 of death, w^ere carefully collated. Only a small part 
 of the information thus brought to light has as jet 
 been utilized; the classification of hazards is yet in its 
 infancy, despite the clearest demonstration of the 
 differences caused by sex, locality and heredity. The 
 analysis of the statistics of female risks showed that 
 a higher death-rate was to be expected from age 20 
 to age 40 than among male lives, and a much lower 
 death rate from age 40 to age 65. This indicated 
 that a special rate and a special reserve should be 
 
14 
 
 made for female lives. This has not been done. 
 Some companies charge women $3 or $5 per $1,000 
 more than men up to age 45; others charge both sexes 
 tl;ie same. But none charges less after age 40 and 
 none has attempted to construct scientifically ad- 
 justed rates for female lives, although Mr. Meech, 
 who compiled the statistics referred to, has made it 
 easy to make the adjustment. The same is true 
 concerning each and every other item in this valuable 
 compilation. In example, the more conservative 
 companies limit their operations to States in which 
 the mortality v^as found favorable; the others write 
 freely, making a distinction, if any, in dividends only. 
 Nothing approaching scientific discrimination in 
 rates has been tried, even in the matter of lives in the 
 Arkansas swamps, where an old person is rarely seen. 
 Doubtless many of the companies were deterred 
 from making any discrimination in rates by the fact 
 that all the States were rapidly coming to imitate 
 Massachusets in adopting the arbitrary standard of 
 the actuaries' tables for estimating reserve liabilities. 
 The honored actuary, Elizur Wright, who had urged 
 the adoption of this standard, considered it by no 
 means a final one, but, instead, only the most reliable 
 then at hand. It was in no sense his purpose to 
 make companies technically insolvent which were not 
 genuinely insolvent; and far less ^was it in is mind to 
 prevent companies from making a rate commensu- 
 rate with the actual hazard. He was on the outlook 
 for definite information relating to the mortality 
 experience of American companies, and he expected 
 American companies to conform their rates to Amer- 
 ican experience. In his report of 1864 to the Massa- 
 
15 
 
 chusetts legislature, Mr. Wright gives the compar- 
 ative experience of American companies as reported 
 to him, and in commenting upon the figures he says: 
 **It seems to us, after a careful consideration of the 
 experience of the companies which we have observed 
 for the last five years, as well as that of several of the 
 larger American companies prior to that time, that 
 premiums might be considerably reduced with safety 
 on policies not extending beyond the age of 70." 
 
 In his report of the following year, Mr. Wright 
 gave a further illustration of the favorable experience 
 of American companies and said: *'0f course this 
 favorable difference of experience cannot be perma- 
 nently held by companies whose business is chiefly 
 whole-life policies; for if the death rate is slower on the 
 earlier ages, it must be faster on the later, the limit 
 of human life being pretty certainly fixed." 
 
 Mr. Wright clearly had no intention of creating 
 hard and fast lines which should fix once for all the 
 rates to be charged for life insurance; and the State 
 supervision which refuses to take into the account 
 more recent statistics resembles what Elizur Wright 
 did about as Pharasaism resembled the religion of 
 Job. At the same time, Mr. Wright was at one with 
 the others in the idea that ^' the limit of human life is 
 pretty certainly fixed." In consequence of that, to 
 his view, later mortality almost balances present 
 saving; the fewer deaths now, the more hereafter and 
 before the limit fixed in our calculations. Such a view 
 seems natural, but is nevertheless fallacious; for the 
 same vitality which means longer lives in the aggre- 
 gate means a longer life to the oldest survivor as well. 
 The two are but different expressions of the same 
 
16 
 
 fundamental fact, the superior vital energy of the 
 race; and the existence of one necessarily implies the 
 other. The gain in mortality is therefore an absolute 
 gain, not to be neutralized by an augmented death 
 rate beyond 70. 
 
 This statement does not rest upon logic alone^ but 
 is supported b3^ facts. The mortality of the Presby- 
 terian Ministers' Fund, the oldest American company, 
 shows a heavy saving over the actuaries' tables, 
 which saving is quite as apparent at older as 
 at younger ages. This is not an exceptional case 
 in this regard, for the New England, the Mutual Benefit 
 and the Connecticut Mutual, all of which are old 
 companies and have done a whole-life business prin- 
 cipally, now make heavy gains from mortality each 
 year. 
 
 Reports of longevity beyond the limit set by the 
 tables have been frequent and in many cases abso- 
 lutely indisputable. It would almost be safe to say 
 that the facts justify puttingthe limit at 110, or pos- 
 sibly 120 instead of C5 or 100. 
 
 The fact that the tables compiled by Mr Meech 
 followed the old assumption as to the limit of life 
 probably had not a little to do with their want of 
 influence upon the practice of companies. The varia- 
 tion from the actuaries' and American experience 
 tables did not seem wide enough to render the use of the 
 old tables ridiculous; and so long as the old tables 
 continued the arbitrary standards of State depart- 
 ments, the companies could not well undertake any 
 serious departure in rates. One company did under- 
 take, not a discriminating adjustment, but a general 
 reduction of rates to accord with its actual experience. 
 
17 
 
 The arbitrary tests of the old tables soon made its 
 surplus seem pitiably small and even threatened to 
 wipe out that margin in time. So the attempt was 
 given over after a somewhat stubborn struggle, and 
 a return to the old standards w^as inaugurated 
 
 In consequence of these things, the actuaries' and 
 American tables, though known to be too unfavorable 
 and also to be opposed to proper classification of 
 hazards, yet remain the standards both for govern- 
 mental examinations of life insurance companies and 
 for the making of rates and dividend calculations and 
 adjustments within the companies themselves. 
 
 Since the actuaries' tables are standard in nearly 
 every State, they will be referred to hereafter in the 
 illustrations given in this work. The tables are here 
 given, together with the rate per cent of mortality 
 and the expectation of life at each age from 10 to 
 100. 
 
 ACTUARIES 
 
 ' TABLE 
 
 OF MORTALITY. 
 
 
 Number 
 
 Deaths 
 
 Per cent, of 
 
 Expecta- 
 
 AGE. 
 
 living. 
 
 each year. 
 
 deaths to 
 the living. 
 
 tion of 
 life. 
 
 10 
 
 100,000 
 
 676 
 
 .006760 
 
 48.36 
 
 11 
 
 99,324 
 
 674 
 
 .006786 
 
 47.68 
 
 12 
 
 98,650 
 
 672 
 
 .006812 
 
 47.01 
 
 13 
 
 97,978 
 
 671 
 
 .006848 
 
 46.33 
 
 14 
 
 97,307 
 
 671 
 
 .006896 
 
 45.64 
 
 15 
 
 96,636 
 
 671 
 
 .006944 
 
 44.96 
 
 16 
 
 95,965 
 
 672 
 
 .007003 
 
 44.27 
 
 17 
 
 95,293 
 
 673 
 
 .007062 
 
 43.58 
 
 18 
 
 94,620 
 
 675 
 
 .007134 
 
 42.88 
 
 19 
 
 93,945 
 
 677 
 
 .007206 
 
 42.19 
 
18 
 
 Actuaries' Table of Mortality.— Continued. 
 
 
 Nnmber 
 
 Deaths 
 
 Per cent, of 
 
 Expecta- 
 
 AGE. 
 
 living. 
 
 each year. 
 
 deaths to 
 the living. 
 
 tion of 
 life. 
 
 20 
 
 93,268 
 
 680 
 
 .007291 
 
 41.49 
 
 21 
 
 92,588 
 
 683 
 
 .007377 
 
 40.79 
 
 22 
 
 91,905 
 
 686 
 
 .007464 
 
 40.09 
 
 23 
 
 91,219 
 
 690 
 
 .007564 
 
 39.39 
 
 24 
 
 90,529 
 
 694 
 
 .007666 
 
 38.68 
 
 25 
 
 89,835 
 
 698 
 
 .007770 
 
 37.98 
 
 26 
 
 89,137 
 
 703 
 
 .007887 
 
 37.27 
 
 27 
 
 88,434 
 
 708 
 
 .008006 
 
 36.56 
 
 28 
 
 87,726 
 
 714 
 
 .008139 
 
 35.86 
 
 29 
 
 87,012 
 
 720 
 
 .008275 
 
 35.15 ,/ 
 
 30 
 
 86,292 
 
 727 
 
 .008425 
 
 34.43 ^ 
 
 31 
 
 85,565 
 
 734 
 
 .008578 
 
 33.72 
 
 32 
 
 84,831 
 
 742 
 
 .008747 
 
 33.01 
 
 33 
 
 84,089 
 
 750 
 
 .008919 
 
 32.30 
 
 34 
 
 83,339 
 
 758 
 
 .009095 
 
 31.58 
 
 35 
 
 82,581 
 
 767 
 
 .009288 
 
 30.87 
 
 36 
 
 81,814 
 
 776 
 
 .009485 
 
 30.15 
 
 37 
 
 81,038 
 
 785 
 
 .009687 
 
 29.44 
 
 38 
 
 80,253 
 
 795 
 
 .009906 
 
 28.72 
 
 39 
 
 79,458 
 
 805 
 
 .010131 
 
 28.00 
 
 40 
 
 78,653 
 
 815 
 
 .010362 
 
 27.28 
 
 41 
 
 77,838 
 
 826 
 
 .010612 
 
 26.56 
 
 42 
 
 77,012 
 
 839 
 
 .010894 
 
 25.84 
 
 43 
 
 76,173 
 
 857 
 
 .011251 
 
 25.12 
 
 44 
 
 75,316 
 
 881 
 
 .011697 
 
 24.40 
 
 45 
 
 74,435 
 
 909 
 
 .012212 
 
 23.69 
 
 46 
 
 73,526 
 
 944 
 
 .012839 
 
 22.97 
 
 47 
 
 72,582 
 
 981 
 
 .013517 
 
 22.27 
 
 48 
 
 71,601 
 
 1,021 
 
 .014260 
 
 21.56 
 
 49 
 
 70,580 
 
 1,063 
 
 .015061 
 
 20.87 
 
 50 
 
 69,517 
 
 1,108 
 
 .015939 
 
 20.18 
 
 51 
 
 68,409 
 
 1,156 
 
 -016898 
 
 19.50 
 
 H 
 
 h 
 
19 
 
 Actuaries' Table of Mortality. — Continued. 
 
 
 Number 
 
 Deaths 
 
 Per cent, of 
 
 Expecta- 
 
 AGE. 
 
 Hving. 
 
 each year. 
 
 deaths to 
 the living. 
 
 tion of 
 life. 
 
 52 
 
 67,253 
 
 1,207 
 
 .017947 
 
 i 18.82 
 
 53 
 
 66,046 
 
 1,261 
 
 .019093 
 
 18.16 
 
 54 
 
 64,785 
 
 1,316 
 
 .020313 
 
 17.50 
 
 55 
 
 63,469 
 
 1,375 
 
 .021664 
 
 16.86 
 
 56 
 
 62,094 
 
 1,436 
 
 .023126 
 
 16.22 
 
 57 
 
 60,658 
 
 1,497 
 
 .024679 
 
 15.59 
 
 58 
 
 59,161 
 
 1,561 
 
 .026386 
 
 14.97 
 
 59 
 
 57,600 
 
 1,627 
 
 .028247 
 
 14.37 
 
 60 
 
 55,973 
 
 1,698 
 
 .030336 
 
 13.77 
 
 61 
 
 54,275 
 
 1,770 
 
 .032612 
 
 13.18 
 
 62 
 
 52,505 
 
 1,844 
 
 .035120 
 
 12.61 
 
 63 
 
 50,661 
 
 1,917 
 
 .037840 
 
 12.05 
 
 64 
 
 48,744 
 
 1,990 
 
 .040826 
 
 11.51 
 
 65 
 
 46,754 
 
 2,061 
 
 .044082 
 
 10.97 
 
 66 
 
 44,693 
 
 2,128 
 
 .047614 
 
 10.46 
 
 67 
 
 42,565 
 
 2,191 
 
 .051474 
 
 9.96 
 
 68 
 
 40,374 
 
 2,246 
 
 .055630 
 
 9.47 
 
 69 
 
 38,128 
 
 2,291 
 
 .060087 
 
 9.00 ^ 
 
 70 
 
 35,837 
 
 2,327 
 
 .064933 
 
 8.54 "^ 
 
 71 
 
 33,510 
 
 2,351 
 
 .070158 
 
 8.10 
 
 72 
 
 31,159 
 
 2,362 
 
 .075805 
 
 7.67 
 
 73 
 
 28,797 
 
 2,358 
 
 .081884 
 
 7,26 
 
 74 
 
 26,439 
 
 2,339 
 
 .088468 
 
 6.86 
 
 75 
 
 24,100 
 
 2,303 
 
 .095560 
 
 6.48 
 
 76 
 
 21,797 
 
 2,249 
 
 .103179 
 
 6.11 
 
 77 
 
 19,548 
 
 2,179 
 
 .111469 
 
 5.76 
 
 78 
 
 17,369 
 
 2,092 
 
 .120444 
 
 5.42 
 
 79 
 
 15,277 
 
 1.987 
 
 .130065 
 
 5.09 
 
 80 
 
 13,290 
 
 1,866 
 
 .140406 
 
 4.78 
 
 81 
 
 11,424 
 
 1,730 
 
 .151436 
 
 4.48 
 
 82 
 
 9,694 
 
 1,582 
 
 .163194 
 
 4.18 
 
 83 I 
 
 8,112 
 
 1,427 
 
 .175912 
 
 3.90 
 
 6 5. 
 
 1'/^ 
 
20 
 
 Actuaries' Table of Mortality.— Concluded. 
 
 
 Number 
 
 Deaths 
 
 Per cent, of 
 
 Expecta- 
 
 AGE. 
 
 living. 
 
 each year. 
 
 deaths to 
 the living. 
 
 tion of 
 life. 
 
 84 
 
 6,685 
 
 1,268 
 
 .189678 
 
 3.63 
 
 85 
 
 5,417 
 
 1,111 
 
 .205095 
 
 3.36 
 
 86 
 
 4,306 
 
 958 
 
 .222480 
 
 3.10 
 
 87 
 
 3,348 
 
 811 
 
 .242234 
 
 2.84 
 
 88 
 
 2,537 
 
 673 
 
 .265274 
 
 2.59 
 
 89 
 
 1,864 
 
 545 
 
 .292382 
 
 2.35 
 
 90 
 
 1,319 
 
 427 
 
 .323730 
 
 2.11 
 
 91 
 
 892 
 
 322 
 
 .360987 
 
 1.89 
 
 92 
 
 570 
 
 231 
 
 .405263 
 
 1.67 
 
 93 
 
 339 
 
 155 
 
 .457227 
 
 1.47 
 
 94 
 
 184 
 
 99 
 
 .516304 
 
 1.28 
 
 95 
 
 89 
 
 52 
 
 .584270 
 
 1.12 
 
 96 
 
 37 
 
 24 
 
 648640 
 
 .99 
 
 97 
 
 13 
 
 9 
 
 .692308 
 
 .89 
 
 98 
 
 4 
 
 3 
 
 .750000 
 
 .75 
 
 99 
 
 1 
 
 1 
 
 1.000000 
 
 .50 
 
21 
 
 RATEMAKING— TERM AND NATURAL 
 PREMIUM. 
 
 The simplest method of apportioning the contribu- 
 tions for life insurance is the annual renewable term 
 or natural premium plan. This plan provides for 
 rates increasing as the insured's age increases, each 
 year taking care of itself. 
 
 To ascertain the net rate at any age for $1,000 in- 
 surance, assume that you have insured the numbe? 
 living at that age according to the tables. Then by 
 reference to the tables at that age you will find the 
 number dying; that number multiplied by $1,000, 
 slip.ws the total expected loss for the year. All actu- 
 aries assume that these losses are to be paid at the 
 close of the yesiv ; hence to ascertain what should be 
 collected at the beginning of the year to cover them 
 the amount should be discounted at 4 per cent simple 
 discount. As that sum is what the whole number 
 living at the age named should pay, it is only neces- 
 sary to divide it by the number living to find what 
 each should pay. The quotient is the net natural 
 premium of that age. 
 
 At the close of that one year the insured renews if 
 at all at the premium for one year's assurance at the 
 next higher age. And so on, indefinitely, the cost 
 finalh^ becoming prohibitory. 
 
 Doubtless, if mortality tables of a complete and ac- 
 curate character had preceded the assuring lives in 
 point of time, the natural premium tables would have 
 been early discovered. But mortality tables only 
 
22 
 
 came into existence in answer to a call by actuaries 
 for safer and fuller data from which to work on 
 plans covering the whole period of life in insurance 
 and annuities. These plans were already in existence 
 and high in popular favor. Scientific exploitation of 
 statistics is supposed to set forth the simpler deriva- 
 tions first; but the practical business world often 
 adopts the complex before science has examined the 
 data at all. 
 
 Natural premium insurance, therefore, while by far 
 the simplest form, came latest into the arena, rather 
 tardily endeavoring to satisfy the public's demand 
 for pure insurance at a low price. The popular de- 
 sire had voiced itself in a swarm of hastily organ- 
 ized and improperly managed associations and or- 
 ders before actuaries and managers could be made 
 to see that it was possible to sell life insurance from 
 year to year at its current value. Even now the 
 lesson is but half learned, and the term natural pre- 
 mium is used to cover a multitude of frauds and 
 thefts, simply because it is yet a mystery t^ many. 
 
 A very large proportion of the worlc^s insurance 
 will alw^ays be of the character known* as *' tempo- . 
 rary," that is, will be intended only to cover for a 
 limited , even if indefinite, period of time. Regular com- ' 
 ■'panics have been more or less averse Jo undertaking 
 to supply this want, because among actuaries it was 
 a grave question whether there was not so great an 
 opening for adverse selections, or the departure of 
 healthy lives, that no company could hold up under 
 it. Therefore, except when united with a heavy in- 
 vestment, thus affording something to be forfeited 
 in event of discontinuance, the regular companies 
 
23 
 
 were for a long time unwilling to make a practice of 
 issuing renewable term policies. 
 
 Only during the last decade has this form of insur- 
 ance been popularized, largely through the deter- 
 mined efforts of SheppardHomans, the renowned Nes- 
 tor of American actuaries. For the purpose of push- 
 ing this cheap and useful form of insurance before the 
 public, Mr. Homans caused the organization of a 
 new company and devoted the later and maturer 
 years of his life to advancing the cause of natural 
 premium insurance. 
 
 In the construction of rates Mr. Homans made an 
 addition of one- third to the net rates to form a 
 special reserve or guarantee fund. To the whole rate 
 thus made up he added just $4 per $1,000 insurance 
 for expenses. The addition of the percentage for a 
 guarantee fund seems to have been for the purpose of 
 preventing adverse selection during the earlier years. 
 It was Mr. Homans' original idea to distribute this 
 fund to reduce the premiums after ten years. This 
 plan has since been almost abandoned however; and 
 so much as is necessary to keep the rate level at the 
 age of entry is used each year for that purpose, the 
 remainder being carried forward with interest. The 
 original intention, therefore, was to have the cost 
 advance gradually as the actual hazard increased; 
 but now the rate is kept level as long as possible and 
 then the rate recoils to a high figure when the artifi- 
 cial reduction ceases for want of funds. This is prac- 
 tically a surrender of the principles of natural premium 
 insurance, and an imitation of level premium. 
 
 The rates for terms longer than one year are made 
 in the same manner as rates for one year's insurance. 
 
24 
 
 For instance, if a person were set to construct a pre- 
 mium to be paid in advance in one sum for term in-" 
 surance for two years, lie would discount the sum of 
 the losses for the first year at 4 per cent simple dis- 
 count for one year, and the sum of the losses for the 
 second year at 4 percent compound discount for two 
 3^ears. These sums he would add together and divide 
 the total by the number living at the beginning 
 of the year. The quotient would be the single 
 premium for term insurance for two years at the^e 
 specified. ^ 
 
 If a single premium for three years insurance were- 
 required, it would only be necessary to add to the 
 sum of the discounted losses of the first and second 
 years the present value of the losses of the third year, 
 calculated at 4 per cent compound discount for three" 
 years. Then divide by the number living at the orig- 
 inal age as before. A similar process will reduce the 
 net single premiums at every age and for any term of 
 years. 
 
 The single premium of a one-year term policy is 
 the annual premium for a natural premium policy for 
 the current year. 
 
 ^ But where a level annual premium is required the 
 'Case is somewhat different. In that cape the first and 
 subsequent annual premiums must be equivalent to 
 the net single premium for the same term. To ascer- 
 tain what^annual premium will be equivalent to the 
 single premium, it is first necessary to find out what 
 is the present or discounted value of one dollar in 
 hand and one dollar promised to be paid annually 
 during the term if the insured is living. In other 
 words, the promise of the insured to pay a dollar 
 
25 
 
 each year must be dealt with as an annuity upon his 
 life, but in the company's favor. 
 
 To ascertain the present value of one dollar a year 
 from now, the payment conditioned upon the in- 
 sured now at a certain age then being alive,, it is first 
 necessary to discount the dollar at 4 per cent simple 
 discount, and then to multiply the same by the frac- "^ 
 tion formed by dividing the number living at the end 
 of the year by the number living at the beginning. 
 That fraction represents the probability of one's be- 
 ing yet alive to pay at the close of the year ; and the 
 result of multiplying the present value of one dollar 
 by it is to find the present value of the dollar subject 
 to the contingency of death during the year. This 
 sum added to the one dollar to be • paid in advance 
 the first year gives the total present value of a prom- 
 ise to pay a dollar annually in advance for two A^ears 
 if living. 
 
 If the present value of an annual premium of one 
 dollar for two years be ascertained, then to ascertain 
 the number of dollars in an annual premium equal in 
 value to the single premium for term insurance for 
 two years, divide the single premium by the present 
 value of the annuity of one dollar. The quotient will ^ 
 be the annual premium corresponding to the single 
 premium. 
 
 If the annual premium for a three-year term were 
 required, it would only be necessary to add to the 
 present value of an annuity of one dollar for two 
 years the present value of a third dollar to be paid at 
 the beginning of the third year, conditioned upon 
 surviving the first and second 3^ears. To find that 
 value multiply the present value of one dollar at 4 per 
 
26 
 
 cent compound discount for two years by the frac- 
 tion formed by dividing the number living at the be- 
 ginning of the third year by the number living at the 
 beginning of the first year, according to the tables, 
 This fraction represents the probability of surviving 
 until the beginning of the third year and the result of 
 the multiplication expresses the present value of one 
 dollar payable two years hence if living. Adding 
 this value to the pr-esent value of a two-year annuity 
 of one dollar already ascertained, the present value 
 of a three-year annuity of one dollar is found. By 
 dividing the net single premium for three years' term 
 insurance by the present value of an annuity of one 
 dollar for three years, the number of dollars neces- 
 sary to be paid annually to equal the single premium 
 or, in other words, the corresponding annual pre- 
 mium, is arrived at. 
 
 A continuation and elaboration of this process will 
 yield the net annual premium at any age for term in- 
 surance for any number of years. 
 
 The loading or margin for expenses and contingen- 
 cies on the annual renewable term or natural pre- 
 mium rates is commonly $4.00 per $1,000 insurance 
 in addition to the thirty-three and a third percent of 
 the net premium added thereto to form a special re- 
 serve fund. 
 
 The loading on single-premium term policies, and 
 on annual-premium term policies as well, is com- 
 monly thirty-three and a third per cent of the net 
 premium. 
 
27 
 
 RATEMAKING— WHOLE LIFE. 
 
 Death is not a mere chance, but, on the contrary, 
 the most certain of human events. In the nature of 
 things, it would be folly to bet against its occurrence 
 without hedging; and therein consists the fatuity of 
 assessmentism. Any insurance intended to cover the 
 whole period of life must be calculated on the basis 
 of paying a certain claim. 
 
 If a pool were formed and it were gravely proposed 
 to put in money enough to leave each member's widow 
 one thousand dollars at his death, the deposit re- 
 quired from each one would be easily estimated, and 
 would be the same regardless of the then ages. It 
 requires one thousand dollars to create an estate of 
 one thousand dollars; if none were to pay more than 
 that, none could pay less. 
 
 The onh^ modification arises from the fact that, 
 while death is certain, the time of its occurrence is 
 very uncertain. Even that would make no difference 
 in the proposed deposits if it were not for the fact of 
 interest. The possibility of earning interest upon 
 such deposits, until they are gradually paid out in 
 death-claims, puts a new face on the aifair. 
 
 Then the element of time assumes importance and 
 It is necessary to endeavor to discover at what 
 time at the earliest the various payments would be 
 required because of death. For this purpose were " 
 carefully constructed and conservative mortality 
 tables found requisite. For mere term insurance much 
 
28 
 
 more crude and careless estimates would have an- 
 swered. But where certain loss stares one in the face, 
 not to be escaped and for which one must without 
 fail prepare, it is essential to know when it is to be 
 expected. Forewarned is forearmed. 
 
 Suppose, therefore, that, armed with mortality ta- 
 bles, a man was set to calculate: \ (1) When the 
 amounts of the insurance on the lives of 1,319 persons 
 now aged 90 would have to be paid; (2) what gross 
 amount he would need to have in hand now to meet 
 such payments as they fall due, assuming that he 
 could earn 4 per cent, on sums in his hands^ (3) what 
 sum each of the 1,319 would have to pay in as a 
 single premium to make up the necessary fund; (4) 
 what is the present value of one dollar in hand plus a 
 promivSe of a man now 90 to pay one dollar each year 
 until his death; (5) what annual premium in advance 
 is equivalent to the single premium at age 90. 
 
 Referring to the actuaries' tables it is found that 
 the 1,319 living at age 90 die in the following order: 
 The first year 427 The sixth year 52 
 '' second'* 322 ''seventh'* 24 
 
 " third " 231 " eighth " 9 
 
 " fourth " 155 '' ninth " 3 
 
 " fifth " 95 " tenth " 1 
 
 Therefore if each be insured for $1,000, payable at 
 the close of the year in which he died, the insurance 
 would have to be paid— $427,000 in one year, etc., 
 ending with $1,000 in ten years. 
 
 If a man owe $1,000, due in one year, and money 
 will earn 4 per cent., he holds the equivalent of his 
 debt when he possesses $1,000, discounted at 4 per 
 cent., or about $961.54. Therefore, if he owes $427,- 
 
29 
 
 000 due in one year, he should possess 427x$961.54^ 
 in order to be solvent at the present moment. The 
 equivalent of $1,000 due in two years, reckoning in- 
 terest at 4 per cent., is about $924.56; therefore the 
 amount required to be in hand to pay $322,000 of 
 losses the second year is 322 x $924.56. In the same 
 way all the death claims can be discounted and cal- 
 culated at their present values. The sum of such 
 present values is $1,192,897.65 and constitutes the 
 gross present fund which will enable him to meet all 
 mortuary claims as the same fall due. 
 
 If it is the intent that these 1,319 old men shall de- 
 posit each the same amount, the whole to be suffi- 
 cient to pay the family of each $1,000 at his death, it 
 will be necessary for each to deposit l-1319th part of 
 $1,192,897.65, or about $904.40. This amount, 
 therefore, is the net single premium at age 90. 
 
 If these 1,319 men are to pay each his quota in 
 equal annual payments so long as he lives, it is evi- 
 dent that the number paying will each year be de- 
 creased by the number dying during the previous 
 year. For instance, if each were to pay $1.00 at the 
 beginning of each year during life, $1,319.00 would 
 be received the first year. But before the second pay- 
 ment would fall due, 427 would be dead, and only 
 l,319less 427,or892,would remain to meetpayments. 
 The amount collected, therefore, would be but $892, 
 which being discounted at 4 per cent, is equivalent to 
 $857.69 in hand. The equivalents of the amounts 
 which the payments each succeeding year will yield 
 is determined in the same manner; and when 
 these are added to the $1,319 in hand the 
 immediate value oi the promises of 1,319 
 
30 
 
 men aged 90 to pay $1.00 each annually in ad- 
 vance is obtained. The value of such promises is 
 about $3,278.24; and expressed in fractions the aver- 
 age value of each man's promise or in other words of 
 a life annuity at age 90 is $2.485398. 
 
 If the present v^orth of the 1,319 men's promises to 
 pay $1.00 annually in advance throughout their lives 
 is $3,278.24 and the immediate fund necessary to 
 pay the estate of each $1,000 at his death is $1,192,- 
 897.65, it is evident that the annual premium 
 charged these men must be as many times $1.00 as 
 $3,278.24 is contained in $1,192,897.65, or about 
 $363.89 net. The same conclusion will be arrived at 
 if the net single premium for insurance be divided by 
 the net present value of an annuity of $1.00. That, 
 indeed, is the usual course when making this illustra- 
 tion. 
 
 For actuarial and accounting purposes all these 
 operations are simplified (in a mathematical sense- 
 only) and short methods are employed to reach re- 
 sults required. The mass of figures is codified into 
 commutation tables, and they are then expressed in 
 logarithms in large part, which makes it possible for 
 divisions and multiplications to be performed by sub- 
 traction or addition. It is these arrangements for 
 mathematical convenience which give to, the science 
 of insurance an appearance of mystery. The actual 
 operations are simple enough, but cumbersome. 
 
 All net single and annual premiums for whole life 
 insurance are arrived at in the same manner as the 
 foregoing. To such net premiums a loading of from 
 25 to 40 per cent is commonly added to cover all 
 contingencies and expenses. 
 
31 
 
 RATEMAKING— LIMITED-PAYMENT AND EN- 
 DOWMENT. 
 
 Endowment is the antithesis of life insurance; that 
 is to say, an endowment is conditional upon a man's 
 living, while life insurance is pa^^able only at death. 
 A simple or pure endowment, therefore, is synony- 
 mous with the original idea of tontine, each being in- 
 tended to benefit survivors only. 
 
 This idea was early adopted as a corrective of the 
 apparent tendency of life insurance to be too expen- 
 sive to those who live long, and it was expected to 
 induce many to insure, by the hope of gain, who, 
 confiding in perfect health and constitutions, might 
 otherwise have refused to act. By combining the 
 advantages of insurance in event of death and of cer- 
 tain endowment in event of survival, it was hoped 
 that the best lives might be attracted. Recent inves- 
 tigations set forth in Dr. Emory McClintock's essay 
 ''On the Effects of Selection," seem to indicate that 
 this hope has not proved groundless. 
 
 Although in practice the endowment is very rarely 
 seen except connected with life insurance, yet in fact 
 the two things are very different and essentially dis- 
 tinct. So far as any real gain is concerned, the two 
 operations might as well be in separate institutions. 
 In the calculation of rates, therefore, it is necessary 
 to take up the two elements separately, one being the 
 cost of the endowment and the other the cost of the 
 insurance — one the providing for a certain payment 
 
32 
 
 to those who do not die, the other providing a cer- 
 tain payment for thope who do die. 
 
 The company which agrees to pay each of 100,000 
 men now aged 10 $1,000, if he survives to age 30, 
 must have a total of $86,292,000.00 on hand 20 
 years later, according to the actuaries* table, for there 
 will be 86,292 people A^et living to demand the fulfill- 
 ment of that contract. The lower the death rate has( 
 been the more will Ha^c to demand the payment; the 
 higher the rate has been, the less will be required to 
 meet all demands. Assuming the experience of the 
 table, to find the amount required to be on hand now 
 to meet such obligations it would only be necessary 
 to discount this gross amount at a rate of compound 
 discount, such as may be assumed to be certain to be 
 secured. Assuming 4 per cent as such a rate, it is 
 found that the present value of $1,000 due in 20 
 years is $456,387, It follows that the present value 
 of $86,292,000 will be $456.387X$36,292, or $39,- 
 382,547.00. 
 
 Now if the original 100,000 boys were required to 
 put into the pool sufficient to pay each survivor 
 $1,000 at age 30, each would have to pay in 1-100,- 
 000 that amount or, approximately, $393.82, which 
 is the net single premium at age 10 for a pure endow- 
 ment due in 20 years. The net annual premium may 
 be arrived at by dividing this single premium by the 
 present value of a 20 year annuity of $1.00 at age 10. 
 
 Endowment life insurance provides not only for the 
 payment of endowments tJ the survivors, but of life 
 insurance to those that die. The net single premium 
 for the latter can be founa by the calculations for 
 term insurance rates for the endowment period. 
 
33 
 
 This net single premium for $1,000 at age 10 for a 
 term of 20 years according to the actuaries' table at 
 4 per cent is $92.75. This premium covers the con- 
 tingency of dying before the completion of theendowr- 
 ment period; the simple endowment premium covers 
 the contingenc3^ of surviving. The two combined 
 cover all contingencies and provide for the payment 
 of a certain claim, due at the end of 20 3'ears or at 
 prior death. The net single premium therefore at 
 age 10 for a 20 year endowment life insurance of 
 $1,000 is $393.82+$92.75 or $486.57 in all. To find 
 the net annual premium, this sum should be divided 
 by the present value of an annuity of $1.00 for 20 
 years from age 10. 
 
 In the case of semi-endowment policies, the amount 
 of the endowment is not the same as the amount of 
 insurance, being but one-half as much. Other pro- 
 portions are occasionally used under a similar name, 
 but inaccurately. In such case, the single premium 
 for the amount of the endowment and the single 
 premium for the amount of insurance should be added 
 together as before, and the annuity similarly applied 
 -as a divisor. 
 
 In the case of limited-payment life policies', the 
 intent is to provide insurance for those who 
 die before the completion of the premium-pay- 
 ing period and also a fund sufhcient to furnish 
 paid-up insurance to all who survive the same 
 period. This is equivalent to a partial endow- 
 ment life insurance, the endowment being for an 
 amount equal to the net single premium at the age 
 attained upon completion of period; for such single 
 premium is the net amount necessary to sustain a, 
 
34 
 
 paid-up insurance at that age. Therefore, to calcu- 
 late the net single premium for a limited-payment life 
 policy, find the net single premium for term insurance 
 for the amount of the policy to cover the premium- 
 paying period; then find the net single premium for a 
 simple endowment equal to net single premium for 
 insurance at age attained at the close of the period. 
 The sum of these two is the net single premium for a 
 limited-payment life policy. To find the net annual 
 premium proceed as before to divide the single pre- 
 mium by the present value of a temporary annuity of 
 $1.00 for the premium-paying period. 
 
 The annual premium may be ascertained directly 
 from the single premium for a whole life insurance by 
 the same process; for it will be found that the single 
 premium obtained by the foregoing process and the 
 single premium obtained by process described in the 
 previous paper are identical. 
 
 As has been said before, the higher the death rate 
 has been, the fewer remain to draw an endowment; 
 consequently a pure endowment contract is the more 
 profitable to a company, the higher the death rate 
 has been. On the contrary, the other component part 
 of an endowment life insurance premium, the term in- 
 surance element, 3''ields the more profit the lower the 
 death rate has been, since fewer persons have by dy- 
 ing caused outlay for death claims. In endowment 
 life insurance, the claim against the company is a 
 certain one, the only question being as to time of 
 payment, during the endowment period in case of 
 death. Hence the gain because of one death fewer in 
 any year is not the amount which would have been 
 paid, but only the interest on the same to the ma- 
 
35 
 
 turity of the endowment period. The gains of supe- 
 rior mortality on endowment policies are therefore 
 small, and less on short term endowments than on 
 others. 
 
 While, as has been said, the endowment and life in- 
 surance transactions are essentially distinct, and in 
 fact complementarj^ to each other, and while they 
 could as well be carried on in different companies, it 
 must not be understood, as some misguided men have 
 thought and said, that it is equivalent to an endow- 
 ment life insurance to carry term insurance and invest 
 in usual channels. The endowment portion of a life 
 insurance premium is not that sum which paid an- 
 nually in advance and improved at a certain rate of 
 interest compounded will equal the promised sum at 
 the close of the period. It is that smaller amount 
 which will be sufficient on the average to pay the 
 promised sum only to all who survive. 
 
 In instance, the annual payment in advance which 
 produces $1,000 when compounded at 4 per cent in- 
 terest is about $32.29. The net annual premium for 
 a 20 year endowment life insurance at age 20 is 
 $36.97, according to the actuaries' table at 4 percent 
 interest. By the same table the net 20 year term rate 
 at age 20 is $8.24. Deducting this from the endow- 
 ment life insurance premium, we have not $32.29, but 
 $28.73 as the net premium for a simple endowment. 
 
 A loading for contingencies and expenses is added 
 to the net premiums, such loading commonly vary- 
 ing from a minimum of 20 per cent on the net pre- 
 miums to a maximum of 40 per cent. The question 
 of "loading," its purpose and misuse, will be consid- 
 ered hereafter under a separate heading. 
 
 OF 
 
36 
 
 RATEMAKING— SPECIAL AND UNUSUAL 
 CONTRACTS. 
 
 One of the most common of the dep artures from what 
 is considered regular in life insurance, is to make the 
 premiums payable otherwise than annually. Pre- 
 miums payable semi-annually, quarterly, bi-monthly 
 and even monthly are too common to excite remark, 
 and in industrial insurance weekly premiums are the 
 rule rather than the exception. 
 
 The treatment of these departures is for the most 
 part unscientific and purely arbitrary. Almost all 
 offices, for the convenience of their book-keepers, 
 choose to consider all policies (unless paid for a longer 
 period) annual premium policies, and all deferred 
 premiums practically as credits granted. This is car- 
 ried to the point of deducting all such deferred 
 premiums from the face of the policy upon the death 
 of the insured. Such is even now the practice of al- 
 most all companies. There appears to be no good 
 reason why proper rates should not be established 
 for such methods of payment which would not place 
 the policyholder in the unenviable attitude of debtor. 
 
 The extra charge usually exacted for th^ privilege 
 ofsmaller and more frequent payments is ample to 
 cover the added risk— that of paying a few dollars 
 more in proportion to cash received. In order to pay 
 quarterly or semi-annually in the least arbitrary 
 companies, one is called upon to pay 3 per cent more 
 than the annual rate; in many companies the in- 
 creased cost is nearer 5 per cent. This charge 
 
37 
 
 amounts to a very high interest upon the deferred 
 amount and no advantage accrues other than that 
 of time of payment. Of course these are small mat- 
 ters, only worthy the time spent upon them because 
 the day is at hand when insurers \y^ll demand a why 
 and wherefore for all such requirements. 
 
 In the matter of monthly payments, however, the 
 overcharge approaches extortion, the less excusable 
 because it is visited upon those ^vho are less able to 
 bear it, the ^N^age workers. The method of adjusting 
 such premiums is commonly to divide the annual rate 
 by ten, thus exacting during the year 20 per cent 
 more than the annual premium. As these premiums 
 are usually paid like others, into the office, the pleacf 
 great additional expense hardly bears examination. 
 
 In the case of ^^eekly premiums there is more justi- 
 fication for a considerable increase of cost, because 
 such premiums are usually collected from house to 
 house, and in very small sums. Yet, even in such 
 cases, the percentage paid for collecting rarely exceeds 
 15 per cent and as the loading on whole life policies 
 is nearly always more than 30 per cent of the gross 
 premium, it ^would seem that a very moderate in- 
 crease might answer after aU. 
 
 One of the most common variations is the introduc- 
 tion of the return premium feature into policies. The 
 effect of this feature upon the unsophisticated is that 
 of bewilderment; yet the method by which this is ac- 
 complished is by no means difficult of explanation. 
 In all problems jQt presented, v^^e have had to deal 
 only with the payment of a definite equal sum upon 
 the death of each insured. Suppose instead that the 
 agreement was to insure the lives of 1,319 people now 
 
38 
 
 aged 90 years as follows: To pay $100 each to the 
 heirs of all who died the first year, $200 for all who 
 died the secondyear, etc., at arithmetical progression, 
 and ending in $1,000 to the heirs of the onemanwho 
 died at age 100. By calculating the gross amounts 
 which would be paid out each year for death losses 
 in this manner, then reducing such amounts by com- 
 pound discount to their present values and adding 
 the same together, we arrive at the total amount 
 it would be necessary to have on hand if one 
 undertook these insurances without expecting any 
 further premiums. That gross amount divided 
 by the number insured, (1,319) will yield the net 
 single premium required from each to effect 
 such an insurance. By dividing this single pre- 
 mium by the present value of an annuity of $1 in 
 advance, the net annual premium for such an insur- 
 ance is found. 
 
 Suppose, now, that it be required to find the extra 
 premium to be charged for a contract to return a 
 premium of $100 at death. It is evident that the 
 transaction is separate and distinct from the original 
 insurance and is in fact identical with the contract 
 already described. That the extra premium is to be 
 returned as well as the original premium only appears 
 to complicate the matter, for it is easy to approxi- 
 mate by ordinary arithmetical means the actual 
 premium required. Algebraic means while really 
 more simple and direct, are not within the scope of 
 the present book. 
 
 Another form of insurance, now becoming more 
 common and popular, is that by which the principal 
 amount is payable in deferred installments after 
 
39 
 
 death, and in some cases after maturity, as an endow- 
 ment. This sort of poHcy is Yariously known as an 
 installment contract, an annuity contract, a trust 
 certificate, and a ^* special " contract. The rates are 
 apparently somewhat lower than those of other pol- 
 icies but, as in so many other things, appearances are 
 here deceitful. The only mystery about these contracts 
 is the actual insurance carried, which is not the princi- 
 pal amount named in the policy but merely the pres- 
 ent value of the installments. By proceeding with 
 that fractional amount as the principal sum, in the 
 beaten path of previous calculations, it w^ill not be 
 found difficult to make rates for these policies. 
 
 Another late candidate for popular favor is the 
 ** Guaranteed Interest Bond," by w^hich, after pay- 
 ments cease, the insured may leave the principal sum 
 as a paid-up policy and draw a certain interest an- 
 nually thereon. In some cases, ivhere the interest 
 does not exceed 4 per cent, there is no extra charge 
 for this feature, the interest being just what it seems. 
 The New York companies in general, however, and 
 many others have not thought it best to assume 
 so high a rate of interest in their calculations. That 
 fact makes the determination of proper rates a fresh 
 and somew^hat unique problem, for it is reallj^to raise 
 a phantasm of what is not. For the usual style of 
 contract, w^here the income and paid-up insurance 
 continue for the life of the assured, the rate may be 
 arrived at either (1) by combining the rate for a lim- 
 ited payment life policy with the rate for a deferred 
 annuity equal to the desired income, or (2) by com- 
 bining the rate for an endowment with the rate for a 
 deferred annuity equal to the difference between the 
 
40 
 
 actual interest they are ready to guarantee and the 
 income promised. Where, after a certain further num- 
 ber of years, the company agrees to pay the principal 
 over, a combination of the rates for limited-payment 
 endowment and for an annuity equal to desired in- 
 come should be used instead of first combination just 
 given. In all cases where the company is not in fact 
 willing to pay as an interest the promised income, 
 the reserve value at the beginning of income-paying 
 period is larger than the principal sum of the policy. 
 The latest departure is the continuous instalment 
 policy, providing, first, for a definite instalment for a 
 term of years and, second, for a continuation of the 
 instalment throughout the beneficiary's life if he or 
 she survives the term. This covers the usual specious 
 objection to a survivorship annuitj^, that the bene- 
 ficiary might die after receiving but one payment and 
 so a considerable sum be lost; and it also covers the 
 more substantial objection to an ordinary instal- 
 ment policy, that it may not provide an income for 
 the life of the beneficiary. A rate for this policy is 
 made either by increasing the rate for an ordinary 
 instalment policy by a premium covering the value 
 of the contingent annuity beyond the term of the in- 
 stalment; or, more simply, by adding to the rate for 
 a survivorship annuity the difference between the 
 premiums for a term annuity-certain and a term 
 annuity contingent upon life. 
 
41 
 
 RATEMAKING-THE LOADING. 
 
 What has been said in preceding papers on the 
 general subject of ratemaking has concerned only net 
 rates or the premiums which will be sufficient, assum- 
 ing a certain rate of interest and a death rate accord- 
 ing to the tables, to cover all demands. Possible 
 errors in these premises are not taken into account. 
 The possibilities of losses on investments, of reduced 
 interest earnings, of augmented death losses, are not 
 provided for; and no provision is made in the net 
 rate for any expense whatsoever. 
 
 It is not so many years since a life insurance pre- 
 mium was first divided into its component parts; and 
 a much shorter time has it been since insurance men 
 became unanimous about the necessity for loading. 
 Among the first of the many altercations into which 
 Elizur Wright's love of justice led him, was one with 
 a then reputable English company which was ready 
 to prove itself solvent on the basis that it would 
 hereafter have no expenses but death losses, no ex- 
 cessive mortality, no interest earnings lower than the 
 rate assumed, and no losses on investments. In other 
 words, in the judgment of their actuary, no loading 
 was required. That view was supported by no less 
 an authority than F. G. P. Neison, then the leading 
 actuary of England with a string of academic titles 
 following his name, and in this country it was en- 
 dorsed by the then professor of mathematics at Yale. 
 Of course both were disposed to scoff at this untitled 
 
42 
 
 interloper, who won the day, nevertheless, and be- 
 came heir to the name, '' Father of Life Insurance." 
 The position which he declared untenable was that 
 future premiums will not be required to cover future 
 exigencies, and that it is safe to spend more than the 
 loading now and recoup from future savings. Any 
 such charge or mortgage against future premiums 
 was in Mr. Wright's view a reduction of the premium 
 from the start and an impairment of the company's 
 resources which deserved attention. The outstand- 
 ing brokerage renewal contracts of many companies 
 — that is, contracts to pay renewals as part compen- 
 sation for services already rendered in obtaining 
 insurances — would doubtless be regarded by the old 
 actuary, were he living, as legitimate matters to be 
 considered in calculating their reserve liabilities and 
 assets. 
 
 All of which goes to shov^ that the views of insur- 
 ance managers as to the proper offices of the loading 
 on premiums are yet hazy and by no means unani- 
 mous. 
 
 For the most part loading is added to net premiums 
 by a method of gross percentage without regard to 
 the purposes for which the same is collected. Much 
 of the calculation must of necessity be crude; but it 
 seems clear that some of the items ought easily to be 
 treated in a more scientific manner. 
 
 The only effort in this direction of which we are 
 aware is that of Sheppard Homans, who divides the 
 loading on natural premium pohcies into two parts, 
 one being for expense purposes and one for all the 
 other various purposes for which loading is collected, 
 but mainly for possible excessive mortality. Mr. 
 
43 
 
 Homans was the chief defender of Mr. Wright in the 
 contest before mentioned; and he carried the division 
 of premiums into their component parts to its legiti- 
 mate conclusion when he introduced the plan of 
 apportioning dividends known as the "contribution 
 plan." In his new method of fixing the loading on 
 premiums, he calculates the part for expense pur- 
 poses at a level amount per $1,000 of insurance and 
 the part for other purposes at a certain percentage of 
 the net premium. 
 
 As in all branches of insurance, commissions use 
 to be paid on the basis of a percentage of the pre- 
 mium, the partition of the loading does not seem very 
 happy in that regard. Mr. Homans has indeed found 
 it possible to work that plan only at a commission of 
 so much per $1,000; but even to do that he has been 
 compelled to wipe out the distinction for the first 
 year of insurance between one part of the loading 
 and another. On all other forms of insurance, this 
 method has proved altogether impracticable and the 
 partition of the loading has accordingly been aban- 
 doned except as to natural premium policies. 
 
 The method by which loading for other purposes is 
 calculated is more to be commended. It must be 
 remembered that the interest factor is absent from 
 natural premium calculations; no provision therefore 
 is required for decreasing interest or losses on invest- 
 ments. No other way to figure a margin on estima- 
 ted death-loss requirements seems so sensible as to 
 add a reasonable percentage. In addition to the 
 reasonable appearance of this feature, the fact that 
 every dollar of this part of the loading must be used 
 for its own purpose and no other, or returned to the 
 
44 
 
 insured, would form a curb on the disposition of 
 some insurance officials to boo»t expenses. Such 
 would seem salutary and beneficial to policyholders. 
 
 It may fairly be assumed that the expense element 
 should be a percentage of the gross premium; that 
 the element to cover excessive mortality may v^ell be 
 a percentage of the net premium on whole life policies 
 since all the net premium is eventually expended for 
 mortality; and that the interests of policyholders 
 demand that these two items be kept separate and 
 distinct. 
 
 Provision for decrease in interest can only be prop- 
 erly made by assuming a rate certainly low enough 
 at the outset of net premium calculations. Losses on 
 investments must in the nature of things be met from 
 surplus already accumulated and not from future 
 premiums. Therefore it seems clear that that item 
 can safely be eliminated from the calculation. In any 
 case no method of approximating a proper loading 
 for contingencies of that kind has been suggested. 
 
 Such loading, if necessary at all, would be required 
 to a greater degree on endowment than on other 
 policies; and might make good the difference between 
 the loading required to cover possible excessive mor- 
 tality on such policies and on life policies. For it 
 must be borne in mind that the mortality element in 
 an endowment policy is only the net term premium 
 for the amount and for the term of the policies, if 
 indeed it can fairly be considered so much. 
 
 On the other hand, of course, the factor for expense 
 must be much larger owing to the usages in the mat- 
 ter of commissions, whatever may be the effect upon 
 the desirability of endowments as investments. 
 
45 
 
 In practice at present, companies load life and 
 limited-payment life rates from 33i/^ per cent to 40 
 per cent, making 25 per cent to 33% per cent of the 
 gross premiums; and endowment rates from 20 per 
 cent to 25 per cent, making from 16% per cent to 20 
 per cent of the gross premiums, unless for very long 
 terms, when the loadingisthe sam^ as on life policies. 
 This loading is considered in all life insurance calcu- 
 lations as a single component of the premium and all 
 of it may be used for expense purposes at the option 
 of the management. 
 
46 
 
 PREMIUMS— THEIR COMPONENT PARTvS. 
 
 The premium on a term policy, a life policy, a lim- 
 ited-payment life policy, or in fact any policy involv- 
 ing no 'other payment than at death, consists ot 
 two parts, the loading for expenses and contingen- 
 cies, and the net premium solely for mortality 
 purposes. Not only is all the net premium required 
 for mortali+y purposes ; but it would be insufficient, 
 were it not supplemented by interest on the sums re- 
 maining unexpended from year to year. That it 
 commonly requires somewhat less money is owing, 
 not primarily to the size of the net premium, but to 
 the fact that death has in many cases been deferred 
 aifew months or years longer, and to the further fact 
 that abetter interest has been earned than it would 
 be safe to count on. 
 
 If no interest were earned upon the funds carried 
 over from year to year, the net premiums would be 
 insufficient to cover the death losses even upon a 
 much more favorable experience than has yet been 
 known, or in fact on any possible experience involv- 
 ing the final death of all. 
 
 Especial emphasis upon this point is proper, as cer- 
 tain misleading analyses of premiums have been put 
 forth by many assessment companies and even by 
 some regular companies seeking to do a natural 
 premium business. These analyses have the air of 
 scientific precision and are the more dangerous be- 
 
47 
 
 cause they are half-truths and deceive many who 
 have a smattering of sound learning. 
 
 By these the net premium is divided into two parts, 
 known as the mortuary and the reserve element. 
 The first of these is described as the part really re- 
 quired for insurance, and the second is variously ex- 
 plained as a ''self-insurance, "in vestment portion, etc. 
 The inference meant to be drawn from this analysis 
 is that no necessity exists for any charge above, the 
 mortality element with a small addition as a pre- 
 cautionary safeguard. 
 
 The half-truth is that the net premium is necessa- 
 rily composed of money to be expended today and 
 money to meet tomorrow's engagements. The 
 amount of money to be expended this year is, how- 
 ever, not the same as the amount to be expended 
 next year; and, as the whole net premium remains 
 the same, it follows that the amount available for 
 future engagements will vary in inverse ratio. In 
 scientific phraseology a net premium is a fixed sum 
 composed of two complementary variables. The 
 line separating the two elements of the premium 
 moves every year and never resumes its former posi- 
 tion. 
 
 But the distinction between the two is merely a 
 matter of convenience; both parts are for the same 
 purpose, namely: to pay death losses. Reference to 
 the papers upon rate-making will show that in the 
 calculation of the net premium no provision is made 
 for any other purpose; the calculation was merely to 
 find the amount of premium necessary to pay losses. 
 The only distinction between the so-called elements 
 of the premium is that of present and future re- 
 
48 
 
 quirements; and the part which is called the mortu- 
 ary element in such analyses is the portion which a 
 mortality exactly corresponding to the table would 
 require to be at once expended, while the part called 
 the reserve element is an advance against future 
 claims sure to come. 
 
 The folly of such analyses is more fully seen when 
 the single premium is examined. In that case the 
 mortuary element is very small, compared with the 
 reserve; because the reserve element comprises all 
 future mortuary demands, discounted. In the same 
 way the reserve element in limited-payment life pre- 
 miums is an installment toward caring for mortuary 
 d«.mands after the close of the premium-paying period . 
 In the same way again the reserve element in a whole 
 life premium is, with its interest, to cover the defi- 
 ciencj' of future premiums in meeting future mortuary 
 demands. 
 
 A precisely similar office is performed by the part 
 left unexpended from a natural or annual renewable 
 term premium ; it is expected of it that it will pay 
 the losses until the next premium is paid in. In the 
 case of a term policy for more than one year, the 
 office of the money left unexpended is soon made 
 clear, since the whole premium would not be suffi- 
 cient to meet the mortuary demands in the later 
 years of the term if not aided by the accumulation 
 made. During those years the reserve element of the 
 premium is less than nothing. By the close of the 
 term all the reserve is expended in payment of death 
 claims. 
 
 The same is true also of all life policies, the term 
 being the whole life of the holder. The long term of 
 
49 
 
 the policy confuses many because the accnmtilation in- 
 creases for so many years before the current mortuary 
 demands exceed the net premium. Even then the de- 
 ficit is made good from the interest, of which some- 
 thing remains to swell the accumulation. In fact, 
 the growth of the fund only ceases at the death of 
 the insured; and if he reaches what is assumed to be 
 the ultimate limit of life, the reserve amounts to the 
 face of his policy. 
 
 This is why the reserve in whole-life premiums is 
 called by some the self-insurance fund, as indeed it is, 
 in the sense that after contributing to meet other 
 mortuary demands it also makes sure of meeting its 
 own. Who would be content to carry a policy which 
 would be sure to provide for all death claims but his 
 own ? But the reserve element is not self-insurance 
 in the sense that is commonly intended, that it serves 
 no purpose except to accumulate against the day of 
 certain death. Its interest earnings are part and 
 parcel of itself, impossible if it were not; and for 
 nianj^ of the later years, even in a whole-life policy, 
 such interest is called upon to make good the defi- 
 ciencies of the regular premium in meeting current 
 mortuary demands. 
 
 A whole-life premium, like an endowment premium, 
 must cover not merely risk but certainty as well; must 
 meet the demands of claims that may come and the 
 demand of a claim that v^ill come. It therefore con- 
 sists of two essential elements not touched upon in 
 the puerile analyses referred to, which are in fact only 
 book-keeping conveniences; these two elements are 
 term insurance to the assumed lirnit of life and a pure 
 endowment due at that time. The term element cov- 
 
50 
 
 ers the danger of dying, the endowment element the 
 possibility of living. Pure endowment provides for 
 a sum to be paid if the insured lives to age 100 : term 
 insurance for a sum to be paid if he dies before that 
 time. To see how small a part of the whole the en- 
 dowment element is, it is only necessary to make these 
 calculations separately, as, for instance, by the 
 actuaries' table and 4 per cent interest at age 50. 
 
 Term or others' insurance element $37 77 
 
 Endowment or self insurance element 01 
 
 The total $37 78 
 
 In other words, 1 cent a year from all men now 
 living at age 50 will supply $1,000 for each of them 
 who survives to age 100. Of course, like all other 
 components, the endowment element is much larger 
 if the insurance is taken late in life. At ages under 
 50 it is less than 1 cent per $1,000 insurance. The 
 deposit for reserve, varying from year to year, com- 
 prises both the deposit for reserve on the term element 
 and the whole of the pure endowment element. For 
 the practical purposes of accounting, it is not neces- 
 sary to make such a distinction; and tables of the cur- 
 rent cost of insurance, the so-called mortuary portion 
 of the premium, answer all purposes. The cost of in- 
 surance on all plans is found each year by calculating 
 by the mortality of the tables the cost, not of the in- 
 surance named in the policy, but of that insurance less 
 any reserve accumulations. To avoid constant cal- 
 culations these items are made up into tables, and the 
 various amounts, which taken together with these 
 equal the level net premium, are denominated 
 deposits for reserve. 
 
51 
 
 As has been more than hinted in the foregoing, an 
 endowment premium consists primarily of t\70 essen- 
 tial elements, a term insurance and a pure endow- 
 ment element. From year to year there will be re- 
 served not merely the whole endowment element, 
 which is merely intended to pay off the insured at 
 the close of the endowment period, but during the 
 earlier years the deposit for reserve on the term in- 
 surance as well. In the later years, when the cost of 
 insurance, the so-called mortuary element, is larger 
 than the term element, the reserve on the term insur- 
 ance is gradually v/iped out. 
 
 The cost of insurance as a mortuary element be- 
 comes peculiarly ridiculous in term insurance when 
 it comes to exceed the net term premium, of which 
 it is supposed to be a part. 
 
52 
 
 RE-INSURANCE RESERVES. 
 
 The reserve of a life insurance company is that sum 
 of money which it would have to pay another com- 
 pany to assume its insurances. In former times how 
 much this reserve should be was left to the judgment 
 of the managers of the various companies; it was 
 expected that the intelligence of the public and the 
 natural caution of the shareholders would be ample 
 protection against too small reserves. 
 
 This was found to be erroneous. The ordinary 
 rules of business, which are meant to govern cases 
 where the entire assets are the property of the mana- 
 gers, will not apply where the larger part of the funds 
 is in the nature of a trust, the beneficial ownership 
 being in others. In an ordinary business, capital is 
 active, and it is evident enough that to withdraw it 
 will cripple the business and thus react to the propri- 
 etor's disadvantage. In insurance corporations cap- 
 ital simply accumulates so long as the company is 
 pushing its business; the purpose for which it is 
 accumulating is not always clear; and to a share- 
 holder it would seem a plain matter that all above 
 what is absolutely required for safet3' should swell his 
 dividends. Naturally too he would view the amount 
 required through a reversed telescope, especially as it 
 will not be needed for many years. Such dangers are 
 not imaginary, as may be seen by looking over the 
 history of life insurance. 
 
53 
 
 In England, governmental interference has been but 
 partial and largely advisory. Great latitude is 
 allowed in the matter of mortality tables to be em- 
 ployed, and a little freedom is granted in the matter 
 of interest rate assumed. Too wide departure from 
 the common standards, however, would not be per- 
 mitted. A company might easily make itself ridicu- 
 lous by too favorable assumptions — a fact which it 
 could not conceal since a valuation b^^ a competent 
 actuary must be made at frequent intervals and the 
 bases of the calculations given in his reports. The 
 latitude given is broad enough, however, to admit of 
 considerable variations in premiums charged; though 
 it is,of course, considered amark of superior strength 
 to be able to qualify under the most severe stand- 
 ards. 
 
 If companies undertook to be reckless concerning 
 reserves in England, it may well be said that they felt 
 sure of freedom in that regard in America. Thanks 
 are mainly due one man, the late Elizur Wright, of 
 Massachusetts, for those governmental precautions 
 v^hich have held in check the marked tendencies 
 toward recklessness on the part of American compan- 
 ies. When he began his work, under a statute calling 
 for an early compliance with tht reserve requirements 
 of the actuaries' tables and four per cent interest, a 
 then popular company in Hartford reported that its 
 re-insurance reserve was a certain sum because 
 another company was willing to take over its busi- 
 ness for that sum. Another company, this time an 
 importation from Great Britain, figured out a surplus 
 exceeding its entire assets by assuming that old busi- 
 ness could be cared for without expense. This plea 
 
54 
 
 had the support of F. G. P. Nelson, then regarded the 
 highest actuarial authority in England, and he was 
 seconded by the professor of mathematics in Yale. 
 To both of these gentlemen the mathematical result 
 was conclusive, regardless of business common sense. 
 
 Fortunately for the security of the insuring public, 
 such tactics were not successful against the sturdy 
 sense of Elizur Wright, who not merely knew what 
 he knew, but— rarest of all accomplishments— knew 
 how to make others know it. The reasonable test of 
 solvency proposed by him was generally adopted 
 and enforced. 
 
 The position of Dr. Wright was, that it should not 
 be assumed that any company would insure the risks 
 of another at a less premium than the latter com- 
 pany exacts, nor at less premium than the net 
 premium (actuaries' four per cent) even if the latter 
 company did business that way. To assume that 
 one company would take over the business of another 
 at less than the premiums charged would be to 
 assume that the premiums charged were exorbitant. 
 To assume that any company could afford to take 
 over the risks at less than net premiums (actuaries' 
 four per cent) would involve the absurdity of believ- 
 ing that an average company had an experience 
 better than the average; for to be safe the re-insur- 
 ance reserve must be not what would re-insure the 
 business in a particular company, but what would 
 probably re-insure it in any well-regulated company. 
 A company may be justified in assuming that it can 
 do better than the average in carrying on its own 
 business; it cannot be justified in assuming that it 
 can at will find others able and willing to do so in its 
 
55 
 
 stead. It may sell insurance at whatsoever premiums 
 it will, but it must show itself to be at all times 
 able to pay others for re-insurance at the lowest 
 average rates they could afford to accept. For 
 instance, the usual rate at age 30 for a one year term 
 policy is $15.00 a year for $1,000 insurance; the net 
 premium (actuaries' four per cent) is $7.78. Now, 
 if a company charged the former premium, it should 
 be estopped by that fact from claiming that it could 
 re-insure a risk with six months to run at the latter 
 rate, for it would thus convict itself of extortion. On 
 the contrary, if a company reported its premium as 
 $5.00 a year, it should not be permitted to use that 
 figure in calculating its reserves, since it is clear that 
 no company would be likely to accept the re-insur- 
 ance at a less premium than is required by average 
 experience. 
 
 Since, then, a company is not permitted to use its 
 own large premiums as an argument for a lower re- 
 serve-thereby confessing their exorbitance— it follows 
 that in practice it is as well to use net premiums to 
 calculate reserves. The problem is a simple one in 
 the case of one-year term policies; a part of the 
 year's premium proportionate to the unexpired term 
 is charged. Equally simple is the problem in the 
 case of a paid-up life policy; it would be necessary to 
 pay over the net single premium at the age of the in- 
 sured at date of re-insurance. 
 
 In the case of whole-life policies with annual pre- 
 miums, a new feature is introduced, which at first 
 sightxomplicates matters. The new company would, 
 of course, charge a man now 50 the rate at age 50, 
 while, if he has been insured for 20 years, the old 
 
56 
 
 company is receiving only the rate at age 30. The 
 contract with the insured will not admit of a larger 
 demand upon him than the specified premium. It 
 follows therefore that in order to effect this re-insur- 
 ance the old company must each year during the life 
 of the insured, pay the difference between the rates at 
 age 30 and at age 50. It may avoid that by paying 
 the discounted value of such differences or, in other 
 words, the present value or net single premium of 
 an annuity on the insured's life equal to the difference 
 in premiums. Therefore such is also the present 
 value of the company's liability on the policy and 
 the proper reserve. Where the actual premium is 
 lower than the net premium assumed, the difference is 
 treated as an additional liability and the present 
 value of an annuity of like amount is added as a spe- 
 cial reserye. 
 
 The method of ascertaining the reserve on limited- 
 payment life and endowment policies is substantially 
 the same. If it is proposed to re-insure a twenty- 
 payment life policy, issued at age 30, and which has 
 run five years, it is evident that the new company 
 must in some way get the equivalent of the premiums 
 on a fifteen-payment life issued at age 35. From the 
 insured it can collect but the premiums specified in 
 the policy; it follows, therefore, that it must demand 
 from the old company the equivalent of an annuity 
 of the difference between the two premiums. This 
 annuity differs from the annuity mentioned in whole- 
 life reserve calculations, in that the former is a term 
 annuity payable for fifteen years if the insured* sur- 
 vive, while the latter is a life annuity payable as 
 long as the insured survives. 
 
57 
 
 The calculation of endowment reserves proceeds 
 upon precisely similar lines; indeed, a limited-pay- 
 ment life policy is in effect an endowment for an 
 amount equal to a net single premium for life insur- 
 ance at the age attained at close of premium -tDaying 
 period. 
 
 The usual practice regarding policies on which pre- 
 miums less than annual are payable is to calculate 
 reserve liability as if paid by annual premiums and 
 then count deferred premiums as part of the re- 
 sources. This is because such deferred premiums are 
 regarded as temporary credits to be deducted in any 
 settlement of the policy. 
 
5S 
 
 SURPLUS-WHENCE DERIVED. 
 
 In the conduct of a life insurance business a gain 
 may be made in all or either of three directions. The 
 two simpler sources of profit are the realization of 
 higher interest than was counted on and the saving 
 of a portion of the loading charged to cover expenses 
 and exigencies. In the management of the business 
 of nearly all companies a profit is certain to arise 
 from a higher interest experience than was assumed 
 in making rates. If there were not a profit from this 
 source, it would be evident that the assumed interest 
 w^as too high, and the rates based thereon danger- 
 ously low. The object of rate computations and of 
 laws fixing the interest factor to be used in reserve 
 calculations is to avoid thepossibility of dangerously 
 low rates; and to accomplish that purpose a lower 
 interest than the current rate is alw^ays used. In 
 consequence, as has been said, a profit is practically 
 certain to arise from this source, since no company 
 now-a-days dares to disregard the plain requirements 
 of a conservative business. Such has not always 
 been the case, however. When Elizur Wright began 
 his crusade against reckless methods in life insurance, 
 a then popular Connecticut company reported that 
 its reserves were on a 6 per cent basis. It was not 
 solvent even on that basis; but, had it been possible 
 for it to continue until the present, it would now be 
 
59 
 
 an exception to the rule mentioned, for it certainly 
 would not realize any profit from excess interest. 
 
 Gains from the margin or loading, proving more 
 than suflScient to cover the expenses and contingen- 
 cies for which it is 'collected, should be reasonably 
 constant and stable. Conservatism requires also 
 that the addition to the net premium be ample pi o- 
 vision for the expenses and possible losses other than 
 death-claims. Every argument in favor of caution 
 in other respects is equally applicable in favor of 
 sufficient loading, though the legislatures have not 
 yet mediatel3^ or immediately compelled such action. 
 The facts indicate that some such interference would 
 not be improper, since the percentage of premium re- 
 ceipts used for expenses and other purposes for which 
 the loading is collected varied in 1891 from 17.2 to 
 41.9 in the companies of the United States. The 
 companies experiencing the largest expense outlay 
 w^ere not the companies doing the largest new busi- 
 ness. The average percentage in all companies for 
 ten years past is 22.7, which seems to indicate that 
 no very large gain is to be expected from the loading, 
 which usually varies from 20 to 33^2 per cent of the 
 whole premium, averaging perhaps a little over. 25 
 per cent. Companies which habitually expend more 
 than the whole loading are practically nullifying the 
 conservative limitations of the State and defjangthe 
 laws of probability. For any excess of expenditure 
 over the loading must be made good from the gains 
 from other sources, and to proceed to such expendi- 
 ture is to assume that the net premium is more 
 than equal to its offices and will yield a profit at 
 least sufficient to offset the excess of expenditure. In 
 
60 
 
 any case, a company having such an expense ratio 
 not merely gains nothing on its loading but is com- 
 pelled to recoup its loss in that regard from the gains 
 from other sources. 
 
 In the case of limited-payment and more especially 
 single-payment policies, it certainly should not be 
 considered that there is a gain upon the loading just 
 because the immediate expenses and contingent 
 losses do not equal the loading. For in such cases 
 the loading is not merely a provision for this year's 
 expenses and other contingencies, but for the same 
 in future years, as well, v^hen no premiums are to be 
 paid. To assert that no such provision is necessary 
 or desirable is to deny the very premises of the argu- 
 ment for loading. 
 
 Of the other source of profit, the saving on death- 
 loss estimates, less explanation is usually thought 
 necessarj^ than of either of the foregoing. Notwith- 
 standing this, the subject requires much closer inves- 
 tigation and is much moie complex than either of the 
 others; for into it enters that fact, so often lost sight 
 of, that death is not a chance but a certainty and 
 that the only chance is in regard to the time of 
 death. In respect to all policies covering the entire 
 period of life, therefore, it is not the case that the 
 company whose actual loss experience is but one 
 million dollars against an expected loss of a million 
 and a half has gained from that source one-half mill- 
 ion dollars, for every one of the claims which did not 
 fall due this year is certain to fall due some time. In 
 the premiums there is not made any provision for 
 paying these claims at another time, but instead 
 only a provision for meeting the demands of other 
 
61 
 
 policies^ It follows, therefore, that the real gain will 
 be the interest actually earned on this half million 
 before it is needed, plus the premiums and interest on 
 the same which those who did not die as expected 
 pay in before they do die. Of course the original rate- 
 calculations were not made with an expectation 
 that these men pay premiums after they die)Ahere- 
 fore any premiums that they pay after their expected 
 deaths constitute an element of gain. It is perhaps 
 clear from all this that the subject of gains on mor- 
 tality is in a degree involved and difficult. 
 
 To arrive at the proper method of computing such 
 gains it is necessary to consider what would be re- 
 quired to reinsure these persistent survivors. Since 
 they have not died, it is evident that the only ob- 
 jection to counting the face of their policies as profit 
 is the fact that they must still be insured at the old 
 premium. Whatever then wrill reinsure them, the 
 new company to receive only the old premiums 
 thereafter, is clearly the measure of what is to be de- 
 ducted from the apparent gain to get at the real 
 gain. For if they are reinsured, there is no longer 
 any offset of the gain. Of course the company can 
 itself well afford to take the risk but only on 
 the same terms, that is, for a consideration of the 
 present reserves and all future premiums. 
 
 In recapitulation, upon all policies running for the 
 whole period of life a less mortality than is expected 
 results in a gain of the amount not expended plus all 
 future premiums, less the cost of carrying on the in- 
 surance, which is the present net reserves plus all 
 future premiums. Eliminating the element of future 
 premiums common to both, the statement becomes 
 
62 
 
 simply: the gain is the whole amount not expended 
 less the present net reserves on the equivalent insur- 
 ance. 
 
 The same is clearly the case in endowment insur- 
 ance also. For if Jones does not die this year as was 
 expected, the company will certainly pay out the 
 amount saved thereby either before the expiration of 
 the term as a death-loss or at its expiration as an 
 endowment. To get rid of this necessity the com- 
 pany must reinsure the policy, which will require the 
 entire reserve and all future premiums. Therefore 
 the real saving is the apparent gain less such re- 
 serve. 
 
 In term insurance for longer than one year, the 
 same applies; for if the insured does not die as ex- 
 pected, it is necessary to provide him with insurance 
 as per contract, which will require the present reserve 
 and all future premiums. 
 
 In annual term or natural premium insurance, it is 
 otherwise, as each year's insurance is a separate 
 transaction. Even when renewable by their terms, 
 such policies are supposed to be reinsurable at the 
 close of their policy -years without other considera- 
 tion than the transfer of future premiums. That this 
 could be done in practice is doubtful; but the rate 
 is each year supposed to be sufficient to cover the 
 risk and the objections to such reinsurance are ob- 
 jections to the plan, not to the price. The apparent 
 gain therefore on such policies is the actual gain. 
 
 Thus in general it is true that the apparent gain at 
 the expiration of the terms of all sorts of policies is 
 the actual gain; and that apparent gains previous to 
 that time must be diminished by the cost of the in- 
 
63 
 
 surance which is to be carried on account of the per- 
 sons who refuse to die at the proper time. 
 
 What has been said does not furnish a formula for 
 ascertaining the surplus earnings of a company. It 
 will be found of greater importance in apportioning 
 the profits. The simplest method of determining the 
 actual surplus of the year is by the balance sheet, 
 which on one side shows the assets brought forward 
 from the previous year plus, the receipts of the year, 
 and* on the other the actual expenditures plus the re- 
 insurance reserve at the end of the year and the sur- 
 plus brought forward from the previous year. The 
 difference between these totals will be the profit on 
 the year's business. 
 
64 
 
 SURPLUS— HOW APPORTIONED. 
 
 In purely stock companies the problem of appor- 
 tioning surplus offers no special difficulties, since all 
 profits belong to the proprietary stock. But it is 
 peculiar to life insurance that it seems to demand a 
 mutual system by requiring heavy margins in all 
 directions in order to insure safety. Since one must 
 either insure for life or a long term or run the risk of 
 being without insurance and uninsurable, it follows 
 that the permanence and security of the institution is 
 of the greatest moment. That can only be assured 
 by paying premiums adequate beyond a question; for 
 such and so rapid is the accumulation of assets that 
 a capital however large becomes insignificant by 
 comparison. Adequate premiums mean more for the 
 strength and soliditj of the company than would 
 capital stock, which might soon fall into designing 
 hands were the premiums inadequate. 
 
 The desire of men for the best bargain naturally 
 tends to reduce rates to the lowest possible basis, 
 without reference to the effect upon the security of 
 the company; for men cannot be expected to act 
 counter to what appears to be self interest. There- 
 fore, the logic of the situation requires the introduc- 
 tion of a system which will make men willing to pay 
 adequate premiums and thus divert competition to 
 some other direction. By adopting the mutual 
 system this is accomplished, as both all possible 
 
65 
 
 guarantees of safety are thus obtained and insurance 
 is furnished at the lowest possible cost notwith- 
 standing. This system transfers competition from 
 price to cost, which is an important change, inas- 
 much as it means care and caution on the part of the 
 companj^ furnishing insurance at the lowest cost, in- 
 stead of daring or desperation on the part of the 
 company bidding lowest for insurance in the market. 
 
 In consequence of these things, the mutual system 
 has become well nigh universal, and some method for 
 properly apportioning the profits among the mem- 
 bers is required. At different times and with different 
 companies, various methods have been in vogue; and 
 even in this country and at this day at least one 
 large company employs a formula which is a mystery 
 to all actuaries and which produces very singular 
 and seemingly contradictory results. The original 
 method was to divide the surplus into bonuses in 
 proportion to the premiums paid; in some cases in 
 proportion to the current premiums, in others in pro- 
 portion to the sum-totals. This was a sort of rough 
 justice, reminding one of the administration of law 
 on the frontier. 
 
 The inequities of the prevailing systems became ap- 
 parent as the business developed; and in the office of 
 the Mutual Life Insurance Company, of New York, a 
 new system was first adopted which has since be- 
 come almost universal in this country. It is known 
 as the contribution plan and was discovered by 
 Sheppard Homans and David Parks Fackler, then 
 actuaries of the Mutual. The central thought of the 
 plan was, as the name implies, to distribute the 
 profits pro rata as they had been contributed. Aq- 
 
66 
 
 cording to this, gain from the loading would be dis- 
 tributed in proportion to the amount each person 
 paid in for loading purposes. In the same way the 
 gain from excess interest would be distributed in pro- 
 portion to the amounts of the policy accumulations 
 earning interest. At the time this plan was adopted 
 this meant the reserves only, because accumulated 
 surplus plans were not then in use. At the present 
 day, when such plans are more common than any 
 other, the share of the company's assets contributed 
 by the policy and comprising both reserve and sur- 
 plus should be this factor in proportionate distribu- 
 tion of surplus. 
 
 The gain from mortuary sources is also distributed 
 according to amounts contributed to pay mortuary 
 losses; or, rather, according to the amounts which 
 were thought to be required to pay current mortu- 
 ary losses. For it must not be lost sight of that the 
 entire net premiums on all policies for the whole 
 period of life are contributed to pay mortuary losses. 
 
 It is in this connection that the partition of pre- 
 miums into so called expense, mortality and deposit 
 for reserve elements comes into play as a book- 
 keeping convenience. Of course, in order to calculate 
 the proper apportionment of gains from loading, it 
 is necessary to know the amount of the loading. It 
 is also necessary to know the amount of the reserve 
 in order to calculate its due share of surplus interest, 
 although simpler methods might be adopted in the 
 case of accumulated surplus policies. To know the 
 amount of current deposits for reserve is in no sense 
 requisite and, in fact, such amounts are determined 
 iust because the separation of the other two elements 
 leaves them already determined. 
 
67 
 
 The so-called mortality element, or, more accu- 
 rately, the current cost of insurance, is a very mis- 
 leading item to many. In the paper next preceding 
 this, it was shown that the survival of a man or so 
 more than was expected in a given year does not imply 
 the gain of the amount of their policies, since they must 
 still be insured, which requires the present reserves 
 upon their policies and all future premiums. There 
 is in such cases no great gain without some small loss. 
 That rule is reversed when death does occur, for then 
 the compan3^ is freed from the obligation to continue 
 the insurance. It loses the amounts of the policies but 
 gains the reserves; or, in other words, its net loss is 
 the amounts of the policies less their reserves. It fol- 
 lows, therefore, that its net risk is the sum of all its 
 policies less the sum of all its reserves, and that its 
 risk on any policy for any year is the amount of the 
 policy less its then reserve. It follows also that the 
 table cost of insurance on that policy for the current 
 year will be a net natural premium, not for the 
 amount of the policy, but instead for the net amount 
 at risk. Since the cost of insurance is an annual 
 term premium, it is possible to calculate upon it a 
 gain without a deduction for re-insurance. Now it 
 is plain that the actual cost of insurance will bear 
 the same ratio to the tabular cost as the actual 
 death losses of the year do to the death losses ex- 
 pected. Therefore, the total actual gain will be the 
 same percentage of the aggregate tabular cost as the 
 total apparent gain is of the expected loss. That 
 same percentage applied to the tabular cost of insur- 
 ance on each policy will show how much each policy 
 contributed to that gain. At least, that is the 
 
assumption which governs this method of distribu- 
 tion and it is for the most part justifiable, though 
 open to some objections, as will be shown hereafter. 
 For annual or frequent distributions of surplus it is 
 almost beyond question that the contribution plan 
 does each person exact justice, and any departure 
 from it properly excites suspicion of discrimination. 
 
69 
 
 SURPLUS— HOW AND WHEN DISTRIBUTED. 
 
 The manner in which the surplus earnings should 
 be distributed and applied has been from the begin- 
 ning a question engaging the attention of the ablest 
 actuaries. In early times, and even until our own, 
 the current of practice if not of theory was toward 
 reversionary additions to the policy, or the furnish- 
 ing of as much more permanent insurance as the sur- 
 plus would justify. This course seemed to be borne 
 out by the fact that the insured evidently intended to 
 apply his money to the purchase of insurance and 
 that, consequently, the office of the premium was to 
 furnish as large an insurance as possible. 
 
 Springing from the practice, and especially from 
 that line of reasoning, came the plan of applying the 
 surplus to the purchase of temporary insurance, thus 
 increasing the immediate protection to the largest 
 possible amount. This plan, just to the extent of the 
 temporary insurance thus furnished, became a com- 
 petitor of short term and assessment plans in point 
 of cheapness. Unfortunately, just to the same ex- 
 tent, it was subject to the objections to assessment 
 insurance, being an increasing cost contract. It was 
 not found satisfactory. 
 
 The application of surplus in the form of reversion- 
 ary additions of a permanent character of course in- 
 creased the reserve values of the policies, or the 
 amount that would be required to reinsure them. 
 
To 
 
 This is clear, since the new company would have to 
 assume a larger risk at the former premium. For a 
 time companies did not report the values of these 
 paid-up additions as a liability, but this was insisted 
 upon later and is now the custom. 
 
 Probably one reason, if not the principal one, for 
 the absence of these items from the reserve calcula- 
 tions was the fact that originally, although fully 
 paid for, such paid-up additions were forfeited with 
 the original policy upon non-payment. Therefore it 
 was not thought fair to consider the same paid-up 
 insurance, which of course it would be a contradic- 
 tion to talk of lapsing. It did not follow because of 
 that, to be sure, that no account should be taken of 
 such insurance in calculating reserves, since insurance 
 which may be lost is not on that score already out 
 of existence. But it did follow that such paid-up 
 additions should not be forfeited with the original 
 policy, and that became clear to every one. 
 
 A recognition of the insured's rights in this surplus 
 accumulation as something already earned and not 
 contingent upon future action carried with it almost 
 as a corollary the eventual recognition of his right 
 to dictate what was to be done with it. It soon be- 
 came the custom to permit the conversion of such 
 reversions into their net cash values, either by a 
 selection of cash dividends once for all, or by the priv- 
 ilege of an option when the surplus was declared, or, 
 in more liberal companies, by the continual privilege 
 of conversion at any time. So that in effect the in- 
 sured became absolute arbiter over the manner in 
 which the surplus was to be applied. 
 
 On the part of actuaries, so long as reversions only 
 
71 
 
 were allowed, there was little objection to the plan; 
 but with the privilege of conversion a new situation 
 was created. The presumption was that healthy 
 persons would take cash dividends and persons in 
 impaired health would prefer to increase their insur- 
 ance, thus creating a selection of risks adverse to the 
 company. This presumption, though backed up by 
 no statistics, seemed unassailable and stubbornly 
 continues until this day, because apparently in line 
 with common sense. To assume that common sense 
 will govern is, however, perhaps too bold an 
 assumption, and doubtless therein lies the ex- 
 planation of the discrepancy between theory and 
 statistics. 
 
 In any event, the result of this actuarial theory 
 was to cause a complete revulsion of practice from 
 reversions with the privilege of cash conversions to 
 cash dividends with the privilege of dividend addi- 
 tions instead, but subject to proof of good health in 
 most cases. Such became the almost universal prac- 
 tice, the cash dividends being commonly used in re- 
 duction of premiums and only payable in case the 
 new premium is paid, although such dividend is al- 
 ready earned and in fact a direct outgrowth of pre- 
 miums already paid. 
 
 Other methods of applying the surplus were as short 
 term and permanent reductions of the premium. The 
 latter amounted to the purchase of single premium 
 annuity for life with the net cash surplus, such an- 
 nuity available only in payment of future premiums. 
 The absolute title to the reserve value of such annui- 
 ties was not conceded to the policyholder, the same 
 being forfeited upon non-payment of premiums, as 
 
72 
 
 was originally true of reversionary additions. This 
 method never became in any sense popular in this 
 country. 
 
 Some companies, which divided surplus at periods 
 longer than one year, hit upon the idea of distribut- 
 ing its payment over the succeeding period, thus 
 making a level premium for the period and also pre- 
 venting sudden depletion of the funds of the com- 
 pany. Like all other methods, this had plausible 
 features; but the companies practicing it usually" 
 treated the surplus as something only earned as it 
 was paid and forfeitable at any time upon non-pay- 
 ment of premium. It is difficult to see wherein it 
 diftered except in name from annual dividends de- 
 ferred the same number of years. 
 
 The practice of deferring the payment of dividends 
 for several years after the beginning of the policy 
 was an early one and justified by better reasons than 
 are usually put forth in defense of life insurance pro- 
 cedure. The theory of surplus division is, and 
 the practice ought to be, that all profits are di- 
 vided without reservation. But if such a division is 
 to be made after the first year, it is evident that the 
 company will have no considerable margin between 
 itself and insolvency. The fairer and better course, 
 whereby to avoid this undesirable condition, would 
 seem to be to withhold for a certain time the pay- 
 ment of dividends from every policy, thus compelling 
 each in turn to contribute to the general surplus. 
 This would only defer the payment of the entire ^ut^ 
 plus, which would all be accounted for at or after the 
 termination of the policy. It is perhaps unnecessary 
 to say that many companies forgot to thus account 
 
73 
 
 for it, some even in event of termination by death or 
 maturity and nearly all in event of termination by 
 lapse or surrender. 
 
 The shortening of the time during which |the pay- 
 ment of dividends was deferred was not occasioned 
 so much by any of these cogent considerations as by 
 the clamor for lower premiums on the part of the 
 public. In order to avoid granting the popular de- 
 mand many companies preferred to put forth a par- 
 tial loan plan, whereby the insured could from the 
 start avoid paying the whole premium. Such loans 
 were made for a proportion of the premiums fully 
 equal to the expected dividends and it was repre- 
 sented that the dividends would soon wipe them out. 
 This plan had indeed the opposite effect to that of 
 the former systems, inasmuch as the person who 
 availed himself of the loan and soon discontin- 
 ued had the benefit of the reduction, while he who 
 paid full premiums and discontinued had no corre- 
 sponding advantage. 
 
 Taking to such expedients did not stem the tide of 
 the public demand, which was at last Janswered by 
 reducing the term during which the payment of divi- 
 dends was delayed to not longer than two years. In 
 most companies, in fact, the term was shortened to 
 one year, a dividend being given as soon as earned 
 and determined. In order to carry a current surplus 
 under this plan it was necessary to resort to the plan 
 of not dividing the total actual earnings, but only so 
 much thereof as seemed judicious to the managers — 
 a most dangerous custom, as both theory and facts 
 abundantly attest. 
 
 Singularly enough, the changes which take place in 
 
74 
 
 almost all businesses do not appear to be otherwise 
 than adventitious and accidental. Yet beneath the 
 surface it is possible to trace a slow evolution directed 
 by causes unknown to the persons who seem to be 
 the leaders in the new methods. This has been pecu- 
 liarly true of life insurance, which has advanced in 
 most cases along unexpected lines and not only with- 
 out the aid of the great actuaries, but even against 
 their earnest opposition. The most striking excep- 
 tion to this general statement is the work of the re- 
 nowned Elizur Wright, who combined in himself the 
 skill of a mathematician and the hard sense of a man 
 of affairs. 
 
 But conforming to the usual trend, the change 
 which has of late years taken place in the matter of 
 dividend periods was occasioned by something en- 
 tirely foreign to that which has made it popular. 
 The fall of dividends below the expectations of the 
 insured had previous to 1870 prepared the public for 
 a change to a plan where the net annual expenditure 
 would not vary. Non-forfeiture was yet too new to 
 be appreciated and by many was considered a prime 
 cause of the low dividends. The time was ripe for a 
 change from old methods and the tontine plan of 
 dividends deferred for long terms was launched. The 
 crisis, and the attendant falling off of the insurance 
 in force because of lapse and surrender, served to 
 bring the so-called profit from lapses into undue 
 prominence — undue because the lapse experience was 
 totally abnormal and, it is to be hoped, not soon to 
 be experienced again. 
 
 Such should not have been the case and, from the 
 recent popularity of non-forfeiture plans, it is clear 
 
75 
 
 that such was not the real cause of the general favor 
 for the new plans. The true secret of their success 
 was the long dividend period, which at the same time 
 silenced the demand for immediate cheapness and 
 aroused expectations of eventual gain. The mere 
 length of the dividend period was the real point of 
 attraction; the other features were merely accidental 
 and transitional and are already in process of rapid 
 elimination. Traditions of the past and its methods 
 are 3^et too strong to be fully shaken oflf and in conse- 
 quence there is yet talk of "lapse-profits" and — most 
 comical of all things — "loss-profits." But the current 
 has set in for sim pier and more straight-forward meth- 
 ods, less involved in mystery. Of all the features once 
 considered essential to tontine but one seems likely 
 to last and that is the long dividend period, which, 
 had it been unaccompanied with taking features 
 when proposed, would have had a hard road to 
 travel to reach popular favor. 
 
 The hardships of forfeiture, once enforced against 
 policyholders under this plan, have long ago been 
 avoided. Of course, as no dividend is declared until 
 the close of the period, no dividend is given to policies 
 surrendered before that time. But even that appar- 
 ent hardship is now-a-days mitigated by a larger 
 surrender value in many companies than would 
 otherwise be deemed safe and proper. The tide of 
 progress is set in that direction in answer to an un- 
 mistakable public demand. 
 
 No such demand exists for the relaxation of the 
 forfeiture of claims to surplus upon the death of the 
 insured. The impression seems to prevail that insur- 
 ance is cheap enough to those who die soon and that 
 
the true problem is to make it cheap to those who 
 live long. The absence of any such protest is signifi- 
 cant, determining in fact the central idea and work- 
 ing principle of a long dividend period, namely: That 
 to survivors only belong the surplus, for they only 
 have contributed it. The same logic which has made 
 the contribution plan of apportioning surplus the 
 only possible one is relentlessly comiDclling the 
 adoption of long surplus periods. 
 
 The traditional methods of calculating surplus and 
 the considering tontine surplus a mere accumulation 
 of annual dividends obscure the matter somewhat. 
 But the true tontine plan involves the following: The 
 accumulation of the actual premiums at the actual 
 interest rate of the company, deducting from time to 
 time the policy's share of expenses and gross losses 
 and adding its share of any offsets, such as the funds 
 accumulated upon policies matured by death or the 
 actual surrender charges against the funds of policies 
 surrendered. A proper method of book-keeping 
 should show the account clearly from year to year 
 and would contrast sharply with the cumbrous and 
 involved methods now in use. 
 
 As the tendency of the times is toward longer divi- 
 dend periods, so is it also in the direction of greater 
 freedom for the policyholder in the matter of the ap- 
 plication of surplus. As the periods do not frequently 
 recur, the actuaries do not seem to have the same 
 fear of adverse selection as in the case of annual divi- 
 dend policies. Consequently, the greatest latitude is 
 permitted in optional disposition of the surplus, 
 with the exception that in case the amount at risk is 
 increased a new examination is usually required. 
 
77 
 
 Certain improvements, scarcely yet begun, may soon 
 be expected in this direction; for it has been the usage 
 of companies to treat tontine policyholders quite dif- 
 ferently from some others in the matter of the single 
 premiums charged at the close of dividend periods 
 for life insurance or life annuities. If the insured 
 chose to apply his fund to the purchase of paid-up in- 
 surance, it has been the custom to exact for a non- 
 participating policy the premium a new applicant 
 v^ould pay for a participating policy. Indeed, the 
 rates of single premiums were raised at a time suspi- 
 ciously near the termination of the first tontine 
 periods. Quite contrary to this is the treatment 
 accorded the holders of limited-payment life policies, 
 whose contracts really consist of, first, a partial en- 
 dowment equal to the net single premium of a life 
 policy at the age attained at the close of premium- 
 paying period, and, second, the purchase of a paid- 
 up life polic3^ with the proceeds of that endowment. 
 That life policy is sold at the net premium, and yet 
 participates, while from the proceeds of a tontine 
 policy a loaded premium is exacted without partici- 
 pation. This is manifestly unfair and out of place in 
 a mutual system. The same condition of affairs is 
 found in the case of an annuity, except as to partici- 
 pation. A deferred annuity contract consists of two 
 separable contracts, namely: a partial endowment 
 for an amount equal to the net single premium of the 
 desired annuity at the age attained at the close of 
 the premium-paying period, and the purchase with 
 the proceeds of such endowment of an annuity at the 
 net single premium then required. Contrariwise, a 
 loaded premium is charged when the proceeds of a 
 tontine policy is the purchasing medium. 
 
78 
 
 In justification of these unjust distinctions the dan- 
 ger of higher reserve requirements is often urged and 
 seemingly with some cogency. But in the first place 
 the same argument would apply with even greater 
 force to limited payment life and deferred annuity 
 policies; for not only is the net rate used, but the 
 table and interest on which that rate is computed is 
 settled in advance and, dividends being payable an- 
 nually, there would be no apparent means of making 
 good any deficit in reserves. There seems to be no 
 just reason why the single premiums should not be 
 fixed at figures unquestionably safe and then em- 
 ployed in both and in all cases, except, perhaps, the 
 purchase of new insurance under new policies. 
 
 Long dividend periods render companies safer by 
 the accumulation of a large surplus; avoid the neces- 
 sity of leaving a portion of the surplus contributed 
 by a policy undeclared from year to year in order to 
 make a vsrorking surplus; avoid the possibility of 
 paying a dividend which future experience will show 
 never to have been earned; avoid the payment of 
 profits to persons who by early death contribute a 
 loss and not a profit; enable a company to contract 
 for more liberal and definite surrender values with- 
 out prejudice to other interests; enable a company tQ 
 meet the increased reserves under any future regula- 
 tion from one's own fund instead of a mysterious 
 "general surplus"; render to each of the actual con- 
 tributors of surplus and reserve his exact share of 
 the whole, and make it possible for a wide liberty of 
 choice to be granted the insured in the use of his fund 
 without danger to the company or damage to 
 others. 
 
79 
 
 EXPENSES-HOW ASSESSED. 
 
 Little effort has been made by actuaries to place 
 the assessment of expenses upon a scientific and 
 therefore just basis. The office of actuary, in this 
 country at least, has been to furnish a safe estimate 
 of net rates required and leave the rest to business 
 managers. English actuaries have usually had a 
 broader field of activity, being in fact the responsi- 
 ble managers as well. But in both countries few 
 endeavors to adjust the expense charges on a scien- 
 tific basis have been made. On the contrary, as has 
 been mentioned in earlier papers of this book, the 
 actuary then in highest esteem in England as late as 
 1860 gravely tested the solvency of a company on the 
 assumption that it would have no expenses whatever 
 and that therefore its gross premiums would be 
 available without deduction to pay losses. In such 
 an assumption he had the support of a learned pro- 
 fessor in Yale and other great mathematicians. In 
 the light of that so recent occurrence it is not singu- 
 lar that no very determined attempt to solve the 
 problem of assessing expenses has been made. The 
 entire subject was until of late considered beneath 
 the notice of scientific men. 
 
 The custom came to be to reckon the expenses in 
 proportion to the premium as the most convenient 
 method, making no distinction as to kinds of policies. 
 This practice, modified in most companies 'because of 
 
80 
 
 the necessity of furnishing endowment insurance art a 
 rate within reason, prevails to this day. Of course 
 any variation, however, compels a surrender of the 
 rule of percentage upon the premiums. The varia- 
 tions are all accommodated by a method which is not 
 a wide departure from the premium-percentage 
 system. This method starts by considering the load- 
 ing as an ** expense element" according to the 
 phraseology of some or, in other words, all available 
 for expense purposes. Accordingly the sum of the 
 margins of '' loading '^ is considered the assumed ex- 
 pense and forms a fund. The amount remaining in 
 this fund at the close of the fiscal year is rebated to 
 the policies in proportion to their contribution to the 
 fund. In effect, this is charging the actual expenses 
 as a percentage of the loading, which, when the load- 
 ing bears the same proportion to the premium, what- 
 ever be the form of policy, is exactly equivalent to 
 the premium-percentage method, but not otherwise. 
 It has already been pointed out in a previous paper 
 that the loading is not an ' 'expense element" but a 
 provision for any and all contingencies. Among the 
 exigencies it is meant to meet are the decline of inter- 
 est and consequent increased reserve requirements, 
 unexpected shrinkage in value of assets, financial 
 losses and excessive mortality experience. The first 
 of these contingencies has already come to all our 
 companies once at least and each of the others to 
 some company. If the whole loading is to be availa- 
 ble for expenses, it follows that no provision is made 
 for any of these contingencies. What is to bethought 
 of those sadly numerous cases where the actual ex- 
 pense exceeds the so-called expense fund is a question. 
 
81 
 
 The attention of actuaries has of late been called to 
 the subject of expense apportionment by the pressure 
 of companies upon the expense funds in their race for 
 new business. The brokerage system, which means 
 the outlay of much more than the loading on a first 
 premium to secure the same, has involved the prob- 
 lem, inasmuch as there seemed to be a manifest 
 unfairness when other and older policies were called 
 on to meet the deficit. Schemes to overcome this 
 difficulty have been much discussed, but it is probable, 
 judging from events, that the problem will disappear 
 with the brokerage system itself. The impossibility 
 of indefinitely extending business under that system, 
 and especially of launching a new company with 
 prospects for immediate success, has impelled many 
 to search earnestly for some means to circumvent 
 this stumbling-block. 
 
 The collection of a larger amount for expenses at 
 higher than at lower ages, thus emphasizing the dis- 
 advantage of age, was some time ago recognized as 
 a wrong. Sheppard Homan, the eminent actuary, 
 discarded that method in the construction of his 
 peculiar yearly-term rates. He added a loading for 
 other purposes to the net premium by a percentage 
 plan, but made his expense charge a definite sum per 
 thousand of insurance at all ages. The same rule 
 was not applied by him to other plans, I believe, and 
 even on that plan does not apply to the first year's pre- 
 mium, in which all above the net premium is considered 
 available for expenses. His method has lately been 
 adopted, I understand, by the New England Mutual 
 and by it applied to all policies of whatsoever form, 
 so far at least as first-year's commissions are con- 
 
 ^ OF THE 
 
 UNIVERSITY 
 
cerned. No alteration of the loading has been an- 
 nounced, however, and it is by no means certain that 
 a radical change in that regard is intended. 
 
 It is in any case an error to suppose that such is 
 the most important reform in the matter of expense 
 assessment. It is not clear that there is any real in- 
 justice in charging a larger expense against a large 
 premium than a small one, especially when the whole 
 premium is intended for mortality purposes. If such 
 is unjust, the injustice is common to all commission 
 businesses and to all forms of insurance. So far as 
 pure insurance is concerned, there seems to be no 
 argument of convincing force against the system of 
 premium-percentage. It is worthy of remark, how- 
 ever, in this connection that no good reason appears 
 for assessing expenses other than initial commissions 
 and other expenditure of that nature against a new 
 single premium and at the same time absolving an 
 old one from all contribution. Just how the ex- 
 penses of a company whose policies were all pai'd-up 
 would be met is, indeed, an enigma. 
 
 But while it is not probable that a percentage con- 
 tribution would be any more objectionable on a 
 purely life premium than on a fire or accident pre- 
 mium, experience has clearly shown that there is a 
 strenuous though not often conscious objection to 
 the application of that system to the premiums of 
 policies which are largely investmeiit in character. 
 The fact of such objection was provocative of the 
 variation from the percentage system already men- 
 tioned, and the failure of the popularity originally 
 expected for endowment insurance can be largely 
 traced to the popular impression that the premiums 
 
83 
 
 are too high. This is only another way of saying 
 that too large a portion of the premium is to be ex- 
 pended, for otherwise the maturity value would be 
 the greater for the big premium. 
 
 Men will pay a reasonable sum for life insurance 
 expenses when they desire insurance, even as they pay 
 a sum not always reasonable for expenses when they 
 purchase other insurance. But few men would know- 
 ingly pay twenty-five dollars per annum for the 
 privilege ot investing seventy-five. When they do it 
 without knowing it, they not infrequently feel that 
 they have been duped, and many look with suspicion 
 upon the mysterious unwillingness to guarantee 
 much. 
 
 In instance, the loading on a life premium at age 30 
 is in many companies $7.09 per $1,000 of insurance. 
 The loading on a limited payment life policy is not 
 proportionately so large, for which departure no 
 good reason can be given. The method in vogue for 
 assessing expenses against this policy is, however, to 
 treat the entire loading as an assumed ''expense ele- 
 ment" for current use and to hold no margin for 
 expenses after the policy becomes full-paid. So long 
 as this is the case, no tears need be shed over the 
 apparent inequality. The loading in the same com- 
 panies on a twenty-year endowment premium is 
 $11.86 per $1,000 of insurance, although the pre- 
 mium provides only for term insurance, upon vrhich 
 the loading would usually be about $4.00. All 
 above that amount the policyholder is paying, not 
 for expense in taking care of insurance, but for ex- 
 pense in taking care of money. In the total premium 
 he is paying more by far for expenses and mortality 
 
84 
 
 than the holder of a life policy, taking into account 
 the reserve value of both policies at the end of twenty 
 years. This operates as a handicap to his investment 
 and makes it to his interest to purchase insurance on 
 life plans and invest elsewhere. Such should not be 
 the case, as the life insurance company has a distinct 
 advantage over other channels of investment in the 
 fact that it becomes a hedge against the chances 
 of death and that, as survivors only receive the 
 investment, the desired amount may be accumulated 
 at less annual outlay than by other means. As was 
 explained in the papers on rate-making, the net en- 
 dowment premium consists, not of a term premium 
 and an installment sufficient to amount at 4 per cent 
 to the face of the policy, but of a term premium and 
 an installment considerably smaller than the other, 
 being a net simple endowment premium. The advan- 
 tage of endowment insurance over term insurance 
 combined with other investments is that a smaller 
 installment is required. That advantage is more 
 than equalized by the larger amount of expenses 
 taxed against endowment premiums. 
 
 The endowment premiums of one large company are 
 lower than those of many others; and that fact in 
 connection with a puzzling method of dividend ap- 
 portionment leads me to conclude that the company 
 has adopted a more intelligent treatment of expense 
 'distribution. What it is the company has not seen 
 fit to make public. It is clear, however, that the 
 proper thing would be to make a very sharp distinc- 
 tion between premiums intended for actual insurance 
 and premiums intended for investment in pure en- 
 dowments. Whether paid in one premium or many, 
 
85 
 
 life policies should bear their due proportion of ex- 
 penses; and, while not strictly equal, it is not greatly- 
 amiss that the contribution should be proportionate 
 to net premium. But provision should be made in 
 the part of the loading intended for expenses, not 
 merely for present outlay but for future demands as 
 well; and present extravagance should thus be 
 curbed. Endowment policies should not be charged 
 for insurance expenses more at most than is exacted 
 from a life policy for equal amount taken at same 
 age. Endowment or pure investment expenses, 
 which should be very low, can best be provided for 
 by making the interest and mortality calculations 
 low enough to leave a sure margin. 
 
SURRENDER VALUES.— PAID-UP INSURANCE. 
 
 In the beginning, and for a very long time, the in- 
 sured was held to divest himself of all rights under 
 his contract by failure to pay premiums when due. 
 This regulation was strictly enforced, leaving the 
 insured even without the privilege of reinstatement, 
 especially if in impaired health. If readmitted to the 
 benefits of his policy, it was considered a matter of 
 grace and not of right. All pleas for consideration 
 were dismissed with the retort '*It is all your own 
 fault," unless it was clearly to the advantage of the 
 company to permit a reinstatement. This was not 
 thought so great a hardship in the days when ordin- 
 ary life insurance was practically the only form in use. 
 The nature of a whole life policy was not at all under- 
 stood outside of strictly actuarial circles. It was by 
 no means generally known that a life policy neces- 
 sarily involved the accumulation of money from the 
 premiums. It was easy to reason by analogy from 
 fire and marine insurance that of course no insurance 
 could be given unless premiums were paid. The large 
 assets of life companies were thought to be unneces- 
 sary and of the nature of surplus. Although a 
 certain degree of reason was conceded to govern the 
 practice of charging an older man more than a 
 younger one, the fact that the premiums did not in- 
 crease with age seemed mysterious and in fact ren- 
 dered the first assertion dubious. Even to this day 
 
87 
 
 the life insurance reserve is a riddle to many men if 
 not to most men. The doubt occasioned by so many 
 apparently conflicting things flowered eventually in 
 the roseate schemes of assessmentism. 
 
 So long as whole life contracts were uppermost in 
 the public mind, the chief complaint against compa- 
 nies in the matter of default in payment of premium 
 was caused by their refusals to accept the premiums 
 though overdue. Aside from the comparatively rare 
 cases when the insured v^as nigh unto death, it was 
 thought unfair that the insured should, though yet 
 in good health, be compelled to pay a higher premium 
 than before because of advanced age. This damage 
 because of the forfeiture condition was measured 
 therefore by the diflerence between the premium he 
 was paying before and the premium required at the 
 new age. This, even though his health conditions 
 admitted of his obtaining new insurance. In a dull 
 way men came to realize that they were wronged, 
 feeling a sense of injury but not altogether compre- 
 hending it, nor v^hat the company gained by inflict- 
 ing it, which was in fact the value of an annuity upon 
 the insured life equal to the difference mentioned. 
 
 The mutual S3^stem marked the beginning of a 
 concession of rights to the insured after he had 
 parted with his premiums. But although it seemed 
 easy for men to understand that they had an interest 
 ill whatever v/as left of their premiums after providing 
 for all things necessary to safe insurance, or, in other 
 words, in the surplus, it was still diflRcult for them to 
 realize what their rights were in the matter of re- 
 serve. Upon surrender, in fact, the companies held 
 the insured to have forfeited his right to any interest 
 
88 
 
 whatever, even to surplus already earned and appor- 
 tioned. Such indifference to men's plain rights natur- 
 ally indicated but little hope of a wider recognition of 
 their claims in matters less clearly understood. 
 
 Events, apparently entirely disconnected, forced 
 upon the companies a departure from the system of 
 forfeiture. First, in the order of time and primary 
 importance as well, was the introduction of limited- 
 payment life and endowment policies. These policies 
 by their very names and natures implied a some time 
 cessation of payments and apaid-up ownership.. To 
 be evicted entirely from this ownership upon failure 
 to pay later premiums was too evident an injustice to 
 pass unchallenged. No analogy could exist between 
 such contracts and fire insurance; they resembled the 
 purchase of property on partial payments instead. 
 The demand for fair treatment became too pro- 
 nounced to overlook and had to be met in some way. 
 It became, in short, a question between giving up 
 the new and most popular plans or conceding some- 
 thing to the general call for fair treatment. 
 
 In fact, at about that time a general blaze of dis- 
 satisfaction sprang up in all parts of this country 
 and England as well. Abroad the outrageous disre- 
 gard of common honesty on the part of insurance 
 managers called forth one of Charles Dickens' most 
 severe satires. There it resulted in legislation to 
 regulate the various companies and societies of the 
 realm. In this country it fortunately culminated in 
 more severe and careful examination, particularly in 
 the State of Massachusetts and under the direction 
 of Elizur Wright. One result of this investigation 
 was legislation upon this and many correlated sub- 
 
89 
 
 jects in several States; but a more important result 
 was the general understanding of the people that 
 they had rights and interests. This was in the end 
 tantamount to the granting of their demands or the 
 failure of insurance forever. The compulsion of law, 
 in itself but an expression of the people's desire, has 
 not proven so efficacious as the demand itself. 
 
 Theodore M. Banta, who has since obtained wide 
 celebrity because of his courageous exposure of the 
 maladministration of William H. Beers, president of 
 his company, is credited with having moved the New 
 York lyife Insurance Company to adopt non-forfeiture 
 provisions in the ten-payment life policies then issued 
 by the company, thus becoming the pioneer in that 
 respect. After two or more payments had been 
 made, these policies could be exchanged for paid-up 
 policies for as many tenths the original amount as 
 annual premiums actually paid. The initiative was 
 shortly followed by nearly all companies and compe- 
 tition in that regard raged for several years. This 
 competition was checked by the reactionary tontine 
 movement, which received a great impetus by the 
 number of lapses from 1873 to 1878, the dread of 
 extinction on the part of companies, and the hope 
 of gain on the part of insurers. The check was but 
 temporary, however, and partial; by 1882 the cur- 
 rent was again flowing uninterruptedly in the other 
 direction, tontine giving way to semi-tontine with 
 non-forfeiture conditions. 
 
 There was great variety in the methods of meeting 
 the popular demand. In the case of limited-payment 
 life and endowment insurance, the course indicated 
 by the New York Life was generally followed. While 
 
90 
 
 not really exact justice, there was an apparent fair- 
 ness about the method which satisfied the public for 
 the time at least. But the problem was more complex 
 in the case of other policies, and ordinary life policies 
 were by no means least troublesome. 
 
 The simplest and certainly the fairest course would 
 have been to apply the net difference between the 
 premium of the policy and the premium which would 
 be charged at the present age to purchase frac- 
 tional insurance at the premium at the present 
 age. In instance, the paid-up insurance granted 
 at age 40 on a policy issued at 30 would be 
 determined as follows: Premium at age 40, 
 $32.20; at age 30, $23.30; the difference $8.90 a 
 year, which at $32.20 per $1,000 insurance will pur- 
 chase about $276.40 insurance. The same result will 
 be reached by applying the difference between the net 
 premiums to purchase insurance at the net pre- 
 mium at the present age, or by the circumlocutory 
 method of finding the present value of an annuity 
 equal to the difference between the premiums and 
 applying it as a net single premium to the purchase 
 of insurance. These methods are equivalent and give 
 the same results, but the last and most involved 
 of the three is the one in common use. Perhaps 
 its use is explained by the altogether too common 
 custom of applying the present value of an an- 
 nuity equal to the difference between the net 
 premiums to purchase insurance at ''the pub- 
 lished rates of the company" or the gross single pre- 
 mium at the age attained. This is equivalent to. 
 using the difference between the net premiums to pur- 
 chase insurance at the gross premium. In instance, 
 
91 
 
 the net premium at age 40 (actuaries 4 per cent) is 
 $23.68;at age 30, $16.97; the difference being$6.71 a 
 year instead of $8.90. This applied to purchase in- 
 surance at the rate of $32.20 a year gives about 
 $208.40. This is manifestly unfair as compared with 
 policies becoming paid-up in the usual way, at any 
 rate; but many companies, not content with this, 
 make the paid-up insurance non-participating though 
 purchased at a participating rate, thus inflicting 
 further injustice. Many companies also condition 
 the giving of paid-up insurance upon the surrender of 
 the policy within a specified time, as if it were still a 
 grace instead of a right. So stubbornly do tradi- 
 tional wrongs cling to life. 
 
 The exact and correct method for calculating paid- 
 up values for limited-payment policies is to apply the 
 net reserve as a net single premium to the purchase 
 of insurance at the age attained. This will give 
 less insurance in the earlier years of the policy and 
 much more in later years; but it is exact justice at all 
 times. In a modified form this method is in use 
 among some companies, but most frequently the 
 insurance is charged for at the gross premium 
 rates. 
 
 Similarly, the proper mode of determining paid-up 
 endowment values is to apply the reserve to purchase 
 a paid-up endowment running through the unexpired 
 term at the net single premium required for such an 
 endowment. This process will 'likewise give a 
 smallerpolicy in the earlier j^ears and a larger in the 
 later years than the formula in common use. 
 
 In the use of the term ''net single premium" every- 
 where in the foregoing, such amount is meant as is 
 
92 
 
 considered an adequate reserve upon a paid-up policy 
 of like character when that age is attained. That no 
 provision should be made for expenses in such a pre- 
 mium is not intended; but that no more ample 
 provision is required than in the case of policies 
 already paid-up and presenting similar liabilities for 
 the company is axiomatic. 
 
 The practice of making such paid up policies non- 
 participating or without rights to future surplus is 
 well-nigh universal, except' where statutory enact- 
 ments supervene to prevent. It admits of no defense, 
 when the premiums exacted are such^ as would be 
 charged a new applicant for a participating policy, 
 which is ordinarilv the case. 
 
93 
 
 SURRENDER VALUES— EXTENDED INSURANCE. 
 
 The reserve on a policy is of the nature of a fund 
 to help out future premiums. It was but natural, 
 therefore, that there should be proposed a method of 
 accomplishing that end upon the failure of premiums 
 by default. The purpose of the insured in paying 
 premiums was assumed to be to carry the amount of 
 insurance specified in the policy; and that design was 
 furthered, upon non-payment of premiums, by apply- 
 ing the reserve of the policy to continue the insur- 
 ance. 
 
 The simplest of these extensions, though almost 
 the latest in order of adoption, is the giving of a 
 specified grace in payment of premiums, charging 
 therefor at customary rates of interest. This re- 
 lieves insurance of its harsh character and gives a 
 reasonable opportunity for reaching and advising 
 the policyholder before he has lost his rights. A lit- 
 tle leniency in this regard is certainly desirable both 
 in the interest of insured and company, as insurance 
 should not be a snap-judgment affair and cannot af- 
 ford to take upon itself such semblance. The only 
 objection urged against this plan in practice is that, 
 when the public has become used to it, all will take 
 advantage of the time and thereby any real advan- 
 tage will be lost. That is altogether erroneous, as 
 companies practicing the system will readily attest. 
 As much might likewise be assumed from the fact 
 
9i 
 
 that no one cares to pay interest unless obliged to 
 do so. 
 
 Some companies not regularly allowing grace put 
 such a provision in their policies upon request, thus 
 discriminating between policyholders in a very rep- 
 rehensible manner. Many companies which dis- 
 avow all privileges of this sort privately instruct 
 their agents to grant grace at discretion and permit 
 them to hold back reports in consequence, a prac- 
 tice which has frequently been the cover if not the 
 cause of embezzlement. One company at leas t grants 
 an extension in the payment of premium for a period 
 to suit the exigency upon request and at the discre- 
 tion of its actuary, who is supposed to take into ac- 
 count the policy's reserve value in his consideration 
 of the matter. Such favors must be asked for, how- 
 ever, before lapse by non-payment, or, if afterward, 
 can be granted only upon proof of continued health. 
 As the possibility of such extension is usually un- 
 known to the insured, and as it is human nature to 
 expect to be able to pay until the day is at hand, 
 this system of grace can hardly be considered gener- 
 ally useful. 
 
 The foregoing relates to the cases of men who in- 
 tend to continue their policies by the payment of pre- 
 miums. The application of the reserve to carry on 
 the insurance when the policy has been intentionally 
 lapsed by non-payment presents other and quite dif- 
 ferent features. In many such cases it would be 
 erroneous to assume that the insured desired to have 
 his reserve applied to continue his policy. The actual 
 facts disprove the theory. In any case, to use the 
 reserve to pay premiums on the original policy— unless 
 
95 
 
 the increase of the reserve by such payment be taken 
 into the account — would be a spoliation under the 
 masque of justice. Yet such was originally the prac- 
 tice of the institutions which then most loudly de- 
 fended the extension system. Such a miserable 
 pretense of fair treatment is even to this writing 
 found in the policy of one company, the conditions 
 reading as follows: '* Continue in force for such time 
 as one annual premium on this policy is contained in 
 its reserve value according to the American four per 
 cent table of mortality, at the end of which time this 
 contract shall cease." Such a policy becomes non- 
 participating, although the premium charged is the 
 full participating rate. Not content with so enor 
 mous an overcharge, the company stipulates for a 
 deduction, in the event of the insured's decease, of all 
 forborne premiums with six per cent interest thereon. 
 Yet even this is a great improvement over a former 
 policy in which the six per cent reserve was used as 
 a basis and the dear public hoodwinked into think- 
 ing it better than a four. 
 
 If such practices can be successful at this late day, 
 it can easily be imagined what deception was em- 
 ployed when life insurance was new. One con 
 sequence of the prevailing indisposition to do any 
 thing like justice in his day was the effort of Elizur 
 Wright to secure equity for the insured by legislation. 
 Upon his initiative, laws were enacted in Massachu- 
 setts compelling companies organized under its laws 
 to continue the insurance in force for a time deter- 
 mined by the amount of the reserve, less a small 
 surrender charge, taken as a single term premium. 
 That there might be no excuse for delay because of 
 
96 
 
 incomplete actuarial calculations, the brave old man 
 caused a complete table of single premiums for all 
 terms and at all ages above 10 to be prepared and 
 printed in the State reports. That table alone would 
 render the reports valuable documents. 
 
 At the time this legislation was made there were 
 few policies other than life; endowments were just 
 coming into use. Consequently Mr. Wright was 
 justified in assuming that the sole object for which 
 men paid premiums was to secure insurance. His 
 efforts were, therefore, directed toward obtaining for 
 them the fulfillment of the desired ends. Modern 
 insurance presents precisely contrary features to those 
 familiar to him at that day, being for the most part 
 investment in character and looking toward the 
 ultimate payment of cash during the lifetime of the 
 insured. Therefore the old rule will not so well 
 apply, and the legislation has been found in most 
 cases useless and in some cases harmful. Massachu- 
 setts long ago revised her laws to accommodate the 
 new features, and placed greater emphasis upon a 
 cash surrender allowance, also insisted upon by Mr. 
 Wright. New York permitted her laws to become 
 optional instead of compulsory, and in the matter 
 of extensions Missouri stands alone in compelHng 
 surrender privileges of that nature. 
 
 Companies favoring the extended insurance sur- 
 render system have accommodated the change of base 
 from protection only to' combined protection and in- 
 vestment by causing only so much of the reserve as 
 is necessary to carry term insurance for the amount of 
 the policy through the remainder of its term to be 
 applied to that purpose. The remaining portion of 
 
97 
 
 the reserve is then used as a single premium for the 
 purchase of a diminished endowment due at the expi- 
 ration of the original term. 
 
 All of the companies granting extended insurance 
 make the policies non-participating from the date of 
 default in premium, most of them forfeiting the last 
 dividend earned as well. None of the various laws 
 relating to extensions require the companies to con- 
 tinue the policies as participating contracts. 
 
 Actuaries have not urged many objections to ex- 
 tended insurances except when it is optional with the 
 policyholder whether he takes paid-up insurance or 
 extended insurance upon surrender. It has been all 
 but unanimously held b^^ American actuaries in the 
 past that there is grave danger of adverse selection 
 of risks when such is the case. There seems to be 
 justification in reason for the view that a man who 
 has great confidence in his vitality would select paid- 
 up insurance, while another, conscious of impending 
 death, would prefer extended insurance. This has 
 been thought especially true where an additional 
 cash option was offered. Perhaps the defect in this 
 reasoning lies in the assumption that a man who 
 knows himself to be near his death will sustain his 
 policy at all hazards. More probably, however, men 
 do not act reasonably at all. A case recently came 
 to the writer's attention of a man who despite danger- 
 ous illness not only failed to meet a premium, though 
 he had the money, but even- neglected to apply for the 
 paid-up insurance to which he was entitled. This 
 with the full concurrence of his wife, the beneficiary, 
 and after advising with his banker. Such may be 
 an extreme case; but in any event statistics have 
 
98 
 
 proven the adverse selection theory a chimerical bug- 
 a-boo. 
 
 The leading Australian company, as old and as 
 large as most of the American companies, makes a 
 practice of allowing a grace on all premiums, of 
 applying dividends as reversionary additions v^ith 
 privileges of cash conversion at will, of extending the 
 insurance upon non-payment of premium by charg- 
 ing the premiums against the original policy as 
 loans until the entire reserve including all dividends is 
 exhausted, permitting payment of premiums with- 
 out health conditions at any time during such 
 extension, and permitting surrender for cash or paid- 
 up insurance at any time. Despite all these privileges, 
 considered so conducive of adverse selection, and 
 many other freedoms avoided by most American 
 companies, the company contrives to pay divi- 
 dends far in excess of any American company. Its 
 interest does not average a higher rate than some 
 American companies experience. 
 
99 
 
 SURRENDER VALUES—CASH.. 
 
 Until recent years, cash was not usually given as 
 a surrender value even upon urgent request, cer- 
 tainly not as a matter of course or of right. Life in- 
 surance began as a proprietary business, and even 
 the first mutual companies were essentially proprie- 
 tary without the safeguard of a stock interest. Even 
 to this day, such is often the case. Consequently the 
 attitude of companies when requested to redeem 
 their promises to pay before maturity was that of 
 the greedy note-shaver of a country town. Covering 
 themselves behind the mystery of a mortality table, 
 and often by a sanctimonious concern for the victim's 
 family, pretending to wish to discourage the Hghtly 
 surrendering of the protection of widows and or- 
 phans, company managers have filched large sums 
 from persons who by immediate distress were 
 compelled to realize on all possible resources at what- 
 soever sacrifice. Such profiting by the need of others 
 was reprehensible enough when it resulted in a direct 
 gain to the managers. Now, when any such profit 
 is supposed to inure to other members, who may 
 each in turn be thus despoiled, no excuse can be 
 offered; unless the charges in relation to perquisites 
 of managers from surrender charges are true. 
 
 So long as there was no definite understanding of 
 what constituted a proper reserve on a policy, it was 
 perhaps unavoidable that there should be a wide 
 variance in the estimate of its cash value. In mutual 
 
100 
 
 insurance there would seem, however, to be no ques- 
 tion whatever as to what should be allowed upon 
 surrender. In such companies the insured should not 
 part from the ownership of his money because he in- 
 trusts its possession to the company. The company 
 has no right to appropriate more of it than is neces- 
 sary- to cover the policy's just share of death losses 
 and expenses. Whatever remains should be consid- 
 ered the property of the policyholder, and is either 
 surplus or a fund to help out future premiums. If 
 the former, the title may be doubtful, as such sur- 
 plus may by the very essence of the contract be the 
 property of survivors only. But the reserve will not 
 be called on to meet future premiums upon the in- 
 sured's life if he carries no insurance, and there is no 
 good reason why all should not be returned to him, 
 if any. 
 
 The indisposition of most companies to do any- 
 thing near justice in this regard moved Elizur 
 Wright to get before the Massachusetts' legislature 
 a bill requiring all Massachusetts' companies to pay 
 a cash value for any policy surrendered upon its an- 
 niversary. This cash value was to be determined by 
 deducting from the 4 per cent actuaries' reserve 
 a moderate surrender charge. This surrender 
 charge was a percentage of the present value of 
 future * 'costs of insurance" or net insurance value, 
 such percentage being sufficient to cover any ad- 
 verse selection caused by the withdrawal of the 
 life. Radically this plan was the outgrowth of 
 proprietary ideas; and the surrender charge was 
 not so much to counterbalance a loss as a future 
 profit expected to be made. It was essentially 
 
101 
 
 adapted to life policies only and to companies ex- 
 pecting to reap a profit for stockholders from the 
 premiums. Upon endowments the surrender charge 
 was not merely less than on life policies but less 
 than on term policies also. The objection to allow- 
 ing ample cash values because of possible adverse 
 selection may be dismissed as bosh; all statistics 
 prove the contrary. Any possible gain made by such 
 ill treatment of patrons has been much more than 
 counterbalanced by the increased cost and difficulty 
 of obtaining business. The average sensible person 
 nowadays refuses to take an insurance "until I can 
 see my way clear," knowing full well that he will be 
 despoiled if he falls on the way. Consequently, he is 
 either altogether deterred from entering or is brought 
 to do so only after much soliciting. He must think 
 not merely of this year's outlay but of his ability to 
 meet future premiums. The gratuitous concern for 
 others' families put forth in the pretense of discour- 
 aging lapses would be ludicrous were the subject not 
 so serious. Nothing is so sure to make one lapse 
 without delay in most cases as the discovery that he 
 will not be fairly treated . Nothing is so likely to 
 encourage him to continue as the confidence that 
 whatever befall he will get good value for his money. 
 Men can be led but not be driven. 
 
 The last argument against regular cash values, 
 and one commonly conceded to have more force than 
 all others, is the possible danger of embarrassment 
 to the companies because of a general demand dur- 
 ing panicky times. There is doubtless some cogency 
 in this position as it is found to obtain in banks, 
 and the similitude between life companies and banks 
 
102 
 
 becomes greater the more investment insurance is 
 urged. It might be inconvenient, if not disastrous, 
 to be compelled to market long-time securities in a 
 crisis; and such is certainly to be avoided. Banks of 
 deposit are, by the laws of most States, prohibited 
 from holding such securities if they accept demand 
 deposits. Policies made surrenderable for cash at 
 the option of the holder are in effect demand certifi- 
 cates. As has already been said, however, the Mass- 
 achusetts law requires cash values only at anniver- 
 saries of the policy and is therefore not subject to 
 this objection. 
 
 That life companies are embarrassed by this phase 
 of the matter is their own fault. Had they been dis- 
 posed to act fairly there would have been no public 
 demand for such conditions in the policy and a com- 
 pany could refuse cash payment for surrendered poli- 
 cies whenever it was necessary in order to avoid dis- 
 aster. But under no circumstances is a company 
 justifiable in refusing to pay the full reserve when it 
 pays anything; * 'discouraging surrenders" is a piti- 
 able subterfuge unworthy of men vested with so 
 great a trust. That the public believe a company 
 insincere in its profession of desire to do equity in the 
 matter of surrender values is btcause of the public's 
 bitter experience in that regard. Until that experi- 
 ence fades away and is reversed by new experience of 
 a contrary character, the public will demand definite 
 agreements in the contract and will not be satisfied 
 with excuses of whatsoever character. 
 
 Meanwhile, many companies seek to avoid possi- 
 ble dangers of the sort just described by stipulating 
 for notice a number of months in advance or for sur- 
 
103 
 
 render only upon the anniversai'y of the policy. In 
 so far as these conditions are intended only to ^Yoid 
 the possibility of a run upon the company and, con- 
 sequently, in so far as they are enforced only when 
 necessary, they are unobjectionable. If, as is often 
 true, they are made use of in times of no financial 
 stress as an excuse for an absolutely indefensible dis- 
 count from the cash values pretended to be given, 
 they are utterly disgraceful. 
 
104 
 
 PREMIUM AND OTHER LOANS. 
 
 The recognition of the policyholder's right to the 
 value of his policy carried with it the privilege of 
 using it as a collateral security for a loan. The fact 
 that no safer or better securities than their own 
 policies could be found was recognized by companies 
 at an early day, and, had it not been involved with 
 the disputed matter of cash surrender values, it is 
 probable that the privilege of a loan not exceeding 
 the reserve value would long ago have been granted 
 by all companies. For the actuarial objection of ad- 
 verse selection could hardly apply, since by this 
 means men who would otherwise surrender their 
 policies would be induced, and enabled as well, to 
 continue them. Likewise, it cannot be argued that 
 such a convenience would result in men lightly sur- 
 rendering the protection of their families, which 
 possibility so troubles the truly good among insur- 
 ance managers. Instead, men v^ould thus find in 
 their life policies the friends in need who are friends 
 indeed, a means of relief during the extremity of 
 misfortune and an unfailing resource of their families 
 after their death. 
 
 Surely, anything which will make life insurance 
 more efficacious should be fostered. The purposes for 
 which it is purchased nowadays are two, the protec- 
 tion of families against the loss of support and the 
 accumulation of a fund for **a rainy day." It cannot 
 
105 
 
 be successfully denied that both these ends are sub- 
 served by permitting the fund to be drawn against 
 when an exigency arises. 
 
 This is particularly true in the case of policies in 
 which the investment element predominates. Such 
 policies are of the nature of bonds and it is often of 
 the highest importance that they should be availa- 
 ble as collateral. Any one familiar with soliciting in 
 the life insurance business must be convinced that to 
 make the hypothecation of policies free as possible 
 would greatly widen the scope of insurance and facil- 
 itate soliciting. I^ife insurance policies will con- 
 tinue to be regarded by the public as low-class in- 
 vestments so long as companies deliberately discredit 
 their own promises to pay by refusing to recognize 
 them as desirable security for their investments. A 
 general reformation in this regard would result in 
 the common acceptance of such policies as collateral 
 all over the countr^^ and at all financial institutions, 
 and would correspondingly relieve the pressure upon 
 life insurance agents for accommodation loans, at 
 the same time rendering the sale of insurance much 
 easier. 
 
 The objection urged against cash surrender values 
 because of the possibility of a sudden and united call 
 for money necessitating a sale of securities would 
 seem to have little appositeness in the case of loans; 
 although the same fatuity which caused the compa- 
 nies to act insincerely about cash values, until the 
 people no longer believed anything not written in the 
 contract, has brought about a similar situation in 
 the matter of loans. It would be common sense, 
 were the people's confidence in the rectitude of in- 
 
106 
 
 surance management such as it should be, first, that 
 companies would gladly loan up to the full value of 
 policies at current rates of interest, and, second, that 
 no one would expect such a loan were there no loan- 
 able funds in the treasury. Such would be the 
 reasonable expectation of a man who held a time de- 
 posit certificate in a bank— just that and no more. 
 But the perverse action of insurance managers has led 
 men to expect anything but what one would expect in 
 anything else; and this well-grounded suspicion will 
 not be quieted by less than definite promises in the 
 contract itself, and capable, therefore, of legal enforce- 
 ment. To such a pass has the folly and stupidity of 
 the past brought insurance that companies are 
 now about to be compelled by popular distrust of 
 their pretenses to promise such loans in a definite 
 manner without reference to the company's con- 
 venience. 
 
 There is no shadow of reason in refusing to loan 
 the full reserve, if any loan is to be made. To talk of 
 margins where one's own promise to pay is the col- 
 lateral is worse than ridiculous; and the remnant of 
 that ancient pretense of fatherly solicitude for the 
 assured 's family and assumed guardianship over him 
 and them, which is put forth as a sometimes excuse 
 for loaning but one-half or two-thirds the reserves, is 
 sillier still. It is better to loan a man the full reserve 
 and keep his patronage than to pay it to him and 
 lose his patronage. In a bank it would be far better 
 to loan a man the face value with accrued interest of 
 a 3 per cent time certificate, the loan to bear 6 per 
 cent, than to cash his certificate and let him go his 
 way. Bankers are already familiar with the same 
 
107 
 
 principle; they decide as to discounts, taking into 
 account tlie customer's balance, thus augmenting 
 the average actual interest. 
 
 Certain companies have made a distinction be- 
 tween loans against policies when the loans are to 
 pay premiums and loans for other purposes. Loans 
 of the former kind are defended as praiseworthy and 
 loans of the latter sort condemned as tending to re- 
 duce the value of the insurance to the beneficiary. 
 Premium loans have been made in several ways. A 
 very common form, which raged for a number of 
 years, was known by the generic name of ''premium 
 loan or part-note plan." It consisted of accepting 
 notes for a definite fraction of the premium from the 
 start, such notes usually payable from proceeds of 
 the policy only. The percentage of premiums for 
 which notes w^ere given v^as supposed to be fixed to 
 accord with the current annual dividends, and in 
 practice agents were instructed to assert that the 
 dividends would take care of notes and interest, a 
 prophecy or estimate which rarely proved reliable. 
 As such policies were bought for their supposed 
 cheapness, and as the increasing indebtedness against 
 them resulted in increasing cost with decreasing in- 
 surance, they proved very unsatisfactory and were 
 lapsed in large numbers. The experience of compa- 
 nies under such contracts has been repeatedly quoted 
 as the strongest possible argument against all forms 
 of loans — an argument more plausible than forcible. 
 This form of premium loans is now, happily, almost 
 obsolete; it was never demanded by the public, but 
 w^as foisted upon it under a misapprehension of the 
 subject. 
 
108 
 
 Another form of premium loan is the loaning of a 
 full premium upon request. This does not wideh^ 
 differ from ordinary loans, except in the insufferable 
 endeavor to dictate what the policyholder shall do 
 with his money. A few years ago, a leading company 
 adopted this idea in a policy which, by other less 
 agreeable features, attracted widespread notice. It 
 agreed, after a certain number of years, to loan any 
 or all premiums through a second term of years, 
 thus securing the policyholder against loss of his pol- 
 icy through inability to meet premiums. Its initia- 
 tive has been followed by some other companies and 
 seems to have had some effect upon the practices of 
 many companies. 
 
 At present there is the widest diversity in the mat- 
 ter of loan privileges. Several companies agree to loan 
 a percentage of the reserve, varying from 50 per cent 
 to 90 per cent. Some of these impose conditions as 
 to time for application; others do not. One company 
 which in all other particulars prides itself upon treat- 
 ing all policyholders, old and new, without discrim- 
 ination, grants premium loans to ordinary policy- 
 holders on request but denies them to holders of ac- 
 cumulated-surplus policies— a preference not defensi- 
 ble on any ground, since the latter policies are the 
 better security and the loss of them a severer one to 
 the holder, resulting in the total forfeiture of the sur- 
 plus. But one company has as yet made arrange- 
 ments to loan the full reserve, and it does so only at 
 periods five years separated, the amount loaned at 
 intervening times being the same as at the close of 
 the last period. 
 
109 
 
 POLICY CONTRACTS.— THE APPLICATION. 
 
 In reading modern life insurance policies, one is 
 met at the very outset by a reference to another in- 
 strument, or other instruments, supposed to have 
 been executed by the insured. In various and often 
 studied phrases such writings are stated to have 
 been accepted as warranties, to be the basis of the 
 contract, to be partial consideration for the con- 
 tract, to be part of the contract itself, etc. Upon 
 reference to these papers they are found to consist of 
 certain declarations and promises made by the in- 
 sured and recorded either by the company's agent or 
 medical examiner or partly by each. The declara- 
 tions cover the personal and family history of the 
 applicant, both by general and detailed statements, 
 his present condition in all regards, and his inten- 
 tions in many regards. His promises are commonly 
 merely assent to stipulations printed on the sheet 
 and often imperfectly understood by him. 
 
 The effect of incorporating such paper or papers 
 into the contract is intended to be the placing of all 
 statements contained therein upon the footing of 
 warranties instead of representations. This distinc- 
 tion is of a purely legal character, not generally un- 
 derstood, yet of the highest importance. If no refer- < 
 ence were made to such writings, or if they were re- 
 ferred to as mere representations, the construction of 
 a court would be that such statements must be true 
 
110 
 
 to the best of the insured's knowledge and belief, if 
 at all material to the eontract. Thus, to avoid such 
 a contract, a company would be compelled to prove, 
 first, that the information withheld would probably 
 have caused the rejection of the life proposed, and, 
 second, that the insured knew the facts. Such proof 
 would raise a strong presumption of fraud, which 
 might be confirmed by other evidence, but which, 
 though unconfirmed, would nevertheless seem well- 
 nigh incontrovertible. 
 
 The two propositions named are, however, both 
 very difficult to prove in ordinary cases and it is to 
 escape from that difficulty that a resort to the war- 
 ranty system was hit upon. A warranty is a solemn 
 declaration of the absolute truth of statements, coup- 
 led v^ith a consent that the contract shall fail if 
 they are found false in any particular. This is 
 accomplished by making such statements not merely 
 representations in order to obtain insurance, but 
 statements offered as a basis and part consideration 
 for the contract. The failure of any part of the 
 application is, therefore, a failure of the foundation 
 involving the downfall of the superstructure, or, to 
 change the metaphor, a failure of the consideration 
 voiding the contract ab initio. It is no longer neces- 
 sary to prove that the error is material, that it was 
 made with full knowledge of the fact, that it was by 
 inference at least intentional and therefore fraudulent. 
 The only thing required to be proved in order to 
 avoid the contract is that any statement is not 
 strictly true or any promise not exactly fulfilled. 
 Such is the law, and that it is not enforced in all its 
 stringency is because there has arisen a series of 
 
legal restrictions which interfere with its application, 
 and furthermore, and more particular^, because 
 petit juries blindly do justice in defiance of law. The 
 courts, recognizing the iniquity of the system, seize 
 every opportunity to render all warranty stipula- 
 tions nugatory. The application being constructed 
 by the company and the statements therein recorded 
 by its agent or representative, it is a legal maxim to 
 construe it strictly as to the company and liberally 
 as to the insured . The same applies to the policy 
 itself with even greater force. Means of getting evi- 
 dence as to materiality of the statements, the igno- 
 rance of the insured concerning the facts, and the 
 absence of fraudulent intent are usually to be found; 
 and, when such evidence of a convincing character is 
 presented, juries soon do what is right between the 
 parties, without regard to legal hair-splitting. 
 
 That such is the case does not in the least relieve in- 
 surance companies of the odium of keeping up this 
 vile system. The oft-repeated assertion that claims 
 are not contested unless believed to be fraudulent is 
 no excuse; the only possible proof of such honest pur- 
 pose would be to throw away all defenses except 
 against fraud. If a company cannot prove fraud to 
 a jury, it has no right to expect the public to believe 
 that there is fraud or to shield corporate greed and 
 oppression under the name of justice. At the best, 
 unless companies intend to enforce warranty stipu- 
 lations to the letter, they are retaining an anti- 
 quated weapon of defense which they either dare not 
 use at all or only upon occasion, which means the 
 vilest discrimination — a discrimination between ben- 
 eficiaries. 
 
112 
 
 To make plain the enormity of this offense against 
 equity, the error of a year in the age of a grand- 
 parent at death, although it were a year too young, 
 would avail to set aside a policy under a strict con- 
 struction of the warranty law. The existence of a 
 secret malady unknown to every one at the time of 
 contract, including the applicant, but v^hich must 
 have existed in latent form, is another reason of 
 avoidance; such evidence was seriously brought forth 
 in a cause celebre a few years ago. Many of the in- 
 quiries of the application are concerning things of 
 which in most cases the insured can have but hear- 
 say information and could not by any possibility 
 know of his own knowledge, so that his testimony 
 thereto would be competent in a court of law. 
 Many other questions call for professional skill in 
 diagnosis of diseases not possessed by all practition- 
 ers and by few others. Other inquiries are so broad 
 in their scope and general in character as to seem to 
 cover mere matters of opinion. Yet the answers to 
 each of these must be the exact truth in order to ful- 
 fill the requirements of a warranty. 
 
 Both in the wording of contracts and in disposi- 
 tion to contest, using trivial defenses under the cover 
 of warranty, assessment and fraternal societies are 
 even greater sinners than regular companies, as wit- 
 ness their involved and misleading certificates and 
 their frequent resort to the courts. In a vague and 
 indefinite way the people have for a long time been 
 sensible of the wrong. This sentiment has shown 
 itself in strong resentment against companies guilty 
 of any illiberality toward claimants and a marked 
 preference for companies establishing a contrary 
 
113 
 
 reputation. That no more has been demanded of the 
 co-operatives is only another proof of how little is 
 expected from them anyhow. Popular indignation 
 has resulted in decisions palliating the severity of the 
 law, incurious special legislation on the subject here 
 and there, in the incorporation of a copy of the in- 
 sured's declarations in his policy in many cases, and 
 latterly in the adoption of incontestability provis- 
 ions after a short interval. Thus, in order to preserve 
 the right to contest when no fraud can be proved, 
 companies have been willing to agree after a short 
 time not to refuse to be defrauded. To so singular a 
 position has the wrong-headed determination to 
 conserve foolish and antiquated provisions brought 
 the companies. In fire insurance the application 
 with its warranties has already been practically 
 discarded. 
 
 Because the application was in the manner de- 
 scribed made a part of the contract, it v^as found a 
 convenient receptacle for many stipulations and con- 
 ditions, which were too objectionable in- the policy 
 proper. This has been carried to a ridiculous point 
 by certain companies, which advertise policies free 
 from conditions and use applications one side of 
 which (usually not seen by the applicant) is wholly 
 made up of printed conditions. Even then an over- 
 flow appears on the other side of the application, 
 which is in toto a warranty and a consideration for 
 the insurance. One of these companies causes a man 
 to warrant that within a certain time he will not 
 kill himself; it could easily have him warrant that 
 he will not die at all, so far as his knowledge of sign- 
 ing any such agreement is concerned. Several com- 
 
panics insert in their applications an agreement 
 concerning the division of surplus which utterly de- 
 stroys the mutuality of the contract and surrenders 
 the insured's interests wholly into the hands of the 
 company's managers. Many applications yet con- 
 tain clauses waiving rights given by special statutory 
 law, although the decision of the supreme court of 
 the nation is that such waivers are absolutely void 
 unless provided for by the law itself. Very obnoxious 
 stipulations, seeking to absolve companies from all 
 responsibility for the frauds of their agents, are fre- 
 quently inserted. Provisions that the contract shall be 
 considered to be made at the home office of the com- 
 pany or shall be construed according to the laws of a 
 certain State are not infrequent. Such pro visions have 
 never been upheld in any of the higher courts and are 
 repugnant alike to law and common sense. A further 
 condition limiting the time within which suit may be 
 brought against the company is sometimes inserted; 
 such a provision might be held legal, judging from a 
 decision of .a national court upon a case in which, 
 however, the provision was by legislative enactment. 
 Similar provisions are sometimes made concerning 
 the making of proofs of death. The endeavor to 
 turn a life insurance company into a temperance 
 society appears in some applications as well as in 
 some policies, in a promise never to become an inebri- 
 ate, coupled w^ith a concession of the right of cancel- 
 lation if such agreement be broken. Nowadays, 
 when drunkeness is pretty generally believed to be a 
 disease, such stipulations are singular reading. 
 
 Other conditions, which are utterly foreign to the 
 real character of a proposal for insurance, might be 
 
115 
 
 quoted; but enough has been said to awaken the 
 reader to the fact that the average application 
 should receive a close examination before a signa- 
 ture. Anything beyond the proper statements of 
 fact and intention of the applicant is really out of 
 place. 
 
116 
 
 POLICY CONTRACTS.— THE PROMISE TO PAY. 
 
 The form upon which a life policy is modeled is 
 that of a simple contract, best typed by an ordinary 
 promissory note. It is not in any sense identical 
 with the "bank draft" sometimes spoken of in ad- 
 vertisements; bank drafts are not promises, but or- 
 ders to pay. The best possible expression of an 
 agreement to pay is the simplest, namely: I promise 
 to pay. The verbose and tautological manner in 
 which this agreement is set forth in most policies is 
 a relic of the days ^when men were not expected to un- 
 derstand their policies, but to be awed at the learn- 
 ing embodied in them. 
 
 Contracts to pay money should specify clearly for 
 what consideration (especially if not already per- 
 formed and to be performed in future), at what time 
 and place, upon what conditions, and to what per- 
 son or persons the money is to be paid. These par- 
 ticulars are necessary for a self explanatory contract, 
 and it is not a matter to be proud of if an apparent 
 simplicity of wording has been attained by leaving 
 any of these essentials incomplete or bj referring to 
 another paper for explanations. 
 
 The reference to the application as a partial con- 
 sideration has already had attention. Immediately 
 following this the real consideration is commonly 
 specified, although in some contracts no mention of 
 this is made until later. Rhetoric, business usage 
 
117 
 
 and common sense, however, accord first place in 
 simple contracts to a recital of the consideration. In 
 life insurance the consideration usually comprises a 
 sum of money paid in advance and a like sum to be 
 paid at regular intervals thereafter for a specified 
 term or during life. Some companies stipulate that 
 these premiums must be payable at the home office, 
 another antiquated condition fallen wholly into des- 
 uetude. Many stipulate for payment before a desig- 
 nated hour and almost all for payment upon a defi- 
 nite day. In practice so rigid rules are rarely 
 enforced, but they are there to enforce whenever com- 
 panies see fit to do so.. The payment of a life insur- 
 ance premium has little in common with a business 
 obligation; and when the invested value will sustain 
 the insurance, certainly a little latitude may safely 
 be granted, subject to a fair interest charge so that 
 it will not be lightly taken advantage of. Such 
 grace provisions are now to be found in the policies 
 of several leading companies. 
 
 The time of claim payment is variously expressed 
 as within a certain period after due receipt and 
 approval of the proof of death or immediately there- 
 upon. There appears to be no good reason why 
 there should be delay after the death of the insured is 
 satisfactorily proved and the identity of the claimant 
 established. This includes, of course, any inquiry 
 found requisite aside from the regular proofs. A clear 
 case should be made out; but, when that is done, 
 there should be prompt settlement. The taking ad- 
 vantage of such clauses to mulct the beneficiary of 
 part of the proceeds of the policy in the form of a 
 discount is a practice now happily obsolete — dead in 
 
lis 
 
 its sins. A life insurance policy should be a promise 
 to pay a definite amount at once upon the death of 
 the insured; but no interest should be allowed be- 
 cause of unavoidable delay and no discount charged 
 because of prompt action. Conditions compelling 
 the filing of proofs within a specified time and limit- 
 ing the time for legal action are both very objection- 
 able, as serving no good purpose and likely to defeat 
 just claims. It is not always possible in this age of 
 travel for even the fact of death to become known 
 within a short time; and a claim against an honest 
 company like one against an honest man should 
 never be considered outlawed. The endowment 
 agreement, for payment during the lifetime of the in- 
 sured, of course, offers no difficulties. 
 
 The place of payment is usually the chief ofl&ce of 
 the company. So long as this is construed to mean 
 merely that the claim will be paid in the exchange of 
 that city it is unobjectionable. A literal construc- 
 tion would be ridiculous. 
 
 Despite the pretenses to simplicity of contract, the 
 conditions of jDayment are so manifold, diverse and 
 complex even in the simplest policy forms that it is not 
 considered feasible to place them in proper order in the 
 contract. They are consequently relegated either to 
 a second page or to the application, as the case may 
 be. Chief among these conditions are the following, 
 commonly imposed for one, two or three years only: 
 Prohibition against residence or travel in the tropics, 
 or in certain parts of this country, or in places where 
 yellow fever or cholera are epidemic; prohibition 
 against engaging in various occupations, such as 
 mining, submarine operations, blasting, manufacture 
 
119 
 
 of explosives, handling dynamos or electric wires, 
 service on railway trains or vessels; prohibition 
 against engaging in a duel. The usual practice is to 
 refuse payment, if at all, only when death is incurred 
 because of a breach of these conditions; but most 
 contracts are void by their terms whenever these 
 prohibitions are disregarded, and companies have 
 pleaded such breaches in avoidance of claims arising 
 from causes quite other than the ones put forth in 
 the plea. 
 
 Suicide has been included as a ground for refusal to 
 pay in the policies of all companies with one honor- 
 able exception. Statisticians and specialists in brain 
 diseases have, from altogether different premises, long 
 ago united in the general conclusion that few suicides 
 occur except as the result of mental disease. Despite 
 the most rigid provisions in that regard, covering 
 self-destruction, whether sane or insane, voluntary 
 or involuntary, companies have repeatedly found 
 themselves compelled to pay claims of this nature. 
 No other single condition has ever proved so com- 
 pletely bootless, nor any so extremely unpopular. 
 
 The engaging in military or naval service except in 
 times of peace is usually interdicted, sometimes only 
 temporarily, sometimes permanently. Other com- 
 panies permit the engaging in this or any other occu- 
 pation and residence in anyplace, subject to the usual 
 extra premiums, which are a lien against the policy 
 from that date. It is doubtful whether an inhibition 
 against military service might not be considered 
 void as against public policy, as well as void because 
 the infraction was involuntary, wherever the enlist- 
 ment was a forced one. 
 
120 
 
 Similarly, whether so stipulated in the policy or 
 not, it might be found against public policy to sus- 
 tain an action when death was occasioned in or be- 
 cause of a violation of law; although it is by no 
 means clear that an innocent beneficiary should 
 be made to suffer. Sucli a condition is in most 
 policies. 
 
 It is a common though not universal practice of 
 companies to pay as a surrender value the reserve on 
 policies voided by a breach of these conditions upon 
 the death of the insured. Such is definitely agreed 
 upon in some policies. 
 
 The existence of any or all these conditions has 
 been felt to place an unfortunate limitation upon the 
 usefulness of insurance by attempting to circumscribe 
 the future activities of the insured. It is nearly as 
 impossible for a man to govern his future mode of 
 life, his choice of occupations, his place of residence or 
 route of travel, or even his habits, as to determine 
 the disease which will one day carry him off. He 
 naturally desires insurance to cover all possible con- 
 tingencies and every exception is a positive and a seri- 
 ous detraction from its utility. Companies are, of 
 course, justified in guarding themselves against being 
 used as conveniences for clever rascals who endeavor 
 to get a bargain in insurance, well aware that their 
 prospective occupations imply a greater risk than 
 their premiums provide for, or that some change wrill 
 render them uninsurable. It is upon that ground 
 that the retention of these various conditions is de- 
 fended; and the logic is rather better than the aver- 
 age reasons put forward for objectionable clauses. 
 The trend is now toward greater liberality in this re- 
 
121 
 
 gard and one company has already removed all con- 
 ditions and restrictions. 
 
 A more disagreeable and less defensible condition 
 than of any of these, is a stipulation for the privilege 
 of cancelling the policy during the lifetime of the in- 
 sured upon proof that he has formed habits tending 
 to shorten his life, has had delirum tremens or has 
 been convicted of felony. A provision for cancella- 
 tion of a fire policy after the building has taken fire 
 would be a fair parallel. Nothing is better under- 
 stood nowadays than the fact that habits are dis- 
 eases, capable of thorough diagnosis and often of 
 cure; and surely nothing is more certain than tTiat 
 many innocent men are convicted of felonies, that 
 many guilty men are not very bad, and that 
 more reprobates are outside prison walls than in. 
 Any stipulation intended to leave a man without 
 insurance and a family without protection just when 
 most needed, and most clearly impossible to obtain 
 otherwhere, should be roundly condemned. 
 
122 
 
 POLICY CONTRACTS— TO WHOM PAYABLE. 
 
 As was circumstantially set forth in the first of 
 these papers, insurance is a contract for indemnity, 
 for making good that which is lost. Consequently, 
 insurance cannot properly be granted to anyone ex- 
 cept the person or persons who have a financial in- 
 terest in the thing or persons insured, nor, indeed, 
 according to the better authorities, even to such be- 
 yond the cash value of their interest. This principle 
 is generally enforced by law under the broad appli- 
 cation of the maxim "against public policy," though 
 a fair construction of insurance contracts and con- 
 sideration of their indemnity basis would seem to 
 render all reference to such general law unnecessary. 
 However, it would certainly seem to be against pub- 
 lic policy in the highest degree to permit a man who 
 has no interest in another man's house to acquire an 
 interest in having the same destroyed by fire. Different 
 in degree, but not in character, is the case of prop- 
 erty insured beyond its value, for to the extent of the 
 over-insurance the policyholder is interested in having 
 the property burn; the preponderance of self-interest 
 is on that side. But if this be repugnant to public 
 policy, it is surely more outrageous and in fact, 
 criminal to permit any person to acquire an interest 
 in another's dying who has not at least an equal 
 interest in his living. Such a license would be to in- 
 cite to murder. 
 
123 
 
 Therefore, it ma^^ be broadly stated that Hfe insur- 
 ance should not be made pa3^able to any person who 
 is not interested in the life of the insured to the full 
 amount of the policy. Concerning relatives the case 
 usually presents no difficulty, since the interest of 
 wife and children in a man's life is only bounded by 
 the value of the life itself and that is usually, though 
 not always, a larger amount than he is likely to in- 
 sure for. The interests of father, mother and colla- 
 teral relatives are really prospective only, unless 
 they are alread3^ actually dependent upon the in- 
 sured; for otherwise they will have no claim upon 
 the insured at law unless reduced to poverty and 
 helplessness, and not then unless he can do more 
 than care for his immediate family. Relatives 
 further removed than brothers and sisters, and pos- 
 sibly their descendants— such relatives as grand par- 
 parents, uncles, aunts and cousins — have no genuine 
 interest whatever in a man's life unless an interest is 
 created by the voluntary assumption of care of them 
 by the insured. Such an interest as a basis for in- 
 surance is regarded with suspicion, both by coiirts 
 and companies, because, if permitted in the case of 
 others than blood relations, it would open the door 
 for extended litigation and for the perpetration of 
 fraudulent insurances, really of a gambling charac- 
 ter. Notwithstanding this, there are no doubt spe- 
 cial circumstances which may give one person moral 
 and even legal claims upon another, because of the 
 relations created by personal preferences and friend- 
 ship; and there is no good reason why, when the fact 
 of such relations is established and the responsibility 
 confessed by the insured, an insurance should not be 
 
124 
 
 granted. A common case is where an engagement 
 to marry has been entered into; insurance in favor 
 of the fiance has been repeatedly held valid by the 
 courts and is not disfavored by companies. Another, 
 but not so frequent a case, is that of parentage out- 
 side of marriage; the obligation of the father to sup- 
 port his offspring is every day more firmly upheld by 
 courts and upon that obligation an insurance may 
 very properly be based. The mother of such a child 
 is, however, up to the present not considered to have 
 any such interest in its father's life as will support 
 an insurance. The law persistently disregards the 
 mutual responsibilities actually created by concubin- 
 age and refuses to a woman, who has been robbed 
 of everything else, even recognition pf an interest in 
 the life of him who often alone stands between her 
 and further degradation. Such law is monstrous 
 and against the good morals which it is intended to 
 protect; for it is not by lessening the responsibilities 
 of men because of wrong-doing that it will be checked; 
 it were more to the purpose as well as more just to 
 heavily increase them. That to admit the insurable 
 interest of a mistress in her lover's life might lead 
 to murder when she feared that he was about to de- 
 sert her is true; equally and similarly true is it when 
 the beneficiary is a wife instead of a mistress. Were 
 the legal right of a lem an to protection and assist- 
 ance once recognized, she would have no greater rea- 
 son to punish desertion with death than would a 
 wife. Some companies, at the imminent risk of hav- 
 ing to pay the amount a second time to other claim- 
 ants, have issued insurances to mistresses and duly 
 paid the same, a deed greatly to their credit. 
 
125 
 
 The intereit of a creditor is recognized as an insur- 
 able interest, but, by the better authorities, not to 
 an amount exceeding his legal claim against the in- 
 sured. Decisions have been made, not merely sup- 
 porting the contrary idea, but even holding that as 
 the insurance was valid in the beginning it is not in- 
 validated by the payment of the debt and consequent 
 cessation of all interest. Such law is a disgrace to 
 the bench and is the result of mere sophistry, coupled 
 with complete disregard of the proper nature of an 
 insurance contract. Applied to fire insurance, it 
 would continue in the holder of a policy a right to 
 insurance upon property already sold; that would be 
 at once repudiated. It has not merely been occasion- 
 ally sustained, however, in the case of life insurance 
 in favor of creditors, but has been sustained as a 
 legal principle with practical unanimity in the case 
 of insurance in favor of a wife afterward legally di- 
 vorced. Thus courts, which deny txie claim of an 
 adulteress upon the man who has seduced her, sup- 
 port her claim for insurance upon the husband from 
 whom her sin has legally separated her. This trav- 
 esty upon justice is a disgrace to civilization. 
 
 The general principle that insurance should be in- 
 demnity based upon an actual interest, not exceed- 
 ing that interest and not extending beyond that in- 
 terest, is a safe one and the true one. 
 
 That a man has an interest in his own life to its 
 full value has come to be fully recognized. His 
 right to mortgage his future by debt is a practical 
 illustration of that interest. Therefore, it is not con- 
 sidered in any way improper to permit him to insure 
 his life in favor of himself, thus protecting not merely 
 
126 
 
 a single obligation to one person or a few persons, 
 but all his obligations to everybody and insuring an 
 estate which otherwise might never be left behind 
 him. Confirmed bachelors, having also no near rela- 
 tives or other person for whom they care, often see 
 fit to carry large insurances to protect beyond any 
 possibility their names from dishonor, because of 
 shrinkage of estate. Provided al w ays that the estate 
 is solvent, the right of a man to dispose by will of 
 the proceeds of a life policy, payable to himself, is no 
 more open to question than his right to dispose of 
 any other property in similar manner. By special 
 legislation in some States the right of a wife and 
 and children as against creditors in insurance upon 
 a husband's life, the premiums on which have been 
 paid by him, or with funds contributed by him, is 
 limited. Of course, where a policy is directly pay- 
 able to the insured's administrators, executors and 
 assigns, the insurance policy becomes part of his 
 estate and subject to all laws relating thereto. In- 
 surable interest in those claiming by will is no more 
 required than in the case of any other property con- 
 veyed by will. 
 
 Of course the ownership of a life policy carries with 
 it the right of assignment to others, but the prepon- 
 derance of legal opinions is that such assignment is 
 valid only to the extent of the actual interest of the 
 assignee at the time of death of the insured and void if 
 no such interest exists. The same sophistry, however, 
 which has led courts to uphold other contracts, al- 
 though all interest in the life has ceased, has in the same 
 manner led them to pronounce assignments good be- 
 cause an interest existed at the time of the assignment, 
 
127 
 
 though such interest has ceased. Assignment by a 
 beneficiary other than the insured is not encouraged 
 by companies and is looked upon with great suspicion, 
 although such assignments, when they likewise con- 
 vey the interest upon which the insurance is based, 
 would seem to be unobjectionable. Otherwise they 
 would be subject to the objection urged against the 
 permission of any other manner of holding insurance 
 upon a life in which one is not beneficially interested. 
 
 Nearly all companies demand notice of any assign- 
 ment, together with a copy, before the same shall be 
 binding upon the company and many companies re- 
 fuse to be responsible for the validity of any assign- 
 ment. By this means they endeavor to shield them- 
 selves and turn the quarrels between contesting claim- 
 ants into a fight with each other instead of with the 
 company. Whether payment to a person not legally 
 entitled to it ^would be considered good as against 
 the legally rightful claimant may be doubted, even 
 though the company in the contract disclaims all 
 responsibiHty. Other companies require proof of the 
 fact and amount of interest before paying the pro- 
 ceeds of a policy to an assignee; and if his interest is 
 less than the whole, or if any doubt exist, such com- 
 panies usually demand the signature of the adminis- 
 trator or executor of the insured as well as the sig- 
 nature of the assignee to the receipt. This course 
 protects at once the company and the often helpless 
 dependents of the deceased, who otherwise are like to 
 be robbed by merciless usurers who have obtained 
 possession of policies because of the dire necessities 
 of a sick and unfortunate man. 
 
 Even when a beneficiary is named in a policy, it is 
 customary to make it payable in case of survival to 
 
128 
 
 the insured, and he is given the right to the surplus, 
 often the right to the surrender value and practically 
 always the right to the endowment or tontine settle- 
 ment. When this is not the case, and particularly 
 when the beneficiaries are minors or (in some States 
 where the disabilities yet exist) married women, it is 
 often found impossible to free the policy so as to sur- 
 render it or assign it, or even to utilize the value of it 
 upon maturity. Precisely the same state of affairs 
 may be brought about by an assignment. 
 
 An attempt to make policies directly payable to 
 persons having legally no insurable interest has lately 
 been made by writing the policy payable to devisees 
 of the insured. In the opinion of some attorneys the 
 effect of this is to warrant the company in paying 
 directly to persons designated by will, without regard 
 to the claims of creditors of the estate, of which, they 
 hold, the policy or its proceeds never become a part. 
 Undoubtedly it is possible to limit the payment as 
 against the insured so that he cannot dispose of the 
 policy in any but the specified manner. But as against 
 creditors claiming through him it is tolerably clear 
 that any such limitations would be void; for a man 
 cannot dispose by will of anything not his ow^i and, 
 therefore, of nothing which is not legitimate subject 
 for levy to satisfy the claims of a creditor. The com- 
 pany which pays devisees without the intervention 
 of executors might find themselves compelled to pay 
 again by order of court; for it has long been settled 
 that a devise is not good unless there be something 
 left after the claims of creditors are satisfied. Whether 
 lield legal or not, such course should be avoided by 
 companies as leading to a neglect of the real pur- 
 pose of insurance, namely, indemnity. 
 
129 
 
 POLICY CONTRACTS-»SURRENDER AND LOAN 
 PRIVILEGES. 
 
 There is a wide variation in the privileges actually 
 given when a policy is loosely said to be '* non-for- 
 feiting" after a certain time. This term, which is 
 so frequently used in describing life policies, in prac- 
 tice merely means that some sort of value may be 
 accorded the insured upon surrender after a certain 
 period. It may indicate that the insurance will be 
 continued in full force under an extension clause 
 without any action on the insured's part, or, on the 
 contrary, it may mean that an utterly insignificant 
 paid-up insurance will be granted provided applica- 
 tion is made for it within a very limited time. There 
 is just one thing that it is sure not to mean and that 
 is, what it says. The original policy is forfeited in 
 all cases for non-payment of premium, and any in- 
 surance given in its stead is either for a different 
 amount or of a diiferent character or both. The 
 only company which really exhausts the value of a 
 policy in maintaining it is the Australian Mutual 
 Proi-.ndent Society of Sydney, New South Wales, Aus- 
 tralia. In insurance as in politics it would seem that 
 we have much to learn from the newest world of all. 
 
 In this country, however, non-forfeiture at the best 
 means merely that the insurance is carried on for the 
 full amount without anj act of the insured so long 
 as the reserve will carry it as a term policy. Such 
 
130 
 
 term insurance does not participate in profits; neither 
 does it represent the profits already accumulated, if 
 any. The insured commonly has no right to pay his 
 premiums during such extension, unless he can pre- 
 sent proof of good health, UQr even then unless he ap- 
 plies within a limited time. The only exception to 
 this sweeping rule is the one month grace allowed by 
 a few companies. The rule is that once started, 
 the extended term insurance inexorably runs out 
 its stated course, expiring on a certain day, though 
 the insured be then upon his dying bed. Even this 
 poor substitute for actual non-forfeiture provisions 
 has been adopted by but few companies, the most 
 avoiding it on the ground of '' adverse selection." 
 
 Where extended insurance begins immediately upon 
 the non-payment of premium, most companies per- 
 mit the selection of a paid-up insurance for a reduced 
 amount instead, either at the time of failure to pa^-- 
 or in some cases for a limited period thereafter. This 
 form of surrender value — namely, paid-up insurance — 
 has been the most popular with companies, though 
 hardly so with the public, and is now the most com- 
 mon value given. In a majority of cases it is not 
 given as a matter of right, but as a privilege to be 
 taken advantage of within a few months or else for- 
 ever lost. How the amount of this paid-up insur- 
 ance is usually determined has already been fully 
 treated in earlier papers of this series. It is enough 
 to say at this juncture that the paid-up policy 
 granted is ordinarily manifestly unfair as compared 
 with the values given those who continue. It is 
 practically always charged for at participating rates, 
 while in fact non-participating. Some companies 
 
131 
 
 have of late changed the provisions of their policies, 
 so that now paid-up insurance begins by stipulation 
 at once upon lapse, thus recognizing it as a right in- 
 stead of a privilege. Many companies, however, 
 following the course taken by certain very large com- 
 panies, require the surrender of the policy and appli- 
 cation to be made for paid-up insurance within six 
 months after non-payment, or the right to such paid- 
 up insurance is forfeited. 
 
 The privilege of surrendering policies for a cash 
 value is confined in most companies to the terminal 
 privilege in investment policies. Otherwise it is re- 
 garded as a great favor, to be granted with caution 
 and upon special occasions only. A few companies 
 have conceded the privilege of surrendering for cash 
 at intervals of one to five j-ears and a very few the 
 privilege of surrendering for cash at any time. The 
 Massachusetts companies are compelled by the law 
 of that Commonwealth to grant cash values within 
 a certain percentage of the full reserve. These com- 
 panies are as yet practically alone in regularly grant- 
 ing cash values upon policies other than tontine or 
 accumulated surplus contracts. The laws of the 
 same State make paid-up policies given upon sur- 
 render participating in future profits. 
 
 Outside of the Massachusetts companies, several 
 have of late years granted cash values after a certain 
 time equal to the full reserves, such values being 
 given only upon policies where the surplus accumu- 
 lates and is not paid upon surrender. 
 
 One company, which which was almost a pioneer 
 in this direction, on such policies pays all dividends 
 in the form of reversionary additions for a number 
 
132 
 
 of years in order to avoid the name of tontine, which 
 it professes to abhor; upon surrender before the close 
 of the distribution period the company allows the 
 full reserve as a cash value, but forfeits the value of 
 all dividend additions as a surrender charge. The 
 same company issues another policy in which it ap- 
 plies all surplus to accelerate the maturity of the 
 policy as an endowment. In that case one gets no 
 benefit from the dividend if he dies; in the former 
 case, he gets no benefit if he surrenders. Thus in sep- 
 arate policies the twin advantages claimed for ton- 
 tine are utilized and at the same time all sin avoided 
 — a trick that reminds one of how the two nuns 
 in Tristram Shandy escaped sin by each pronounc- 
 ing a part of the wicked word. In any event, the 
 course of this company in giving cash values equal 
 to the reserves, even though the surplus be forfeited, 
 has proven popular and has, in consequence, been 
 imitated by several companies, which now adorn 
 their policies with columns of cash surrender values. 
 The nigger in the woodpile is of course the forfeited 
 surplus; and one small company frankly so avows 
 in a policy wherein it tries to ride two horses at 
 once by permitting either annual or accumulated 
 dividends. The penalty it puts upon choosing the 
 former at any time is that all other surrender priv- 
 ileges are abridged both in amount or character and 
 the cash surrender entirely withdrawn. Not all com- 
 panies have this virtue of frankness. 
 
 There is almost as great variety in loan as in sur- 
 render privileges. A condition, formerly very com- 
 mon, but now falling into disuse, provided for a loan 
 of a definite proportion of the premium annually, or, 
 
133 
 
 rather, for the acceptance of notes as part payment 
 of premiums. This plan was designated the ''pre- 
 mium-loan plan," although really not a plan at all, 
 since it was applied to all plans in most companies. 
 These premium-notes commonly bear interest at a 
 rate in excess of the company's earnings, and at one 
 time formed a considerable part of the assets of -many 
 companies. From the standpoint of security only 
 they were justly regarded the safest possible invest- 
 ment. But as such notes were obtained by the repre- 
 sentation that dividends would wape them out, their 
 accumulation signified gross cause for disaffection 
 among the policyholders. They lapsed in great num- 
 bers under the pressure of increasing cost and decreas- 
 ing insurance, leaving the notes and their reserves to 
 cross accounts. Originally, in a few instances, these 
 notes were binding against the promissors in any 
 event, but latterly they have by their terms been col- 
 lectable only from proceeds of the policies. 
 
 Yet other companies, which have long since dis- 
 carded the delusive premium loan system, make loans 
 for the purpose only of sustaining the insurance in 
 force. In other words, they will upon application 
 advance a premium or premiums to an amount 
 within the reserve value and hold same as a lien 
 against the policy. But few companies make any 
 general application of this system, which in spite of 
 its narrowness commends itself as a good feature. 
 Others, following the lead of a certain great com- 
 pany in a so-called special form of policy, permit the 
 borrowing of any or all premiums after a fixed num- 
 ber of years, giving no privileges before that time. 
 This feature has been made a catch by agents to such 
 
134 
 
 an extent that it is likely to have a boomerang ef- 
 fect, which will be unfortunate, as it is really a valu- 
 able privilege as things go now-a-days. 
 
 A verj^ small number of companies, and they for 
 the most part what is known as cash value compan- 
 ies, stipulate for loan privileges without assuming 
 any custodianship over the insured's affairs, that is, 
 without dictating what shall be done with the money 
 borrowed. These privileges, however, are made as 
 useless as possible by the foolish restrictions thrown 
 about them. In many cases loans are not granted 
 except upon the anniversary of the policy, which 
 means, in practice, not when the money is needed 
 unless to pay premiums. The amount loaned rarely 
 exceeds three-fourths the reserve and is usually much 
 less. Consequently under the pressure of great 
 need for mone^^, one is strongly tempted to surren- 
 der and get more. A company can better afford to 
 loan the full reserve and keep the patron than pay 
 the full reserve and lose him; its own paper should be 
 a good security for all it will pay for it. One com- 
 pam^ has partially recognized this hj agreeing to 
 loan at the end of five-year periods the full reserve; 
 but between the periods the amount loaned does not 
 increase. So this is no more than a hint of what 
 ought to be. 
 
 Perhaps nothing more thoroughly illustrates the 
 view taken by companies that the foregoing are 
 privileges and not rights than the fact that without 
 exception it is stipulated that no surrender value or 
 loan will be allowed until after a specified period. 
 Be this period long or short — and it is commonly 
 long enough— to insist upon it is to insist that what 
 
135 
 
 is granted is not a man's right to his own, but a con- 
 cession of what he is in no wise entitled to. For to 
 take the former view would be to stultify the condi- 
 tion, since to render to another what is his is but 
 one's bounden duty at all times without unreason- 
 able delay. 
 
 The cause of this condition is no more honorable 
 to companies than is the fact. For it has been 
 adopted in order to shield companies in paying 
 larger first year's commissions than first year's 
 premiums justify. Not daring, or, at least, not car- 
 ing to render a true account of such outlay, compan- 
 ies have adopted the subterfuge of refusing any sur- 
 render value until the cost of obtaining the insurance 
 has been covered without trenching upon the re- 
 serve. 
 
136 
 
 POLICY CONTRACTS.— SURPLUS CONDITIONS. 
 
 Though the methods of determining the surplus 
 belonging to a policy have already been described, it 
 is perhaps wise to preface this paper by a simple for- 
 mula, adapted to any policy, viz: to the accumulation, 
 if any, at the beginning of the year add the premium 
 or premiums as received; improve the sum at the rate 
 of interest actually earned by the company; from the 
 amount thus obtained deduct the policy's share of the 
 company's actual expenses and also its net share of 
 losses determined by its actual insurance, or the differ- 
 ence between the face of the policy and its accumulated 
 value. The remainder will be the present value of the 
 policy, or the fund actually accumulated because of 
 it. Deduct from this the net reserve required by the 
 company's standard (not less than the legal reserve) 
 and the remainder is surplus, not being required 
 to fulfill the purposes of the policy. That it is sur 
 plus belonging to the policy is not so sure, since by 
 agreement its eventual ownership may be conditional. 
 That it has been contributed by the policy is likewise 
 doubtful, since the policy may before its term expires 
 result in a loss instead of a profit. But the amount 
 thus determined is for the present an apparent con- 
 tribution from the policy's premiums and, if surplus 
 is now to be divided, it should be declared to that 
 policy. If division of surplus is deferred, the ac 
 count can be carried along and either augmented by 
 
137 
 
 the withdrawal of others or cancelled by the surren- 
 der of the policy. But when division is actually made, 
 it is or should be made in precise accord with this 
 formula. 
 
 In order to veil departures of greater or less im- 
 portance from this method, companies have seen fit 
 to invest the apportionment of surplus with an air of 
 impenetrable mystery. Upon it the skill of the actuary 
 must be directed and none but adepts is thought able 
 to comprehend the workings of his scientific hand. 
 The uninitiated are supposed to accept the findings 
 with a feeling of grateful awe; w^hich they do — but 
 not without distrust. 
 
 Means of witholding an ample surplus even on an- 
 nual dividend plans have already been suggested in 
 the simple expedient of deferring payment of 
 dividends one or more years after same have been 
 earned. Tontine and other accumulated dividend 
 plans ofcourse render even this expedient unnecessary, 
 since the very essence of such contracts is the piling 
 up of surplus. No excuse is manifest, therefore, for 
 deducting aught from the amounts due by the for- 
 mula already given, and yet less excuse for refusing a 
 fair accounting when desired. Nevertheless, no less 
 than twelve companies, among which are several of 
 the great institutions of international repute, insert 
 in fine type in their applications the following pledge: 
 '* That in any distribution of surplus or profits the 
 principles and methods which may be adopted by 
 said company for such distribution, and its deter- 
 mination of the amount equitably belonging to any 
 policy which may be issued under this application, 
 shall be and are hereby ratified and accepted by and 
 
138 
 
 for every person who shall have or claim any interest 
 under such policy." One of the great companies has 
 but lately become ashamed of this cumbrous clause, 
 which sounds like the incisive words- of a judgment 
 note, and so have improved it as follows: '' That 
 the distribution of surplus which may be adopted 
 and approved by the society is hereby accepted by 
 me in my own behalf and for every person who 
 shall have any interest in the policy now applied 
 for." 
 
 It will be observed that in both these agreements 
 the applicant approves not merely present methods, 
 of which he conceivably might know something, but 
 methods to be as well, of which surely no one has 
 any knowledge. 
 
 This uncertainty is by almost all other companies 
 transferred to the policies and there appears in vague 
 clauses about ** Surplus then apportioned" or ** pro- 
 fits then determined" or equally unmeaning phases. 
 One large company, and one only, openly stipulates 
 in the policy for similar approval of the company's 
 future action to that demanded in the applications 
 mentioned; but the most of them dodge the issue. 
 Among companies doing an annual dividend business 
 only, there is often silence on the entire subject, no 
 mention of dividends anywhere. One great com- 
 pany refers the insured to its charter for instructions 
 in that regard. Copies of its charter are not readily 
 available to the public; but, if an Iowa policyholder 
 lately in the courts against the company is to be be- 
 lieved, this company is supposed to divide all surplus 
 above a fixed amount. It is to be feared that the 
 company misreads that ancient document, as the 
 
139 
 
 general surplus seems vastly to exceed the amount 
 specified. 
 
 But one of all the companies endeavors to give any- 
 clear agreement as to the dividend it will pay. Its 
 agreement, though marred by too many qualifica- 
 tions, is so much superior to any other that it should 
 be inserted here: '' This policy shall, if kept in force, 
 share in the surplus, according to the company's us- 
 age, at each distribution after years from the date 
 
 hereof, until all contributions to the surplus found in 
 the course of making such distributions to have 
 arisen from this policy shall have been returned; but 
 no dividend shall be pa3^able at or after the time de- 
 fault may be made in the payment of any premium." 
 
 The fact that long-term dividend plans in point of 
 time succeeded annual dividend plans embarrassed 
 with a past the companies adopting the new plans. 
 For they felt it incumbent upon them to so write 
 their new contracts as to make them intelligible in 
 some sense to their old patrons. Therefore the system 
 adopted by each company was its own adaptation 
 to the prevailing modes of expression and thought. 
 A more or less definite analysis of the sources of ex- 
 tiaordinary profit was commonly given in the poli- 
 cies. New and very peculiar phrases came to be used 
 in this connection, such as '* profits from lapses" and 
 most especially ''profits from losses," all meant to ex- 
 press the very simple idea that all profits should be- 
 long to the policies in force when dividends were de- 
 clared. Awkward methods of putting this proposi- 
 tion are not yet out of vogue entirely, although the 
 leader in this form of policy has long since eschewed 
 all unnecessary verbiage, saying only ''shall partici- 
 
140 
 
 pate in the accumulated surplus derived from policies 
 on the tontine plan, both existing and discontinued, as 
 may then be apportioned. " One company at least gives 
 a circumstantial account of how such surplus is to 
 be derived, dividing its policies into classes according 
 to year of termination of dividend period. It takes 
 the precaution, however, of binding the insured by 
 his application to accept whatever it may offer. An- 
 other company proposes to calculate dividends an- 
 nually and purchase therewith simple or pure en- 
 dowments, all due at a certain time. This to a de- 
 gree only is supposed to give a *' profit from losses," 
 as it is called— to a degree only, because pure en- 
 dowment rates are calculated usually on a low 
 mortality table. Such rates are presumably loaded 
 and are certainly based on less interest expectation 
 than the actual, thus giving scant value in both par- 
 ticulars unless participating themselves, which is not 
 stipulated. Such endowments, though full-paid, 
 are also forfeited upon non-payment of premium on 
 the original policy, though no corresponding gain is 
 given upon persistency. 
 
 Almost all companies now stipulate for cash divi- 
 dends, but one or two declaring reversionary divi- 
 dends with cash privileges and a few more permitting 
 the choice of reversionary dividends without re-ex- 
 amination either in the application or under strict 
 conditions at a later date. One company permits the 
 selection of reversionary dividends when the first 
 dividend is declared, if then in good health. 
 
 On long-term dividend contracts it has come to be 
 customary to allow several options as to the disposi- 
 tion of the surplus and, in fact, of the entire value of 
 
141 
 
 the policy in most cases. The options usually in- 
 clude cash and reversionary privileges together 
 v^ith the right of annuity conversion; similar privi- 
 leges are conceded in the disposition of the entire 
 proceeds of the policy, if desired. Stipulations for 
 re-examination in case the amount of insurance is in- 
 creased are usual, but not universal. Some compan- 
 ies also permit the total cash value, or part thereof, 
 to stand as a combined paid-up policy for its face and 
 an annuity equal to 3, 3V2 or 4 per cent, upon the 
 amount, thus converting by a subtle casuistry insur- 
 ance into pure investment. Even this is not sufficient 
 in all cases, and by a peculiar jugglery the income is 
 made to appear to be 5, 6, 7 or even 10 per cent., the 
 additional being paid for by the collection of a sufficient 
 deferred annuity premium as a part of the original 
 premium. All possible efforts are put forih to make 
 these options attractive to the patron who, how- 
 ever, upon one or the other will get but fair value for 
 his money and ought to expect no more. 
 
142 
 
 INSTALMENT, ANNUITY AND TRUST CON- 
 TRACTS. 
 
 The fact that the Yalue of a man's life cannot be 
 adequately expressed in a lump sum is especially evi- 
 dent when the person interested in the life depends 
 upon the man not merely for an income, but for 
 proper directions as to the care and use of it. The 
 immediate expression of a husband's value to his 
 v^ife in a financial sense is the income he affords her, 
 assured against all contingencies except his ow^n dis- 
 ability or death and protected against herself by 
 care and caution and by the very nature of the case 
 not subject to discount or w^aste. A life policy is in- 
 tended to cover the contingency of death and other 
 forms of insurance as yet imperfectly cover the con- 
 tingencies of temporary and permanent disability. 
 But since life insurance is to indemnify a loss, it should 
 in such cases provide an income of the same nature 
 and with similar safe-guards. This, it is now gener- 
 ally understood, the mere payment of a lump sum 
 upon the death of the insured utterly fails to do in a 
 large majority of cases. For such sum is at once at 
 the disposal of the beneficiary, subject to losses in 
 investment, to waste, to loss by over-confidence in 
 others, to seizure by creditors, and, though escaping 
 aH these, to constant diminution by use. 
 
 The ingenuity of actuaries was long ago brought to 
 bear upon this problem, and in England, at least, 
 what is known as survivorship annuities have shared 
 
143 
 
 the general popularity of life annuities. These con- 
 tracts, now issued by but few American companies 
 and rarely by them, provide for the payment of an 
 annuity for life to a certain person from and after 
 the death of another. It is purchasable at a level 
 annual premium upon either of two tables, one pro- 
 viding for the return of premiums in event of the prior 
 death of the beneficiary and one having no such pro- 
 . vision. These contracts provide the desired income 
 for the entire life of the beneficiary and the income 
 might be made inalienable by a stipulation against 
 its negotiation. Such a contract would, however, 
 be the absolute property of the beneficiary, and as 
 such subject to sale under execution for her creditors, 
 the same as any other bond. Unless coupled with a 
 condition of non-negotiability, it could be sold or 
 pledged at will; and not even an agreement of that 
 sort could operate to prevent the company and bene- 
 ficiary agreeing to cancel the contract for a consider- 
 ation. It is doubtful whether an agreement on the 
 part of the company not to purchase would be good 
 after the death of the insured; for then, at least, the 
 company and beneficiary are principals to the con- 
 tract, and may alter it by agreement in that respect 
 and any other. An objection which has probably 
 proven most completely fatal to the popularity of 
 these contracts is, that upon the death of the specified 
 beneficiary the insurance ceases, while the value of 
 the life insured is unimpaired, and the only change is 
 that it has inured to another person's benefit. This 
 is particularly enforced upon men's minds by the fact 
 that at such a juncture insurance may not be attain- 
 able because of altered health conditions. 
 
144 
 
 Within the past decade, and under various names 
 and pretentions, a plan to provide an income by mak- 
 ing policies payable in instalments has been intro- 
 duced to the public, often with a flourish of trumpets 
 as if something wonderful had been discovered. One 
 company, at least, made no change in existing policies, 
 except to add a memorandum agreeing to pay the 
 principal sum in a specified number of equal instal- 
 ments, crediting all balances with the net average in- 
 terest earned by the company and paying accrued 
 interest with each instalment. One or two others 
 used a similar memorandum, except that interest 
 was not paid in addition to instalments but was 
 used to lengthen the term of payments. In both 
 cases there was usually a stipulation in the contract 
 that the policy should not be negotiable— a stipula- 
 tion, which, however, is in the case of notes con- 
 sidered beneficial to the payer and which certainly 
 might be done away with by agreement. 
 
 Yet other companies issued new forms of policy, 
 promising directly to pay a certain sum per annum 
 for a certain number of years. For such policies a 
 premium was collected suflicient to furnish an insur- 
 ance equal to the present value of such instalments 
 discounted to the dateof payment of first instalment. 
 The rate of discount is usually 4 per cent, and the 
 actual insurance is not the sum of the instalments, 
 but the discounted value. These plans furnish a 
 definite income, but one not certain to endure so long 
 as required or for the life of the beneficiary, so as to 
 adequately indemnify the financial loss occasioned by 
 the death of husband or father. In fact, such pro- 
 visions are not more likely to fulfill the required con- 
 
145 
 
 ditions cf permanency, certamt\^, impregnability and 
 non-negotiability than would be the payment ot a 
 lump sum. For it is certainly possible that with a 
 sufficient cash estate one might provide for one's-self 
 an income for life, however long, while an instalment 
 provision is certain by its terms to fail after a com- 
 paratively short period. Any endeavor to continue 
 a control over w^hat shall be done with this income 
 after the insured's decease by stipulations for rever- 
 sions, forfeitures or change of beneficiaries are futile. 
 Upon the death of the insured such a contract be- 
 comes the personal property of the beneficiary, who 
 assumes the position of one principal to the contract. 
 A stipulation that the contract shall not be nego- 
 tiable would operate to prevent him from disposing 
 of the same; but, having once come into possession, 
 the ownership cannot be taken from him and trans- 
 ferred to another by any stipulation in the contract. 
 Despite any condition to the contrary, the death of 
 the beneficiary after the death of the insured will re- 
 sult in the passing of the title to the heirs of his 
 estate. The entail of property, personal or real, is 
 strictly forbidden both by constitutional and legal 
 provisions and will in all cases be declared void by 
 the courts. 
 
 Some companies issuing instalment policies, or 
 policies having attached to them instalment memo- 
 randa, are by their charters compelled to pay all 
 death claims within a specified time after the receipt 
 of proofs of loss; in which case it would seem doubt- 
 ful whether an instalment contract would be sus- 
 tained at law at all. The right of companies to act 
 as banks of deposit, crediting interest on funds left 
 
146 
 
 iii their hands after the decease of the insured, is also 
 questionable; and it is not clear that a claim of that 
 nature would have standing in the courts. 
 
 In instalment contracts such as have been described, 
 there are commonly provisions for commuted or dis- 
 counted values after the death of the original bene- 
 ficiary. 
 
 One life insurance company, which has by its char- 
 ter the right to act as trustee, calls an instalment 
 contract issued by it a ** trust certificate," and ex- 
 pressly agrees that the carrying out of the instalment 
 provisions shall be a trust. In that case, if the clause 
 has any legitimate meaning, the company is during 
 the lifetime of the designated beneficiary his trustee, 
 which would probably operate to remove the policy 
 from his control and from the reach of creditors claim- 
 ing through him. That such is the intent, however, 
 is not clearly indicated by the words of the contract, 
 and the company in question does not report trust 
 items among its liabilities. 
 
 Another company, which operates a trust depart- 
 ment under its own charter, lias a contract designat- 
 ing such department as trustee for the beneficiaries, 
 and is thus enabled to make an agreement to hold 
 the proceeds of the policy in trust, paying over a cer- 
 tain amount each year, and accumulating the re- 
 mainders at a fixed interest. Such an agreement 
 makes thecompany in its dual capacity both princi- 
 pals to the contract, vests in it the title to the policy 
 and its proceeds and only the use thereof in the bene- 
 ficiary and the reversion after the ofiices of the trust 
 have been performed in the insured. This makes the 
 beneficiary, or cestui qui trust as he is now called. 
 
147 
 
 a passive person, acquiring the title to each payment 
 as it is received and not before. Of course he cannot 
 alienate what he does not own, nor can his creditors 
 seize what is not his; so the provision for his future 
 cannot be destroyed by any act of his. The safety of 
 the fund is by the charter guaranteed by the assets 
 of the trust department and the capital of the com- 
 pany, but not by the assets of the insurance depart- 
 ment. Whether the income from such a fund would 
 last throughout the life of the cestui qui trust would 
 depend upon the amount of income, rate of interest 
 and amount of fund. Unless the income were limited 
 to about the annual interest, the estate might easily 
 fail to accomplish the desired end. 
 
 Another very large compan3% which has by its charter 
 trust powers, attaches to its policies a trust memoran- 
 dum creating in itself, not a trust of the policy, but an 
 executory and revocable trust in the proceeds there- 
 of for the benefit of the designated cestui qui trust 
 and with reversion to the insured. The trustee is 
 instructed to pay from the fund a designated sum 
 annually until all is expended and agrees to credit 
 interest at not less than a certain rate per cent. It 
 is held that such trusts are first liens against its en- 
 tire assets, it being a mutual company. The effect of 
 the trust, being executory, is that the title to the 
 policy is potentially in the insured until his death; 
 and the effect of that might be to avoid the trust in 
 favor of the creditors of his estate. 
 
 Any policy which can be put into negotiable con 
 dition can be utilized to accomplish the purpose more 
 effectively than any of the forego mg, by assigning 
 the same to a trustee with instructions to at once 
 
148 
 
 invest the proceeds thereof in an annuity upon the 
 life of the cestui qui trust, but in the name of the 
 trustee, such trustee to receive and pay over to the 
 cestui qui trust the annuity instalments. This will 
 provide an income for the whole life of the benefici- 
 ary, the amount of the income increasing, the longer 
 the original insured lives. The intervention of the 
 trustee effectually prevents the alienation, discount 
 or pledge of the income or its seizure by creditors. 
 As it becomes an executed trust at once, the policy 
 cannot be seized for debts of the estate unless the in- 
 sured was insolvent when the assignment was made. 
 As the policy and annuity contracts are both assets 
 easilj^ distinguishable, the failure of the trustee would 
 result only in the contracts being turned over by the 
 court to a new trustee and the carr^nng out of the 
 trust by him. The only point of risk would be the 
 company issuing the insurance and annuity con 
 tracts, and, of course, great care should always be 
 used in selecting it. 
 
149 
 
 APPENDIX. 
 
 Sample of simple form of annual dividend policy. 
 
 No. 100,000. Amount, $10,000. 
 
 Age, 35. Premium, $271. 
 
 THE LIFE INSURANCE COMPANY OF CHICAGO, 
 
 in consideration of two hundred seventy-one dollars 
 and the payment of a like sum on the first day of 
 July every year during the continuance of this policy, 
 
 PROMISES TO PAY, 
 
 upon proof of the fact and manner of death of John 
 Doe 
 
 TEN THOUSAND DOLLARS 
 
 to Mary Doe, his wife, or, in event of her prior death, 
 to the executors, administrators or assigns of the 
 insured. 
 
 John Doe is hereby made a member of this mutual 
 company, which further agrees to receive the premi- 
 ums upon this policy, to improve the same at the 
 actual net average rate of interest earned on the 
 mean assets of the company, to deduct at the close 
 of each polic3^ year the actual cost of the net insur- 
 ance furnished, to reserve for reinsurance such an 
 amount as may be required, and to return annually 
 to the holder of this policy, in cash or an equivalent 
 paid-up insurance as he may elect, the surplus of this 
 fund. 
 
 The company will loan the holder of this policy in 
 an amount not exceeding its then reserve, upon tfie 
 
150 
 
 security of the policy, and will prefer such securities 
 in making loans; but one annual premium must be 
 paid in advance from proceeds of such loan. 
 
 The failure to pay a premium when due shall be 
 construed to be an application for such a loan in the 
 amount of the premium, such advance to bear six 
 per cent interest, payable annually; and if the value 
 of the policy exceeds the net amount due (that is, the 
 premium less any abatement by surplus), the policy 
 shall be continued in force subject to a lien for amount 
 advanced and interest thereon. If the value is less 
 than the net amount required, the value shall be ap- 
 plied to continue the insurance at the one-year term 
 rates of the company. 
 
 Upon the surrender of this policy at any time the 
 company will pay its net cash value, provided that 
 the company may demand reasonable notice of with- 
 drawal; or instead of cash the holder may, at his op- 
 tion, take the equivalent value in paid-up insurance, 
 in continued insurance, in a life annuity, or an an- 
 nuity for a term of years. 
 
 Notice of any assignment must be given the com- 
 pany, and proof of interest will be required. 
 
 Executed at Chicago July 1, 1893. 
 
 Simple form of deferred dividend policy. 
 No. 100,000. Amount, $10,000. 
 
 Age, 35. Premium, $271. 
 
 THE LIFE INSURANCE COMPANY OF CHICAGO, 
 
 in consideration of two hundred seventy- one dollars 
 and the payment of a like sum on the first day of 
 July every year during the continuance of this policy, 
 
151 
 
 Upon proof of the fact and cause of death of John Doe, 
 
 TEN THOUSAND DOLLARS 
 
 to Mary Doe, his wife, or, in event of her prior death, 
 to the executors, administrators or assigns of the 
 insured. 
 
 John Doe is hereby made a member of this mutual 
 company, which further agrees to receive the premi- 
 ums upon this policy, to improve the same at the 
 actual net rate of interest earned upon the mean 
 assets of the company, to deduct at the close of each 
 policy year the actual cost of the net insurance fur- 
 nished, and to continue this accumulation for twenty 
 3^ears, at the close of which period, if the insured be 
 then living and this policy in force, the company will, 
 at the option of the holder, either redeem this policy 
 by paying the entire accumulation in cash or by 
 issuing an equivalent paid-up life policy, or by issuing 
 an equivalent paid-up annuity for life or a term oi 
 years, or w^ill permit this policy to be continued for 
 a second accumulation term often, fifteen or twenty 
 years, and will pay over any excess of the accumu- 
 lated value of this policy over its reserve, either in 
 cash or in an equivalent paid-up addition to this 
 policy, or in a paid-up annuity for life or a term of 
 years. 
 
 The company will loan the holder of this policy in 
 an amount not exceeding its then accumulated value, 
 upon the security of the policy, and will prefer such 
 securities in making loans; but one annual premium 
 must be paid in advance from the proceeds of such 
 loan. 
 
 The failure to pay a premium when due shall be 
 
152 
 
 construed to be an application for such a loan in the 
 amount of the premium, such advance to bear six 
 per cent interest, payable annually; and if the value 
 of the policy exceeds the amount of the premium, the 
 policy shall be continued in force subject to a lien for 
 the amount advanced and interest thereon. If the 
 value is less than the premium, it shall be applied to 
 continue the insurance in force at the one-year term 
 rates of the company. 
 
 Upon the surrender of this policy at any time the 
 company will pay its net cash value, provided that 
 the company may demand reasonable notice of with- 
 drawal. 
 
 Notice of any assignment must be given the com- 
 pany, and proof of interest will be required. 
 
 Executed at Chicago, July 1, 1893. 
 
 Sample form for trust assignment to secure income. 
 
 I hereby assign to the Equitable Trust Company, 
 a corporation incorporated under the laws of Illinois, 
 and with its principal office at Chicago, all my inter- 
 est in policy No. 100,000 on my life in the Life Insur- 
 ance Company of Chicago, in trust, however, for 
 Mary Doe, my wife, and on the following conditions: 
 
 If the said Mary Doe shall survive me, the said 
 Equitable Trust Company shall collect the proceeds 
 of the said policy of insurance, and shall purchase 
 therewith from the said Life Insurance Company of 
 Chicago an annuity for the life of the said Mary Doe, 
 but in the name of the said Equitable Trust Com- 
 pany as trustee for the said Mary Doe; and the said 
 Equitable Trust Company shall collect the instal- 
 ments upon the said annuity as the same shall be- 
 
153 
 
 come due and payable, and after deducting a fee oi 
 two per cent thereon shall pay the same over to the 
 said Mary Doe on the first day of the month next 
 succeeding the date of such collection. In event of 
 the death of the said Mary Doe or of her legal sepa- 
 ration from me, this deed of trust shall be void, and 
 the said Equitable Trust Compan^^ shall, upon re- 
 ceipt of a fee of twenty-five dollars, reassign the said 
 policy of life insurance to me. 
 
 Executed at Chicago July 1, 1893, and 
 
 Accepted at Chicago July 1, 1893. 
 
155 
 
 TABLE OF CONTENTS. 
 
 INSURANCE IN GENERAIv Pages 3—7 
 
 Mutual burden-bearing. Indemnification. Rates made by 
 application of rules of average. Hazard in health and life in- 
 surance an increasing one. Real insurance is only against pre- 
 mature death. Cancellation by company not admissible. Con- 
 sequently care both in drawing up contracts and in selecting 
 risks. Tendency in England to less strict requirements as to 
 health, in this country to more. Classification is desirable. In- 
 surance is to indemnify loss. Interest is pre-supposed. Amount 
 of insurance should be limited to value to beneficiary. Insur- 
 ance on life, limited-payment and endowment plans automatic- 
 ally adjust to diminishing value of life. 
 
 VITAIv STATISTICS Pages 8—20 
 
 Very accurate statistics desirable. Public demands a policy 
 which cannot be terminated by company. Hence company 
 must be more cautious about its agreements. Assessment insur- 
 ance only an apparent exception. Mortality tables must cover 
 the whole period of life. Benefit of selection lost in five years. 
 Companies must expect the average mortality of the country. 
 Company must fix the rate for each year in advance. Statistics 
 covering thousands of lives needed. First compilation was by 
 John Graunt in 16G2. More complete tables by Edmund Hailey 
 in 1693. Insurance had begun in crude attempts. Good tables 
 in 1742 by Johann Peter Suessmilch, by Menander in 1741. In 
 1765 the Equitable Life Insurance Institution started in London 
 on mutual principle. In 1815 Milne compiled tables from ex- 
 perience of city of Carlisle. Later the Actuaries' tables from 
 experience of seventeen companies. American experience 
 tables from experience of Mutual Life, compiled by Sheppard 
 Homans. Limit of life placed arbitrarily at 95 or 100. Meech's 
 tables, compiled from experience of thirty American companies. 
 No resulting attempt to classify risks. Arbitrary standards 
 adopted first by Massachusetts, then by nearly all States. Elizur 
 Wright did not consider the Actuaries' table a final standard. 
 He was collecting American experience. Error in Wright's 
 view. Gain in mortality is absolute, not temporary. Variations 
 of Meech's tables from others small because of assumed limit of 
 life. One company reduced rates for a time. Actuaries' and 
 American Experience tables now used by all authorities. Actu- 
 
156 
 
 ries' table given with rates of mortality at different ages and also 
 terms of expected life. 
 
 RATB-MAKING— TERM AND NATURAL PRE- 
 MIUM Pages 21—20 
 
 Insurance a year at a time. Formula for natural premium. 
 Natural premium simplest plan, but last to come into use. 
 Is not now generally understood. Sheppard Roman's term 
 plan. Construction of rates. Present imitation of level pre- 
 mium. Formula for single premium for term insurance. For- 
 mula for level annual term premium. Use of present value of 
 an annuity of one dollar. Loading. 
 
 RATE-MAKING-WHOLE LIFE Pages 27—30 
 
 Eventual death certain. Hence whole life policy covers cer- 
 tainty as well as chance. The time of death only is uncertain. 
 Calculation of (1) when amounts of insurance must be paid, (2) 
 net present amount in hand necessary to pay them, (3) what sum 
 each must pay in now to make up this amount, (4) present value 
 of an annuity of one dollar, (5) what annual amount is equiv- 
 alent to single premium required. Use of commutation and 
 logarithmic tables. Loading. 
 
 RATE-MAKING — LIMITED PAYMENT LIFE 
 
 AND ENDOWMENT Pages 31—36 
 
 Endowment the opposite of life insurance. Combining the 
 two. Attracts the best lives. Analysis of rates for pure endow- 
 ment. Combined with term rates gives endowment insurance 
 premium. Semi-endowment premiums. Limited-payment life 
 policies really term insurance combined with an endowment 
 equal to net single premium at close of term. The single pre- 
 mium for such a policy and for a whole life policy necessarly 
 the same. Gain because of lower death rate in endowment in- 
 surance. Endowment insurance not the same as carrying terim 
 insurance and investing the remainder of the premium else- 
 where. Loading. 
 
 RATE - MAKING — SPECIAL AND UNUSUAL 
 
 CONTRACTS Pages 36-40 
 
 Premiums otherwise than annual. Arbitrary increase. As- 
 sumption that the deferred premiums are credits. Amount of 
 extra charge. Extortion practiced in the case of monthly pay- 
 ments. Excuse for large addition to weekly payments. Return 
 premium charges. Method of arranging insurance for increas- 
 ing amounts. Its application in return premium plans. Install- 
 ment insurance really for a discounted amount. Guaranteed 
 interest or debenture contracts. Method by which interest above 
 the actual guarantee is provided for. 
 
157 
 
 RATE-MAKING— THE LOADING Pages 41-45 
 
 What net rates cover. No provision for expenses or variations 
 in mortality, losses on investments, etc. EHzur Wright's con- 
 tention for the necessity for loading. Euture premiums will be 
 required to cover future exigencies. Probable attitude of Wright 
 toward contracts for permanent renewal commissions. Loading 
 , is usually a percentage of premium. No pretense of scientific 
 accuracy. Sheppard Homans' separation of elements of loading 
 in natural premium rates. Expense portion a certain amount 
 per thousand of insurance; portion for other purposes a percent- 
 age on net premium. Necessity caused by manner of paying 
 conmiissions. Homans does not make distinction on first year's 
 premium. Margin for excessive losses properly a percentage 
 of term or, indeed, any life net premium. Two items should be 
 kept separate. No ample provision for decrease of interest 
 possible except by assuming a certainly safe rate originally. 
 Present practices. 
 
 PREMIUMS— THEIR COMPONENT PARTS Pages 46-51 
 
 All premiums on policies which cover the contingency of 
 death only consist of two parts, loading and net premium, all 
 of which is solely for mortality purposes. Interest is required 
 to help out the net premiums, which do not fully cover the 
 mortality. Erroneous ideas of the three-fold nature of such 
 premiums. Separation of net premium into mortuary and re- 
 serve elements. Really means merely money to be expended 
 to-day and money to be expended to-morrow. Money to be 
 paid out to-day varies and the reserve varies in inverse ratio. 
 Really no distinction between the two. In net premium no 
 provision is made for anything but the payment of losses. 
 Exemplified by single premium. Reserve comprises all future 
 mortuary demands discounted. Reserve in whole life and 
 term policies is to make good the deficiency of future premiums. 
 So-called self-insurance fund. Actual elements of whole life 
 net premium are term insurance to limit of life and pure endow- 
 ment premium for an endowment due at the extreme limit ot 
 life. The endowment element is very small, being but one cent 
 at age 50 for an endowment of one thousand dollars due at age 
 100. Deposits for reserve cover not only the reserve on the en- 
 dowment element but on the term element as well. Tables of 
 insurance cost. Elements of premium on endowment insur- 
 ance. Cost of insurance not a mortuary element. 
 
 RE-INSURANCE RESERVES Pages 52—57 
 
 Amount formerly left to companies. Governmental interfer- 
 ence in England. American tendencies toward recklessness. 
 Part of Elizur Wright in establishing reserve requirements. 
 Peculiar ideas of reserves. Actuary Nelson's contention. Wright 
 
158 
 
 held that it should not be assumed that a company would take 
 another's risks at a less premium than the latter was receiving, 
 nor at a less rate than the net premium. Enough must be re- 
 served to make sure that an average company could afford to 
 re-insure the risks. Example of a one-year term policy. One- 
 year term and single payment policies give no difficulty. In 
 whole life policies the re-insuring company must be paid 
 enough to make good the difference between the premium on 
 original policy and premium which would be charged at in- 
 sured's present age. This is the present value of an annuity for 
 the life of the insured equal to the difference between the 
 premiums. If premium is lower than net premium, an annuity 
 equal to the deficit is also charged for. Reserves on limited- 
 payment and endowment policies calculated in similar man- 
 ner. Reserves on policies paid by less than annual premiums 
 calculated as if paid annually and deferred premiums treated as 
 temporary credits. 
 
 SURPLUS— WHENCE DERIVED Pages 58—63 
 
 Three sources of profit. Two simpler are from higher in- 
 terest or lower expense than was counted on. A profit from in- 
 terest must be practically certain or rates would plainly be too 
 low. Such was not always understood. A company with a six per 
 cent reserve. Gains from a salvage on the loading should be 
 constant. Extravagance of American companies makes gains 
 from this source average little. In some cases there is a deficit 
 to be made good from other gains. That amounts to an as- 
 sumption that the net premium is more than equal to its offices. 
 No gain certain from loading on limited payment premiums 
 when not all expended in the current year. Some of the load- 
 ing should be reserved to cover expenses after the premium-pay- 
 ment period. Savings on mortality estimates. Death not a 
 chance but a certainty— only time of death uncertain. Apparent 
 gain by saving on estimates not real; gain is only the interest 
 on apparent gain for an uncertain period. No provision in pre- 
 mium for paying claims at another time. Real gain in addi- 
 tion to interest is the premiums to be paid by those who do not 
 die as expected. To reach the deduction to be made from the 
 apparent gain, calculate what would be necessary to reinsure 
 these unexpected survivors, in other words, the :»-eserves on 
 their policies. The same is true in endowment insurance, and 
 in term insurance. But in term insurance for one year or less 
 it is otherwise, such being renewable if at all for the future 
 premiums. So the apparent gain corresponds to the real gain. 
 A formula for ascertaining the surplus earnings of a company. 
 
 SURPLUS— HOW APPORTIONED Pages 64—68 
 
 No trouble in purely stock companies. Life insurance natur- 
 ally a mutual operation. Logic requires a system which will 
 
159 
 
 induce men to pay ample rates. Competition transferred from 
 price to cost. Various methods of dividing surplus. One large 
 American company employs a mysterious method. The contri- 
 bution plan. Salvage on the loading in proportion to the load- 
 ing, excess interest in proportion to mean policy assets and mor- 
 tality gains in proportion to tabular cost of insurance. Division 
 of premium for bookkeeping convenience. Net loss is amount 
 of policy less the reserve. Hence current cost of insurance is 
 net natural premium on net amount at risk. 
 
 SURPLUS— HOW AND WHEN DISTRIBUTED. ..Pages 69—78 
 
 Early practice was reversions. Soon temporary additions 
 were used by some as more attractive. Reversions increased re- 
 serve values which companies did not recognize, but forfeited 
 same with original insurance upon non-payment. Recognition 
 of insured's rights in this even after non-payment brought about 
 recognition of his right to say in what form he wished surplus 
 applied. So conversions of additions into cash were permitted. 
 Actuaries objected on the ground of adverse selection. There- 
 fore cash dividends became the rule with limitation of choice of 
 additions. Dividends also applied to permanently reduced 
 premiums. Also in reduction of premiums for a fixed term. 
 Dividends deferred for several years. Reason for such action. 
 Term shortened' in answer to clamor for cheaper insurance. 
 Result of adoption of short terms is that not all surplus is divided. 
 Cause of introduction of tontine dividend plan was lapse rate. 
 Real cause of popularity was apparent cheapness, giving an in- 
 vestment at about the price charged for life insurance. Long 
 dividend period seems the only feature likely to prove perma- 
 nent. Hardships of forfeiture largely diminished. No apparent 
 demand for relaxation of forfeiture at death. Men seem to feel 
 that to survivors belongs the surplus, for they only have contrib- 
 uted it. Tontine surplus formula. Great latitude given in ap- 
 plication of surplus. Unfairness of charging tontine policy- 
 holder full participating rates for non-participating policy while 
 holderof limited-payment policy is furnished a participating pol- 
 icy at the net rate. Same as to purchase of paid-up annuity. Ex- 
 cuses for this course. Long dividend periods increase safety of 
 companies. Other benefits of such plan. 
 
 EXPENSES— HOW ASSESSED Pages 79-85 
 
 Little attention from actuaries. Early practice to charge for 
 expense in proportion to premium. But slight variation yet. 
 Loading considered the expense element and expenses charged 
 upon that. Plan proceeds from wrong premises. How about 
 cases where actual expense exceeds total loading? Pressure of 
 brokerage system. Wrong of using a greater amount for ex- 
 penses because of age of member recognized by Sheppard 
 Homans. Reported recent action of New England Mutual. In- 
 
justice of practice in regard to single premiums. Injustice of 
 expense charge against endowment premiums. Illustration ot 
 this unfairness. A handicap to the investment. Cut rates in 
 one company. 
 
 SURRENDER VALUES -PAID-UP INSURANCE. . .Pages 86-92 
 
 Early practice was forfeiture upon non-payment. Not pro- 
 tested against while life plan was universal. General feeling of 
 dissatisfaction and its causes. Introduction of investment insur- 
 ance created demand for surrender values. In which case anal- 
 ogy was with purchase of property instead of with fire insurance. 
 Popular indignation in England and America. Elizur Wright's 
 work in Massachusetts. Adoption of non-forfeiture provisions 
 by the New York Life. General acceptance of non -forfeiture 
 principles, checked by tontine reaction, but now universal. 
 Variety of plans for determining values to be allowed. In case 
 of limited-payment and endowment polices, prevailing method 
 is to give paid-up insurance in proportion to number of premiums 
 paid. Simple and intelligible formula for determining the proper 
 amount of paid-up insurance due upon surrender of a life policy. 
 Most involved formula in common use for no good reason. 
 Harsh conditions often imposed. Correct formula for limited- 
 payment and endowment policies, giving a less value than the 
 usual plan in the earlier years but a greater in the later years. 
 Definition of net single premium as used in the foregoing. 
 
 SURRENDER VALUES — EXTENDED INSUR- 
 ANCE - Pages 93—98 
 
 Nature of the reserve. Origin of idea of extended insurance. 
 Grace in payment. Arguments pro and con. Same privileges 
 allowed upon request amount to discrimination. Private in- 
 structions to agents. Grace at the discretion of the officers. 
 Using the reserve to pay premiums on the original policy. 
 Elizur Wright's system of extensions. He prepares a complete 
 table of net single premiums. Assumes that sole object of 
 policyholders is to secure insurance. Missouri only compels 
 extensions. Adaptation of extension system to endowments. 
 Extension is non-participating. Actuaries object to extensions 
 only when they are optional with holder. Practice of Australian 
 company. 
 
 SURRENDER VALUES— CASH Pages 99—103 
 
 Formerly if given at all, as a great favor and not as a right. 
 Pretense of managers. Originally no definite idea of reserves. 
 In mutual companies the insured should not be considered to 
 have parted with the ownership of his money becausehe has in- 
 trusted it to the company. All that remains of it after j ust claims 
 upon it have been liquidated belongs to him. Elizur Wright's 
 surrender charge. Possible loss by adverse selection counter- 
 
161 
 
 balanced by greatly increased cost of inducing men to buy a 
 policy which means great loss unless completely paid. Danger 
 of run upon companies. Such danger if it exists, is the fault of 
 the companies, who would never have been compelled to promise 
 such values in advance had they shown a disposition to act 
 fairly without being compelled to do so by the letter of their 
 policies. Notice is often required. 
 
 PREMIUM AND OTHER LOANS Pages 104—108 
 
 Objection of adverse selection could not well apply. It makes 
 life insurance more efficacious. Investment policies will con- 
 tinue to be regarded low-class investments so long as companies 
 discredit their own promises to pay. Objection of danger of a 
 run cannot apply. Reasonable expectations. Should loan to 
 the full reserve if at all. Practice of banks. Loans to pay prem- 
 iums. The part-note plan. Notes to be covered by dividends. 
 Result was increasing payments and decreasing net insurance. 
 Loan of full premium upon request. Similar loans guaranteed 
 for a fixed term of years, covering all premiums. Diversity of 
 practice of companies. Loans from 50 to 90 per cent of the re- 
 serve. One company discriminates against the holders of ac- 
 cumulated surplus policies. But one company loans the full 
 reserve, and that only at five year intervals. 
 
 POLICY CONTRACTS— THE APPLICATION.. .Pages 109— 115 
 
 Reference to application. Same declared to be warranty. 
 Character of the communications and promises referred to. 
 Effect of a warranty to render the importance of the error im- 
 material and the sincerity of the answer unavailing. How they 
 differ from representations. Courts and juries endeavor to undo 
 the wrong of such a stipulation by avoiding the condition when- 
 ever possible. This does not remove the odiun from the com- 
 panies which retain this ancient weapon. If company cannot 
 prove fraud, it has no right to expect men to believe that there 
 has been fraud. Illustration of the defenceless condition of the 
 policyholders. Assessments and fraternal societies even greater 
 sinners. Results of the practice are a marked preference for 
 companies with incontestable policies, adverse legislation, 
 attaching a copy of the application to the policy. Application 
 made the hiding-place for many stipulations which companies 
 would have been ashamed to have in their policies. Policies 
 free from conditions while the back (called the front) of appli- 
 cations is full of them. Warrant not to kill yourself. Waver of 
 statutory rights not valid. Many other obnoxious conditions. 
 
 POLICY CONTRACTS— THE PROMISE TO PAY 
 
 Pages 116—121 
 
 Fonn is that of a simple contract like a promissory note. 
 Consideration should be clearly specified. Mention of consider- 
 
16^ 
 
 ation should come first in the contract. Rigid stipulations of 
 some companies. Time of payment of amount of policy. Con- 
 ditions limiting time for filing proofs and for bringing action 
 for recovery. Place of payment usually home office. Conditions 
 of payment are so manifold and complex that they are never 
 given in their proper place, near the promise, to pay. List of 
 conditions frequently imposed. Pleading breach of conditions 
 in avoidance of claims even when such violation had nothing 
 whatever to do with cause of death. Suicide clauses. Military 
 and naval service. Custom to pay a surrender value upon sur- 
 render of void policies. All conditions circumscribe the use- 
 fulness of insurance, One company has removed all conditions. 
 Provision for cancellation. 
 
 POLICY CONTRACTS— TO WHOM PAYABLE. .Pages 122—128 
 
 Insurance a contract of indemnity. Hence not given to per- 
 sons not interested in the thing insured. Illustrated by fire insur- 
 ance. Interests of relatives direct and collateral. Certain hard- 
 ships. Interests of creditors limited by amount of debt. Interest 
 in one's own life. Right of assignment. Court sophistry. If 
 assigned by beneficiary must convey also the insurable interest. 
 Notice of assignment. Survivorship reversion. Policies payable 
 to devisees. Not good as against creditors of estate. 
 
 POLICY CONTRACTS— SURRENDER AND LOAN 
 
 PRIVILEGES Pages 129-135 
 
 Non-forfeiting means a variety of things. At best it means 
 extension; at worst a small paid-up, non-participating policy if 
 applied Tor within a short time. Characteristics of extensions. 
 Paid-up insurance conditions. Cash surrender privileges. Pe- 
 culiar action of a non-tontine company. Custom of endorsing 
 cash values. Old part-note plan. Loans to pay premiums 
 only. Loaning all or any premiums after a fixed date. Loans 
 without dictation. Foolish and annoying conditions. Loans 
 usually too small a part of the value. 
 
 POLICY CONTRACTS— SURPLUS CONDITIONS . Pages 136-141 
 
 General formula to determine amount of surplus. Made a 
 mysterious operation by companies. Retaining a surplus. Con- 
 ditions in applications of several companies. Similar clauses or 
 indefinite agreements in most policies. Often entire silence on 
 the subject. One company refers to its charter. But one com- 
 pany offers a definite agreement. Embarassment in introducing 
 long dividend periods. Built upon foundation of annual divi- 
 dends. So-called profits from lapses and losses. Peculiar forms 
 of stating this. Surplus applied to purchase of pure endow- 
 ments. Options of settlement offered. Income options often 
 deceptive. 
 
163 
 
 INSTALMENT, ANNUITY AND TRUST CON- 
 TRACTS Pages 142-148 
 
 Value of human life not expressed in a lump sum, but in an 
 income. Contingencies to be covered. Former methods of 
 meeting this fact. Objections. Modern instalment policies. 
 Objections. Charter provisions of some companies. Provisions 
 for commuted values. Trust agreements, both spurious and 
 genuine. A duplex company. Objections. A mutual company 
 with trust powers. Trust is executory and does not vest title. 
 A more effective provision. 
 
 APPENDIX— SAMPLE ANNUAL DIVIDEND POLICY WITH- 
 OUT CONDITIONS. SAME WITH LONGER DIVIDEND 
 PERIOD AND OPTIONS. SAMPLE ASSIGNMENT IN 
 TRUST TO SECURE INCOME FOR WIFE FOR LIFE. 
 
UNIVERSITY OF CALIFORNIA LIBRARY 
 
 — rf-fABtt^^ltJHE.^AST DATE 
 
 mi 10 191P 
 
 1 NOV 301918 
 
 JUL m rm 
 
 MAR 1' 
 Nov 8 IftI 
 
 ^?R 14 1S24 
 
YB 17992