THE LIFE INSURANCE COMPANY WILLIAM ALEXANDER LIBRARY OF THE UNIVERSITY OF CALIFORNIA. ClMS 115u0ine00 THE LIFE INSURANCE COMPANY APPLETONS' BUSINESS SERIES. THE WORK OF WALL STREET. By SERENO S. PRATT. Illustrated. i2mo. Cloth, $1.25 net ; postage, 12 cents additional. FUNDS AND THEIR USES. By FREDERICK A. CLEVELAND. Ph.D., of the University of Pennsylvania. Illustrated. i2mo. Cloth, $1.25 net ; postage, 12 cents additional. TRUST FINANCE. By Dr. EDWARD S. MEADE, of the Wharton School of Finance, University of Pennsylvania. i2mo. Cloth, $1.25 net ; postage, 12 cents additional. AMERICAN RAILWAY TRANSPORTATION. By EMORY R. JOHNSON, of the Wharton School of Finance, University of Pennsylvania. i2mo. Cloth, $1.50 net; postage, 14 -cents additional. THE MODERN BANK. By AMOS K. FISKE. Illustrated. i2mo. Cloth, $1.50 net ; postage, 12 cents additional. MODERN INDUSTRIALISM. By FRANK L. McVEY. i2mo. Cloth, $1.50 net ; postage, 12 cents additional. MODERN ADVERTISING. By EARNEST ELMO CALKINS and RALPH HOLDEN. Illustrated. i2mo. Cloth, $1.50 net ; postage, 12 cents additional. IN PREPARA TION. THE LIFE INSURANCE COMPANY. By WILLIAM ALEXANDER. (To appear May, 1905.) MODERN ACCOUNTING. By HENRY RAND HATFIELD, of the University of Chi- cago. (To appear Fall, 1905.) RAILROAD FINANCE. By FREDERICK A. CLEVELAND, Ph.D. D. APPLETON AND COMPANY, NEW YORK THE LIFE INSURANCE COMPANY BY WILLIAM ALEXANDER UNIVERSITY gflLireitf^ NEW YORK D. APPLETON AND COMPANY 1905 COPYRIGHT, 1905, BY D. APPLETON AND COMPANY Published May, 1905 PREFACE THIS is not so much a book of reference as a general treatise on life insurance. It is not intended for the full-fledged actuary, but may serve as a preliminary to actuarial study. It is not intended primarily for the chief executive officers of life insurance companies, for they are presumably experts, but it may be of value to junior officers, heads of departments, and insur- ance canvassers whose efficiency and progress may depend to some extent upon an intelligent grasp of the subject as a whole. The capitalist who invests his money in life insurance (and who sometimes makes expensive blunders through ignorance of fundamental truths) may find it of interest; so also may the financier, the legislator, the journalist, the sociologist, the student of political economy for life in- surance has become one of the greatest of financial forces, and has done as much to advance modern civilization as any other single influence. The student who enters upon the study of life insurance is like a traveler who seeks to follow an unfrequented trail. At first he will be in constant danger of losing his way, but after a time he will reach the beaten path and be able to follow it easily. Hence, although the effort has been to make this treatise comprehensive, the chief aim has been to make its earlier pages elementary and absolutely clear and simple. v 55 Vi PREFACE If the explanations deal principally with life insurance as practised in the United States, the reason is not because the book is designed chiefly for American readers, but be- cause life insurance has had its greatest development in the United States, where competition has been keenest, where the greatest volume of business has been written, and where the largest companies have been built up. Unless otherwise stated, the usages prevailing in the State of New York in accordance with the New York law are here described. Some of the most remarkable men of modern times have been the founders and builders of life insurance com- panies. No adequate history of American life insurance can ignore these men. But there is no reference in this book to their achievements (except so far as the companies built by them stand as monuments to their energy and ability), for this is neither a biography nor a history, and space for dealing adequately with this branch of the subject is lacking. CONTENTS PART L FIEST SECTION PRINCIPLES AND PRACTISE CHAPTER PAGB I. INTRODUCTORY 3 II. WHAT is INSURANCE? 7 III. THE GERM OF THE LIFE INSURANCE IDEA, AND ITS DEVELOPMENT 11 IV. SCIENTIFIC FOUNDATIONS 15 V. THE NATURAL PREMIUM 23 VI. THE SINGLE PREMIUM 27 VII. THE LEVEL PREMIUM 33 VIII. ANNUITIES 44 IX. SIMPLE ENDOWMENTS AND TERM POLICIES. ... 51 X. THE ENDOWMENT POLICY, AND THE LIMITED PAYMENT LIFE POLICY . . 54 XI. THE GROSS PREMIUM 57 XII. RESERVE 61 XIII. FINANCIAL STATEMENT AND CERTAIN PARENTHETICAL REMARKS 69 XIV. No COMPANY CAN AFFORD TO GRANT INSURANCE AT LESS THAN COST 74 XV. ASSESSMENT INSURANCE 77 XVI. SURPLUS 83 XVII. THE THREE METHODS OF CONDUCTING THE INSURANCE BUSINESS . 85 XVIII. DIVIDENDS 90 vii viii CONTENTS PAET I. SECOND SECTION CHAPTER PAGE XIX. THE EXPERIMENTAL COMPANY BEGINS TO DO BUSINESS. 93 XX. THE POLICY CONTRACT. ORDINARY LIFE ANNUAL DIVI- DEND POLICY 97 XXI. THE HISTORY OF THE POLICY TRACED .... 106 XXII. THE POLICY CONTRACT. ORDINARY LIFE DEFERRED DIVIDEND POLICY 114 XXIII. THE POLICY CONTRACT. LIMITED-PAYMENT-LIFE DE- FERRED DIVIDEND POLICY . . . . . 117 XXIV. ALL KINDS OF POLICIES 125 XXV. EXCEPTIONAL KINDS OF INSURANCE 131 XXVI. THE GENERAL UTILITY OF LIFE INSURANCE . . . 140 XXVII. THE BUSINESS OF GRANTING ANNUITIES .... 145 XXVIII. MISCELLANEOUS FACTS 155 XXIX. LIFE INSURANCE LITERATURE . 168 PAET II PROBLEMS OF MANAGEMENT I. SECURITY 175 II. THE PROVINCE OF THE AGENT 178 III. EXPENSES IN GENERAL 182 IV. WHETHER A COMPANY SHOULD HOLD A LARGE OR A SMALL SURPLUS . 189 V. THE PROBLEM OF DIVIDING SURPLUS SIMPLIFIED UNDER THE DEFERRED DIVIDEND PLAN 192 VI. Is THERE ANY TAINT OF IMMORALITY, OR ANY ELEMENT OF GAMBLING IN THE INSURANCE IDEA! .... 198 VII. LARGE vs. SMALL SURRENDER VALUES 208 VIII. GOVERNMENT SUPERVISION 215 IX. THE AGENT'S RESPONSIBILITY 220 X. RESIDENCE, TRAVEL, AND OCCUPATION. EXTRA HAZARDS . 229 XI. OTHER PROBLEMS . . .235 CONTENTS ix PART III THE MODERN COMPANY ITS RELATIONS TO THE PAST, PRESENT, AND THE FUTURE CHAPTER PAGE I. THE MODERN LIFE INSURANCE COMPANY .... 245 II. THE MODERN LIFE INSURANCE COMPANY (Continued) . . 252 III. INFANCY OF REPRESENTATIVE COMPANIES .... 258 IV. GROWTH OF MODERN LIFE INSURANCE 265 V. How TO SELECT A COMPANY 269 VI. A RETROSPECTIVE GLANCE 273 VII. THE PRESENT AND THE FUTURE 278 INDEX , 283 PART I PRINCIPLES AND PRACTISE ABSTRACT OF PART I After certain introductory statements and certain elementary explanations, the funda- mental principles upon which life insurance is based, and the manner in which these principles are applied in practise, are illus- trated by the building up of an imaginary company. To the student who is not already an ex- pert, the most important part of this book is comprised in Chapters IV to X (inclusive), because they deal with three facts regarding which the general public are both ignorant and indifferent, but which must be clearly understood before any intelligent knowledge of life insurance can be hoped for. These three facts are (a) that ALL life insurance costs money to the company that grants it; (b) that this cost can be accurately deter- mined; and (c) that the latter fact need not be taken for granted, but can be readily grasped by any person of ordinary intelligence. PART I. FIRST SECTION CHAPTEK I INTKODUCTOKY INCREASING PUBLIC INTEREST IN LIFE INSURANCE CHARLES LAMB, while at the East India House, is said to have written on the fly-leaf of one of his ledgers, " This book is full of interest." And many people would also regard as a jest a similar inscription in a book on life insurance. But the world is waking up to the fact that life insur- ance is really a topic of great general interest. Already it is so interesting to thirty million people of various nation- alities that they are spending their money to obtain it these are the buyers of life insurance. And there are three hundred thousand men, and not a few women, who are mak- ing their bread and butter by selling it these are the in- surance canvassers, or agents. A book recently published in New York gives the names of nearly five thousand people whose lives are known to be insured for amounts varying from fifty thou- sand to two million dollars each. And this list is very incomplete, for many men are secretive about the amount of insurance they carry on their lives. In addition to those insured for very large amounts 3 4 THE LIFE INSURANCE COMPANY there are many more who carry policies for amounts rang- ing between five and fifty thousand dollars. Nor is this interest confined to the well-to-do. Many thousands of policies for $1,000 and upward are issued every year, and the " industrial " companies issue multi- tudes of policies for still smaller amounts. THE SCOPE, INFLUENCE, AND UNIQUE CHARACTER OF LIFE INSURANCE Life insurance has become a mighty force, and as its development has been most conspicuous in the United States, it furnishes one of the best examples of American push and Yankee ingenuity. The history of life insurance from the close of the seventeenth century down through the eighteenth and nine- teenth and into the twentieth is as interesting and instruc- tive as the history of a great nation. A study of its scientific basis reveals many curious facts, some of which are, at first blush, startling to the uninitiated. Its influence for good if wisely directed is potent and far-reaching. It tends directly to knit together the best elements in the community; to solve difficult social prob- lems, and to bring nearer an epoch of peace among nations. It turns men and women from the crooked paths that lead to the jail, the poorhouse, and the asylum, and guides them into prosperous and sunny avenues. It educates chil- dren, starts young men on successful business careers, makes worthy citizens out of the struggling poor, and, best of all, gives support and protection to the widow, the orphan, and the aged. And yet it is a business enterprise pure and simple. It is beneficent in its aims and achievements, but it dispenses no charity. It does nothing to weaken self- reliance or impair self-respect. It does not foster depend- INTRODUCTORY 5 ence: on the contrary, it teaches independence. Hence it is worthy of the study of all genuine philanthropists. No financier can be indifferent to it, for already it is on as high a financial plane as the banking systems of the world. Indeed, the direct influence of American life insurance has had a potent influence in making New York one of the great financial centers of the world, placing it on a level with London, Paris, and Berlin, the great centers of finance in the Eastern Hemisphere. And life insurance as a branch of financial business is unique. A life insurance company should be, and may be, the strongest of financial organizations. It should be, because its province is to guard the savings of the people. It may be, because of the uniformity of the workings of the " law of mortality " upon which it is based, and because it is protected against the chief perils which are a constant menace to banks, trust companies, and other financial enterprises ; for the obligations of an insurance company mature with the same regularity and deliberation during financial disturbances as at other times. It enjoys an immunity, moreover, which does not extend to other branches of insurance. Great conflagrations have, for example, wiped many fire insurance companies out of exist- ence, but life companies are exposed to no such sudden perils. The laws which govern mortality work with such uniformity, when a great number of lives widely distrib- uted are united together for mutual protection, that even the ravages of epidemics and the carnage of the battle- field are found to have little practical effect upon the aver- age mortality experienced. That what should be and may be is actually the case, is illustrated by the financial strength attained by the life insurance companies of the world, some of which have been in business for a century and a half. 6 THE LIFE INSURANCE COMPANY Life Insurance also has its romances, its mysteries, its surprises, its pathetic and humorous episodes. But this book has a serious purpose: these cursory remarks must come to an end, and we must proceed to our study of the life insurance business. CHAPTEE II WHAT IS INSURANCE? IN general, insurance may be described as a device for repairing a serious injury at a moderate cost. This device (when explained) is so obvious and ade- quate that our thoughts revert irresistibly to Columbus and his egg. But what is this device ? It is simply to bring together a number of people who agree that if a certain loss fall upon one of them } all shall unite in repairing that loss. It is true that insurance is a business, and that this business is conducted by insurance companies ; but, under a final analysis, it will be found that the customers of the company insure one another. THE INSURANCE COMPANY Insurance protects the individual at the expense of the many. Take the case of a man whose only possession is a ship worth $30,000. If the ship sinks, he is ruined. But if he is one of an association of three thousand ship owners, who have agreed to share the*ir losses equally, his ruin will be averted. Each of his associates will come to his rescue. His $30,000 will be restored at a cost to him of the nominal sum of $10, and at a cost to each one of his associates of the nominal sum of $10. Here we have, vaguely expressed, the idea upon which marine insurance is based. Now, let us suppose that these ship owners, having their private affairs to attend to, should induce certain compe- 2 7 8 THE LIFE INSURANCE COMPANY tent outsiders to establish a company to carry on this insur- ance business for them. Then we should have a rudely constructed marine insurance company. And if we scrutinize other branches of insurance, the general truth will be revealed that insurance of any kind can be furnished more safely and economically by a duly organized company than by a voluntary association of inex- perienced men. Such voluntary associations have been tried, but experience has proved that they lack continuity and permanence; that everybody's business is nobody's business, and that the proper handling of any branch of insurance demands ripe experience and expert skill. If the bankers and merchants^f the present day should deter- mine to make their own clothes, they would soon find them- selves shouldered with an intolerable burden, and they would quickly turn for relief to the hatter, the tailor, and the shoemaker. In the same way, the business man who wants insurance, instead of forming a combination of his own, usually searches out a regularly organized company. And in so doing he acts wisely. Thus, insurance has become a business or rather, a group of business organizations, varying according to the kind of insurance to be dealt in. And of these organiza- tions, the life insurance company is the one demanding our study. 1 LIFE INSURANCE Many people have a vague impression that the object of life insurance is to insure life, whereas its province is only to insure some product of life. It can not, for exam- 1 The conception of a corporation as an artificial person to hold prop- erty and support obligations uninterrupted by the death of individuals, was found in Roman law and custom. . . . Experience showed that the corporate form was the obvious remedy for the chief difficul- ties in the practise of insurance. ... A larger capital than an aver- age private fortune was demanded as a guaranty. . . . Individual WHAT IS INSURANCE? 9 pie, substitute a new life for one that has been terminated, as a fire company substitutes a new building for one that has been burned. If, therefore, we could abandon the name " life insurance " and should employ any other phrase indicating that it is the product of the effort which a man exerts when alive (and which he can not exert when dead) that is insured, and not life itself, the aims and achievements of life insurance would be more clearly dis- cernible. There was a time when the failure to recognize the dis- tinction here emphasized prejudiced many wives against life insurance ; but nowadays women are getting to be as complaisant about investments in life insurance as they are about investments in railroad bonds. Not long ago an Australian, before starting on a long voyage, wrote as fol- lows to one of our American companies : " My reason for seeking an increased assurance upon my life at this particular juncture is the earnest request of my wife that I should do so. According to the instincts of her sex, the prospect of a long separation brings to her some forebodings, a more vivid realization of the uncertainties of life, and a recoil from the thought of being left without an adequate provision for herself and her two children." That woman was abreast of the times^ and thought straight. She recognized the fact that although insurance could not protect her husband's life, it could protect the income which his labor produced. Such insurance might very properly be called income instead of life insurance. One or two other examples will make this point even more obvious : A man is without capital; he determines to lay something by from year to year ; in thirty years he will have a substantial fund if underwriters may die or fail; only a permanent institution can be trusted in long contracts. Encyclopaedia Britannica, 1902, vol. xxix, p. 508. 10 THE LIFE INSURANCE COMPANY he lives. But he may die ; so he turns to life insurance, which in this case may very properly be called capital insurance, for it enables him to create and maintain a capital. The success of a business firm depends upon the money contrib- uted by one partner, the expert knowledge of another, and the active labors of a third. So the lives of all three are insured to protect the firm, not against death, but against the possible loss of capital, ex- perience, and labor. This may very properly be called partnership insurance. A man who owes a larger sum than he can pay at once, binds himself to discharge the obligation gradually. But death may inter- vene; so a creditor's policy is taken in order that his debt may be in- sured. But we are advancing too rapidly. In determining what life insurance is not,, we are beginning to talk about it in a way which can only be understood by the reader who already knows what it is. Let us, therefore, go back to the beginning and see if we can discover its germ, and then study its development from that germ. CHAPTER III THE GEEM OF THE LIFE INSURANCE IDEA, AND ITS DEVELOPMENT LIFE insurance in its simplest form sustains the widow who has lost the support of her husband. From this it will be seen that the idea of life insurance must be as old as civilization itself. And if we glance at the habits of the members of the most primitive of families we shall come upon its germ. Take the case of three young men, sons of one father. They are all well able while living to take care of their dependents, but if death comes to one of them the widow and children of that one will be destitute. So the brothers agree that in the event of the death of one, the other two shall care for that one's family. The idea of thus asso- ciating the members of a single family for mutual protec- tion naturally suggests a similar combination among the friends and neighbors in a community. Note the work- ings of such an association: Those who survived would still be able to work, and still be able, consequently, to lay aside from year to year a part of their earnings. Nor would the family of the man who died first secure an undue advantage. We must assume that the original agreement was reciprocal, and made at a time when it was impos- sible to foresee the fate of the individual members of the association. Each member had practically said to each of his fellows, " I bind myself to contribute to the sup- port of your family if you should die before me in consid- 11 12 THE LIFE INSURANCE COMPANY eration of your making a similar pledge to me" And the fulfilment of such a pledge would not carry with it any taint of dependence. It would be the fulfilment of a straightforward business obligation, and the widow of a dead member would receive support, not as a matter of charity, but as a matter of right. From the imperfections of such an association it is easy to trace the gradual adaptation of the life insurance principle to the varying needs of civilized men, and its final establishment on a scientific basis. AN IMAGINARY COMPANY CONSTRUCTED TO ILLUSTRATE THE FUNDAMENTAL PRINCIPLES UPON WHICH THE BUSINESS OF LIFE INSURANCE IS CONDUCTED There is nothing very obscure about life insurance; but the subject has been befogged by vague and inadequate descriptions. Hence, the value of clear, elementary expla- nations. To this end let us suppose that a body of intelli- gent business men with a practical knowledge of finance, but who are totally ignorant of the principles of life insur- ance, have determined to organize a company. And let us see what problems will come before them for solution. This may at first sight seem a whimsical method of deal- ing with a grave subject, 1 but the device will enable the untutored reader to grasp one by one the simple principles underlying the various problems that must be considered, and which are the A B C of life insurance, and which for that reason are often left unexplained. Let us assume then that these business men have selected from their number a President ; have (under the advice of a competent lawyer) organized a company on the " mu- 1 1 have in several places mixed some innocent mirth ; of which if thou be a severe, sour-complexioned man, then I here disallow thee to be a competent judge. Izaak Walton. THE GERM OF THE LIFE INSURANCE IDEA 13 tual " plan ; l have opened an office, and have put a sign over the door bearing this appropriate inscription : THE EXPERIMENTAL LIFE INSURANCE COMPANY Let us suppose that a passer-by, seeing the sign, calls upon the President and says, " I want $10,000 of insur- ance : I am thirty-five years of age : what is your charge ? " Such a question would bring the President up with a round turn. He would be forced to admit that he had no idea what charge ought to be made. " I can not meas- ure the risk," he admits ; " a stone from the cornice of this building may fall on your head as you pass out, and forthwith we should owe your widow $10,000. On the other hand, you may live to be ninety-five, and die of old age. In that event, you would continue to make payments to the company for a long period, and we should have noth- ing to pay to your heirs for sixty years. I must make some inquiries before committing myself. So the President seeks counsel, and receives instantly the following piece of practical advice : " You must have an Actuary." " And what, pray, is an Actuary ? " " An Actuary is the officer of a life company who is familiar with the scientific principles upon which the business rests, and who makes the calculations upon which its transactions are based. He is necessarily a mathema- tician, and must know what other actuaries before him have learned about the science, and what they have done to develop the practise of life insurance." So an Actuary is added to the official staff of The Ex- perimental Company, and this Actuary tells the applicant 1 The different plans on which the life insurance business is conducted are explained on page 85 and need not concern us here. 14 THE LIFE INSURANCE COMPANY that no company could carry on the business of life insur- ance efficiently with a solitary policy-holder. Then the applicant offers to get some of his friends to join him. " That would help," says the Actuary ; " but it would not be adequate. Nothing is more uncertain than the life of the individual. Nor could an accurate prediction be made as to the probable longevity of fifty or a hundred men. The life insurance business depends on the law of average, and we can not obtain a reliable average until the number under observation runs up into the thousands or tens of thousands." CHAPTER IV SCIENTIFIC FOUNDATIONS AT this point we may assume that the applicant with- draws promising to call again and that the Actuary proceeds to enlighten the President regarding such tech- nicalities of the business as the following: THE LAW OF AVERAGE If you pitch a penny three times it may come up heads every time. But it would be a very hasty generalization to conclude from this that a tossed penny will always come up heads. Every one knows that if we toss a coin a num- ber of times tails are as likely to come up as heads. And if we toss it a sufficient number of times to give the law of average the opportunity of working smoothly, the uni- formity of the result will be remarkable. Eor example, if we toss the coin 20,000 times, we may feel reasonably sure that heads will come up 10,000 times and tails 10,000 times if the experiment be fairly tried. These are famil- iar truths, but it is not so well known that the law of average applies also with substantial accuracy to what are seemingly the most eccentric of happenings. Sometimes, for example, the sender of a letter forgets to put a postage-stamp on the envelope. At first blush the attempt to apply any fixed law to such an accident would seem preposterous, but experience proves that in a great central office where millions of letters are posted, the pro- 15 16 THE LIFE INSURANCE COMPANY portion that will be unstamped in a given year can be predicted with some degree of accuracy. THE LAW OF MORTALITY Thus it is with life. Charles Babbage, who wrote with authority on actuarial matters a century ago, said, " Nothing is more proverbially uncertain than the dura- tion of human life when the maxim is applied to an indi- vidual, but there are few things less subject to fluctuation than the average duration of life in a multitude of indi- viduals." And Dr. Southwood Smith, another author- ity, went so far as to say that " Mortality is subject to a law the operation of which is as regular as that of gravi- tation.' 7 It is this uncertainty in the case of the individual that makes life insurance expedient : it is this certainty in the case of a multitude of individuals that makes it possible and safe. By carefully studying this law of average as applied to the duration of human life, accurate statistics were gradually gathered and tabulated, and finally what are called tables of mortality were successfully constructed. THE COMPANY SHOULD HAVE A LARGE AMOUNT OF BUSINESS IN SIGHT BEFORE OPENING ITS DOORS The moral which the Actuary will draw from all this will be that The Experimental Company has been precipi- tate in opening its doors, and he will advise the Presi- dent to close them until a number of men willing to take insurance have agreed to form a nucleus, whose contribu- tions shall start a fund from which the insurance of the few who die prematurely may be paid. He will explain that if such precautions are taken, and if the business is SCIENTIFIC FOUNDATIONS 17 conducted at first with the utmost care, the company will soon be on a thoroughly sound footing. But he will warn the President that in the beginning some perils must be encountered. The young life insurance company is like an infant, subject to children's diseases which are dan- gerous for a time, but which will soon be outgrown. 1 THE THEORY OF PROBABILITIES The mathematical theory of probabilities may be said to be an outgrowth of the law of average. Curiously enough this doctrine was developed in the solution of two problems connected with games of chance propounded to the celebrated Abbe Pascal by a French gambler. Pas- cal solved the problems, and his investigations prompted other mathematicians to give further study to the subject. Finally the theory of probabilities was brought to a high degree of development by the great French mathematician Laplace. By applying this doctrine to statistics recording the chances of death at various ages as shown by the tables of mortality, actuaries have succeeded in framing what are known as expectation tables, which show the probable average duration of life beyond any given age. 2 MORTALITY TABLES In the beginning, tables of mortality were based on the death records of certain towns, and were unreliable and misleading. More recently, they have been based on the experience, and the more accurate records, of the life insur- ance companies themselves. 1 It is assumed for the sake of convenience that The Experimental Company starts without capital, although that assumption is not in accordance with the existing law of the State of New York, as ex- plained on page 87. 2 See Expectation Table on page 167. 18 THE LIFE INSURANCE COMPANY The most valuable experience, perhaps, thus far pub- lished, is called The British Offices Life Tables of 1893. This compilation was made by a joint committee of the Institute and Faculty of Actuaries, and the observations cover the whole experience of sixty British companies dur- ing a period of thirty years. But they are not as yet in general use, and The Experimental Company will find it convenient to employ The American Experience Table based on the first fifteen years' experience of the oldest of the New York companies. The latter table has proved a safe and a substantially accurate guide. It has been adopted as the official standard of the Insurance Depart- ment of the State of New York and of a number of other States ; and the premiums now being paid on a large pro- portion of the insurance outstanding in this country are based on it. THE INHERENT SAFETY OF THE INSURANCE PRINCIPLE A flood of light will illumine the mind of even such a novice as the President of The Experimental Company if he will take the trouble to glance at the American Expe- rience Table of Mortality* He will see that without a guide such as this he would be like a mariner without a compass. And if at this stage of his investigations he will take the trouble to refer to a reliable encyclopedia or any book embodying an accurate history of life insurance, he will find that all this is a matter of record; that before tables of mortality were devised life insurance transactions were little more than gambling wagers ; that as the early sellers of insurance had no knowledge of the proper charges to make, they usually erred on the safe side, and checked the development of the business by charging excessively high rates. He will discover that life insurance had its 1 See page 24. SCIENTIFIC FOUNDATIONS 19 earliest development in England ; that it was first prac- tised, not by insurance companies, but by individuals or groups of individuals who were absolutely lacking in sci- entific knowledge; that little regard was given to differ- ences in age ; that the overcharges for insurances on young lives were often excessive, and that the charges on old lives were sometimes inadequate. He will see, moreover, that the first company organized on a really scientific founda- tion, charging premiums graded according to age, and based on a mortality table, was the " Old Equitable " of London, incorporated in 1762. 1 He will see further, that in the beginning even that company, whose earliest rates were based on a very imperfect table constructed from the mor- tality statistics of the city of Northampton, charged con- siderably higher rates than afterward proved to be ade- quate. Finally he will see that with longer experience this and many other imperfections were gradually reme- died, and that to-day the " Old Equitable " of London, re- joicing in a youth of one hundred and forty-three years, transacts its business on a strictly scientific basis, 2 with every prospect of vigorous health and strength for an indefi- nite number of future centuries. For history proves that under normal conditions (such as have prevailed during the century and a half within which life insurance has been thus conducted) no company THUS BASED, if it lias been managed with wisdom and prudence, has failed. Failure has been inevitable in instances where companies have been erected on unsound foundations; and many companies based on scientific principles have also failed, 1 Several companies were founded before the "Old Equitable," but it was the first company to establish a scientific basis for the conduct of the business. 2 The basis upon which all successful companies in England and in other countries are now conducted corresponds substantially with that inaugurated by the " Old Equitable." 20 THE LIFE INSURANCE COMPANY but investigation will show that with companies belonging to the latter category the failures have, in every instance, been due, not to the basis of their organization, but to MISMANAGEMENT, At this point the President of The Experimental Com- pany, if a modest man, may feel some doubt as to his fitness for the responsibilities he has assumed. He may wonder whether the Actuary is not the only officer needed. But if so, he will soon discover that a life insurance com- pany needs business acumen as well as scientific knowledge, and that he may be able at once to do useful work. Be- fore attempting to make any practical use of the mortality table, for example, his attention must be fixed upon another subject of almost equal importance, concerning certain phases of which he will find himself as competent to deal as the Actuary namely, the question of interest. INTEREST If you owe a man $1,000 payable fifty years hence, and if you could find a savings-bank that would guarantee you 3 per cent, interest on a deposit of $228.11 during that period, you could pay your $1,000 debt with $228.11 ; for the latter sum compounded annually at 3 per cent, would at the end of fifty years amount to precisely $1,000. Now, in all life insurance transactions interest bears a very important part. A life insurance agreement is not a transaction done and done with, but a running contract often extending over a long series of years during which the company is taking money in, but has, in that particu- lar case, nothing to pay out ; and as the funds of the com- pany are supposed to be kept closely invested at pro- ductive rates of interest, it is only fair that this source of profit should be taken into account in determining the charges to be made for the insurances granted. SCIENTIFIC FOUNDATIONS 21 CUMULATIVE POWER OF COMPOUND INTEREST The importance of interest in all insurance computa- tions will be obvious to any one who has taken note of the marvelous cumulative power of compound interest, and of the enormous difference in result dependent upon even slight variations in rate. Take a simple illustration: If we compound $1 at 7 per cent, annually during a period of fifty years it will amount at the end of that time to $29.46 (twenty-nine times the original amount!) The same sum compounded during the same period at 3 per cent, will amount to only $4.38. A vast difference; and yet the smaller amount (more than four times the original amount) is a large sum to be produced by the turning over of a single dollar. INFLUENCE OF INTEREST ON LIFE INSURANCE TRANSACTIONS Now, when it is noted that during the youth of the great American companies 7 per cent, was the prevailing rate at financial centers in the United States, with higher rates at outlying points ; and when it is noted that at the present time conservative managers believe that in future it will be unsafe to count upon certainly earning on the average more than 3 per cent, it will be seen that varia- tions of a very important character in the history of insur- ance have occurred during a period of less than a quarter of a century in consequence of this decline in interest alone. But this is by the way. THE THREE PER CENT. STANDARD We may assume, then, that the President will, at this juncture, have an earnest discussion with the Actuary in reference to interest. The Actuary will explain that in 22 THE LIFE INSURANCE COMPANY fixing the premiums which policy-holders must pay, they must be given the benefit of the interest to be realized. Otherwise they will be overcharged. But as the terms of these contracts must be agreed to in advance; as the rate of premium in each case must be designated in the begin- ning ; as it is impossible to know exactly what average rate of interest will be realized, the problem is to determine what credit it will be safe to make the policy-holder on this account. In studying this problem the Actuary can point to the opinions expressed and the action taken by other companies; and the President can^ with his financial ex- perience, form, perhaps, a more accurate judgment of the probable future productiveness of money than the Actuary. Let us conclude, then, that in determining the premi- ums to be charged by The Experimental Company, it is assumed that the invested funds will yield on the average 3 per cent, interest. The probabilities are that the actual rate will be higher, but if so, no hardship need result to the policy-holders, because any excess can be returned to them in the shape of dividends, later on. CHAPTER V THE NATURAL PREMIUM THE Actuary will tell the President of The Experi- mental Company that the charges made by a company for the insurances granted by it may be adjusted in various ways : that one way is to grant the insurance year by year, charging for each year the cost of the insurance for that particular year. When this is done the charge increases from year to year because the average mortality among old men is greater than among young men. The charge, or " premium," which must be demanded when this method is adopted is known as the natural premium. " In studying this question," says the Actuary, " let us suppose that the business can be conducted without ex- pense." " But," says the President, " such an assumption would be absurd. No business can be conducted without ex- pense." " You are perfectly right," replies the Actuary, " but if I ignore expenses for the time being my explanations will be clearer, and w r e can take up the subject of expense later on. " We shall for the present, therefore, concern ourselves only with what is termed the net (or pure) premium i.e, the price necessary to charge if no allowance is made for expenses or contingencies. And to discover the net natural premium w y e must learn something of the uses of the Mortality Table." 3 23 24 THE LIFE INSURANCE COMPANY THE AMERICAN EXPERIENCE TABLE OF MORTALITY Com- pleted Age. Number surviving at each Age. Deaths in each Year. Com- pleted Age. Number surviving at each Age. Deaths in each Year. Com- pleted Age. Number surviving at each Age. Deaths in each Year. 10 100,000 749 40 78,106 765 70 38,569 2,391 11 99,251 746 41 77,341 774 71 36,178 2,448 12 98,505 743 42 76,567 785 72 33,730 2,487 13 97,762 740 43 75,782 797 73 31,243 2,505 14 97,022 737 44 74,985 812 74 28,738 2,501 15 96,285 735 45 74,173 828 75 26,237 2,476 16 95,550 732 46 73,345 848 76 23,761 2,431 17 94,818 729 47 72,497 870 77 21,330 2,369 18 94,089 727 48 71,627 896 78 18,961 2,291 19 93,362 725 49 70,731 927 79 16,670 2,196 20 92,637 723 50 69,804 962 80 14,474 2,091 21 91,914 722 51 68,842 1,001 81 12,383 1,964 22 91,192 721 52 67,841 1,044 82 10,419 1,816 23 90,471 720 53 66,797 1,091 83 8,603 1,648 24 89,751 719 54 65,706 1,143 84 6,955 1,470 25 89,032 718 55 64,563 1,199 85 5,485 1,292 26 88,314 718 56 63,364 1,260 86 4,193 1,114 27 87,596 718 57 62,104 1,325 87 3,079 933 28 86,878 718 58 60,779 1,394 88 2,146 744 29 86,160 719 59 59,385 1,468 89 1,402 555 30 85,441 720 60 57,917 1,546 90 847 385 31 84,721 721 61 56,371 1,628 91 462 246 32 84,000 723 62 54,743 1,713 92 216 137 33 83,277 726 63 53,030 1,800 93 79 58 34 82,551 729 64 51,230 1,889 94 21 18 35 81,822 732 65 49,341 1,980 95 3 3 36 81,090 737 66 47,361 2,070 37 80,353 742 67 45,291 2,158 38 79,611 749 68 43,133 2,243 39 78,862 756 69 40,890 2,321 The above table starts with 100,000 persons who have attained the age of ten. Of these, 749 will die during the following year; that is to say, before they attain the age of eleven. Those, therefore, who attain the age of eleven will number 99,251, and of these 746 will die before reaching the age of twelve. Only 3 of the 100,000 will be alive at the age of ninety-five, and presumably these 3 will die during the year; that is to say, before reaching age ninety-six. THE NATURAL PREMIUM 25 It will be seen that the American Table of Mortal- ity begins with 100,000 persons all ten years of age; that their history is followed from year to year until at the age of ninety-five only three will survive ; and that these three will presumably die within the following year. The table shows (1) the number living at the begin- ning of each year, and (2) the number dying during each year. To show in the clearest way how these statistics enable us to determine the proper charges for life insurance, it will be well for the moment to ignore interest, and to take a very simple illustration. For example, let us suppose that all the persons living at age thirty-five (according to the table) have decided to insure one another for $1,000 each, for a single year. Kef erring to the table we find that there are 81,822 sur- vivors at age thirty-five. What sum must each person contribute to establish a fund sufficient to pay $1,000 to the representatives of each one of those who die during the year? In other words, what is the net natural premium that each subscriber to the fund must pay in advance ? l Keferring to the table we find that out of these 81,822 persons 732 will die during the year. The total insurances to be paid, therefore, will be $1,000 X 732 = $732,000. Now, each one of these 81,822 persons must in the very beginning pay his share of the total amount. That will be $732,000 -5- 81,822 = $8.946249. 2 The net natural pre- 1 In computations of this kind it is always assumed that the premium is paid at the beginning of the year, and that no matter at what time death may occur within the year the insurance will not be paid until the end of the year. (As a matter of fact the companies now make a prac- tise of paying each claim as soon as it is known that the person whose life is insured is dead, but, nevertheless, all actuarial computations continue to be based on the foregoing assumption.) 2 We might call this $8.95, but accuracy demands that all the items in such calculations shall be carried to a number of decimal points. 26 THE LIFE INSURANCE COMPANY mium then (if we disregard interest) will be a trifle more than eight dollars, ninety-four cents, and six mills. If those who survive at the beginning of the second year decide to continue the insurance for another year, the cost to each will be greater (a) because the survivors among whom the cost must be distributed are reduced to 81,090, and (b) because a larger number (737) will die. The calculation will then be $737,000 -f- 81,090 = $9.088667. That is to say, the premium for the second year will be about $9.09. In the same way, if the insur- ance is continued for subsequent years the cost will in- crease from year to year. It may be said in general, therefore, that the actual cost of life insurance, if granted from year to year, is very low on young lives, increases annually, and becomes very high on old lives. For example, starting at age twenty-one, the net natural premium on a policy for $1,000 will begin at $7.62, 1 and will increase from year to year. The fol- lowing table gives the rate at ten-year intervals : 2 Age 21 31 41 51 61 71 81 91 Net natural) Q Q3 6Q Qg premium ) This net natural premium represents the cost of insur- ance, if no charge for expenses or other contingencies be made, on a " life " policy (i. e., one under which the in- surance is payable only upon the death of the insured) on the basis of the American Experience Table of Mortality, and on the assumption that the money employed will yield 3 per cent, interest. 1 Here an allowance is made for interest, although there is little scope for the accumulation of interest when premiums are paid on the natural basis. (Allowance for interest is here made by discounting at 3 per cent.) 2 See table on page 34 for the rates at all ages. CHAPTER VI THE SINGLE PREMIUM BUT of the men who seek insurance, there are few who wish to shoulder an increasing burden. Hence the natu- ral premium is seldom employed. 1 This increasing burden is effectually evaded by charg- ing a " single " premium. " If," says the Actuary to the President of The Ex- perimental Company , " we turn again to the Mortality Table, we shall discover that at age ninety there will be 847 survivors. " Now, if these 847 survivors should wish to insure one another for (say) $1 each " Hold on," says the President, " I never heard of a man wanting to insure for so small a sum as one dollar." " True," replies the Actuary. " But if we can find the correct premium for $1, we shall have a convenient unit of measure, and can then determine the premium for any number of dollars." " I see," says the President. " Now," continues the Actuary, " if the 847 survivors at age ninety wish to insure " But," interrupts the President, " no man so old would be fool enough to think of insuring " True again," replies the Actuary. " But notwith- standing that obvious truth notwithstanding the fact that the cost of insurance at age ninety would be absolutely pro- 1 Except by the organizations known as "assessment" companies. (See p. 77.) 27 28 THE LIFE INSURANCE COMPANY hibitive, I have a good and sufficient reason for taking that age to illustrate my point. You must bear in mind that we are now studying the theory, not the practise, of life insurance, and in order to explain clearly the method of computing the single premium, our calculation must be brief. We are confronted by a dilemma, and it will be the part of wisdom to select the short horn of that dilemma which is to choose age ninety in preference to a younger age. It is better for purposes of illustration to content our- selves temporarily with a premium ridiculously high than to secure a moderate premium by selecting such an age as twenty-one, because, in the latter case, the necessary com- putation would be so long that I am sure you would never have the patience to follow it from beginning to end, or if you did, your mind would be so confused by its very length that you would not readily grasp its significance. Let me make this absolutely clear." " I am all attention," says the President. " Pray listen carefully, then," replies the Actuary. " I wish to prove by a simple and concise arithmetical com- putation that the net cost of insurance, on the single-pre- mium plan, can be easily determined ; and that it can be readily understood by any man of ordinary intelligence. Now, according to the Mortality Table, the survivors at age ninety will all be dead before the end of six years, and to trace their history until the last man is dead will neces- sitate a computation of only six processes. If, on the other hand, we should attempt to follow the history of all the people living, according to the table, at age twenty-one, we should have over 90,000 lives to deal Avith. The computa- tion would be wearisome in the extreme, for it would have to be extended over a period covering nearly three-quarters of a century. My object would be defeated if I should lay before you so long and confusing a calculation, for I wish to make it evident to you at a glance that the premium THE SINGLE PREMIUM 29 can be readily and accurately computed. Therefore, as the principle is the same, let us assume (absurd as the propo- sition is) that these 847 survivors at age ninety have determined to insure. And while we are considering the proposition it will only be necessary for you to remember that the enormously high premium necessary at age ninety is employed for the moment solely by way of illustration, and that such a premium is never actually charged by any insurance company and is never paid by any actual policy- holder. Then, when the computation is finished, and the adequacy of this high premium at age ninety has been shown, it will be easy for you to recognize the fact that although the process may be long and wearisome, the exact cost of insurance at younger ages can be determined in precisely the same way. " And let me say just here that unless you follow step by step the six simple computations which I am now about to place before you, you need never expect to grasp clearly the theory upon which life insurance is based." HOW TO DETERMINE THE NET SINGLE PREMIUM NECES- SARY TO INSURE FOR LIFE 847 PERSONS, ALL NINETY YEARS OF AGE, FOR $1 EACH ; ON THE BASIS OF THE AMERICAN EXPERIENCE MORTALITY TABLE, AND ASSUM- ING THAT 3 PER CENT. INTEREST WILL BE EARNED ON THE MONEY PAID IN Referring again to the Mortality Table (p. 24) we shall find that of the 847 persons whose lives are to be insured, 385 will die during the first year. Consequently, 385 policies of $1 each, amounting in all to $385, must be paid at the end of the first year. At the end of the second year $246 must be paid, for there will be 246 deaths in that year; at the end of the third year $137 must be paid; at the end of the fourth year $58; at the end of 30 THE LIFE INSURANCE COMPANY the fifth year $18, and at the end of the sixth year $3. If interest should not be considered it would only be neces- sary to add these items together; but we must now take interest into consideration. Hence, the first item ($385) must be discounted at 3 per cent, for one year, which re- duces it to $373.78 ; the second item ($246) must be dis- counted for two years, reducing it to $231.87; and so on until we come to the last item, which must be discounted for six years. Here is the whole calculation, concisely stated : 1st year, age 90, ^ = $373.78641 2d f< 91, ^^ = $231.87859 y/^eD cents, and of the payment of a like sum on of yfe/cy in each and every year hereater during the continuance of this contract, THE EXPERIMENTAL LIFE INSURANCE COMPANY hereby insures the life of (hereinafter known as the Insured) and on receipt of satisfactory proofs of the death of the said Insured, provided this policy is then in force, promises to pay at its office in the City of New York, to ~fftctz:&t 4 I s - l-t CL O CL -O U o 6^0 * S > ^ c c *s c v) fo , o ^ >; v- ^ o .^ -H T3 5 S <52 J OL- ^ 3 12 ,_- s ") ".13 D ^ <]J Cu ^j \ *^ s 1 5 2 s S 2 t3 >8 s ^ ^ t_ 1 ^ C1 ' o ^ ^ tx > c b ^ f = "^ ^ ^ OJ c ^ o ^ O B . 2 ' \ , ^>. O Ci <3 o c 1 ,M j= 1 " ^ ^ ^ 1 S. 5 -s e^ ^ ^s, | | ^ 1 1 S J XftJ r^ ^ "^ P j^ w J^ ft ^ J= ^ C *O Cv c >^ ^" iT 1 u 03 c ^^ O ' -"2 c ^^ c >^ o w C^ ^ +_ h- 3 cT a. D- CX 3 du 5 a) 91UBS 9q} 9AJ9D9J O} p9ZfJOl/}ttB A V^cf ^; 07 ^3D wniuitjuj, /o louvivq am iftioi pituniaj, puv pyuSis tq jsnui tfwoaj. siqt 'tuniiuutf tonpaji 01 pasn iq of si puapi&iQ * V? // 109 110 THE LIFE INSURANCE COMPANY insurance will thus be steadily increased by these annual dividend additions. Usually the dividend is small at first, increasing gradually as the policy grows older. SECOND PREMIUM The date on which the second premium falls due is stated in the policy and also on the renewal notice sent out by the company; and if the premium is not paid on or before that date, the policy will lapse unless the contract provides for a grace of thirty days, in which case the pre- mium must be paid within the days of grace. (If no such grace is provided for, or, sometimes in addition to the grace, it is possible for the insured to obtain, under certain restric- tions, what is known as an " extension " of his premium. But if so he must pay interest, and he will do well not to avail himself of favors of this kind unless he is in absolute need of the accommodation.) If the premium is not paid the policy will lapse, and if the policy lapses when it is only a year old that will be the end of the matter, for the cost of maintaining the insurance falls chiefly on the company in the beginning. Hence a policy acquires no intrinsic value until several premiums have been paid. REINSTATEMENT But this loss is not irrevocable under ordinary condi- tions. If the insured overlooks his premium, or if he is hard up when it falls due but is able to pay at a later date, the policy can usually be restored, provided he is still an acceptable risk, and if he is willing to pay the amount overdue with interest. But herein lies a danger. Many a man has allowed a policy to lapse with the idea of reviv- ing it after a short interval, but has died without insur- I bo Eh UJ u uu c* s D S uu c^ CL UJ ^ od u- O PJ U < tu 1 5^ ^> ^ 0 d **$ "^ > "H -H us GO '"H us oj s t *. . V* *N (M CO ^ CO l> 00 C> <2> >, g o .5 ^s^ ft i .22 ^ H M bfi r i i C "fl 'C r a 119 120 THE LIFE INSURANCE COMPANY according to the terms of the contract, no further premiums will have to be paid if the policy is continued after it has been twenty years in force. OPTIONS OFFERED UNDER A 2O-PAYMENT LIFE POLICY FOR $10,000 AT END OF ITS 20-YEAR ACCUMULATION PERIOD 1. Draw dividend (the policy's share of accumulated profits) in cash, and retain policy. (Now fully paid-up for $10,000.) 2. Retain policy as above and convert dividend into paid-up insurance. (Thus increasing total amount of paid-up insurance.) 3. Convert entire value of policy and dividend into a life annuity. 4. Discontinue policy and withdraw its entire surrender value con- sisting of C (a) Entire Reserve on policy, namely $6,100, in cash. ) ( (b) Policy's share of accumulated profits, also in cash, f THE ENDOWMENT POLICY Endowment policies are issued to run for ten, fifteen, twenty, twenty-five, thirty, or thirty-five years. They pro- vide that the insurance shall be paid to the beneficiary in the event of the death of the insured during the endowment period (as would be the case with a policy issued on the life form), or to the insured himself if alive at the end of the endowment period. Endowments are issued on the annual dividend and on the deferred dividend plan. Here it will suffice to describe a single endowment contract, and as a representative policy we shall select a twenty-year endowment on the deferred dividend plan, with an accu- mulation period of twenty years corresponding with the endowment period. The second and third pages of this Endowment Policy correspond with those of the Ordinary Life and Limited Payment Life policies already described, except that (a) the surrender values are larger, (b) the value at the end AGE PREMIUM 55 $524.70 In consideration of the application for this policy, which is hereby made a part of this contract, and of the payment in advance of Five hundred and twenty-four Dollars and seventy cents, and of the payment of a like sum on or before the fifteenth day of January in every year thereafter until premiums for TWENTY years have been paid, or until the prior deathi of Richard, Roe,- (hereinafter known as the Insured) THE EXPERIMENTAL. LIFE INSURANCE COMPANY promises that on receipt of satisfactory proofs of the death of the said Insured, provided this policy is then in force, it will pay the sum of Ten Thousand Dollars at its office in the City of New York, to Martha Roe, his wife (hereinafter known as the Beneficiary) or in the event of the Beneficiary's prior death, then to the executors, administrators, or assigns of the Insured. Or, if the Insured is Jiving and this policy is in force on the fifteenth day of January, 1925, the Company will then pay to the said insured Ten Thousand Dollars It is understood and agreed by and between the parties hereto that the BENEFITS AND PROVISIONS stated on the S.econd and Third pages hereof form a part of this* contract as fully as if recited at length over the signatures hereto affixed. New York. January 75, 1905- | cy Q 2 E of ii MfM p, as|- SB* 1 s ! H itflljbiy NCK nt o I'M HgS s^S gg-s g g s EX FO Fro . M fc m o 1 ^ i 8 i S 2 3 13 2^3 uj 3 ^ 1 1 ! P o eo 3 7^ 2 u '^ ' 1 1 tu o n Q ' S 5 5 H o" i t t o *. . i a bo 1 . i 1 _ 3 g > i^ "^f *- T- 5 <= t: s r 131 a a 122 THE POLICY CONTRACT 123 of the Accumulation Period is the face of the policy, and (c) the Options are somewhat different. NON-PARTICIPATING POLICIES Some companies make a specialty of non-participating, or " stock rate " policies, and even companies whose busi- ness is transacted on the mutual plan sometimes issue non- participating contracts. The first page of a Non-Participating Ordinary Life Policy is identical with the first page of the participating policy on page 99, and the second and third pages are also the same except that (a) instead of a dividend clause there is a paragraph distinctly stating that the policy does not participate in profits; (b) there is no Accumulation Period or offer of options at the end of an Accumulation Period, and (c) the guaranteed surrender values are smaller than under a corresponding participating policy. **i 9 JZ *~> Still & *Q &'%"& 9 o rl^ * 3 3 8 Ci oS to On" >-*n GV-> <^ OTJ "^s ^ CO ^ 1 g 1 _ * -^ ^- - - - r- *- ~ -4*3 ^ ~ & * I'M 1 1 .^* 1 a _ O OB Ci^SOOdQsQ) 1 ^^ ^2 oT s PS 8c2SH*r >s^ ^T ^s.T c\T ^vT vC cv*' o*r j eS ^ 2 fc ^ & - H ^ s O ^f s "^ o l-^ 3 EH -2 B[ P O lO t-3 1 i'! r "^ pn H En r* O JU ^ H H H b C?CO"*tCCOt-OOCiO 0) p 3 1 S 5 O td li 6 TJ E 1 1 1 SH t*" Q-> o, a ^ ND SV [CIPATING ? 11 a"* & - a |l|i IMS ! ! 1 i 1 S *H o oj ? 3 ^ fib o*l ** 'eS ^ I .5 o* 3 8 ^ ^ 1 ^ 03 13 S i I 1 fl & T^- ^r J | fcl ' ^1 3 ^ o a .2* a G-i H s2 05 rj H b .' 2 a 'a ' a a "5 O = O ^^ O f HH 4) * 1 124 CHAPTEK XXIV ALL KINDS OF POLICIES LIFE insurance policies are so many and various that the novice is bewildered. And sometimes a policy-holder who has had his own contract in his possession for years has a mistaken notion of its character. If he had taken the trouble to examine it in the beginning his error would have been apparent. But he has jumped at a conclusion and is surprised when he finds that he is in error. For exam- ple, he may hold an ordinary life policy on the deferred dividend plan. When the time comes for him to receive his dividend he not only demands the dividend but also the face of the policy. And he is surprised and disap- pointed to find that the policy is not an endowment matur- ing at the end of its " accumulation period/' but a life policy under which he is entitled, it is true, to a cash divi- dend, but which does not itself finally mature until his death. But all the differences between policies are far simpler than the novice imagines. The contracts are obscure to him chiefly because of his unfamiliarity with the general subject of life insurance, or because he does not understand technical phrases, or because he fails to distinguish between general rules and the exceptions to those rules. Thus it is, when a man begins to study the grammar of a foreign language. He is chiefly bothered not by the rules but by the exceptions. 125 126 THE LIFE INSURANCE COMPANY Take another illustration. There are certain general types of seagoing vessels that are perfectly familiar to every boy alongshore. But they naturally puzzle the man who has lived all his life in the interior. He is told that a ship has three masts, and a schooner two, and that the former has square sails. This is the rule, and he must understand it before he can grasp the exceptions to the rule, such as that a schooner-rigged vessel with three masts is not a ship, but a " three-masted schooner." The character of standard policies will be found to be exceedingly simple if we classify and tabulate the general truths regarding them as follows : BASIS. KIND. FORM. PERIOD. METHOD OF SET- TLEMENT. Natural Annual divi- Life. 10 years. Cash. premium. dend. Regular instal- Single premium. Deferred divi- dend. Limited pay- ment life. 15 years. ments. Bond. Annuity. Level annual premium. Non-partici- pating . Endowment. 20 years. Continuous instal- ments. ALL KINDS OF POLICIES 127 The first column in the foregoing table deals with the basis on which the premiums are to be paid. Practically that matter is very simple, for we have seen that the busi- ness of the regular companies is conducted almost exclu- sively on the level annual premium basis. And as long as we are considering the rules and not the exceptions, we need only take note of policies issued on the level premium plan. Assume, then, that a man has determined to apply for a policy on that basis : What is the first thing for him to consider? It is the kind of insurance he wants. (See Table, column 2.) Does he want an annual dividend policy, or a deferred dividend policy, or a policy without any dividends at all. 1 After that he must decide upon the form (see Table, col- umn 3) that is to say, whether the policy shall be a life policy, or on the endowment form, or on the intermediate limited payment life form. Observe that these are mat- ters of choice. The man who selects an annual dividend policy may prefer it on the endowment form, or if he selects a non-participating policy may prefer it on the limited payment life form. And so on. The next point to consider is the period. (See Table, column 4.) This does not concern the man who takes an ordinary life policy, for in that case both the premiums and the policy continue for life. It does concern him if he takes a limited payment life policy, for he must in the beginning decide whether premiums shall cease at the end of ten, at the end of fifteen, or at the end of twenty years. With the endowment policy, both the premium period and the endowment period must be determined. Usually the premium term and the endowment period coincide that is to say, it is usual for an endowment paid up in 1 I.e., a non-participating policy, under which, in consideration of the fact that he waives all claim to dividends, he obtains his insurance at a lower premium rate. 128 THE LIFE INSURANCE COMPANY fifteen annual premiums to mature at the end of fifteen years; but this is not essential. A fifteen-year endow- ment, for example, can be so drawn as to be paid for in ten annual premiums. These are the only periods that the man who takes an annual dividend, or a non-participating, policy need con- sider. But if the policy is on the deferred dividend plan there is still another period to determine, namely, the accumulation period the period at the end of which the dividend is to be paid. Here again it is usually preferable that in any one policy all periods should coincide. For example : that the premiums on a twenty-year endow T ment should run for twenty years, and that the dividend should be made payable at the end of twenty years. But this is not essential. It is possible, for example, to issue a fifteen- payment, thirty-year endowment, with an accumulation period of twenty years. In such a case the insured would have a paid-up policy at the end of fifteen years ; would receive a dividend at the end of twenty years, and the amount of the insurance would be paid to him at the end of thirty years. The next point (see Table, column 5) is the method of settlement. The usual method is for the company to pay the money in one lump sum. But that is not essential. It is often stipulated in a policy that the settlement shall be made on an altogether different basis. And it is now the practise with many companies, even when the policy is pay- able in cash, to give the beneficiary the privilege of select- ing an alternate method. The favorite alternative methods are: (a) The regular instalment method, (b) the bond method, (c) the annuity method, and (d) the continuous instalment method. Adjustments of this kind have been devised to provide against the dangers which often beset widows and minors upon the receipt of large amounts of uninvested capital. ALL KINDS OF POLICIES 129 REGULAR INSTALMENT OPTION The company, instead of paying the insurance money in one lump sum, may cut it up into instalments. For example, take the case of a policy for $10,000, which has matured. The beneficiary can withdraw this amount at once, or the company will pay the money in fifty equal annual instalments of $377.30 each, making in all a total of $18,865. This, it will be seen, is nearly double the orig- inal amount, and results from allowing interest to the bene- ficiary. If the instalments extend over a shorter period, the return is less because there is less time for the accumula- tion of interest. The following is a table showing the value of $1,000 payable in annual instalments. The first item shows that the company can afford to pay, as an equivalent for $1,000 down, the sum of $1,060 in five annual instal- ments of $212 each; or $1,138.20 in ten instalments of $113.82 each, and so on. $1,060.00 in 5 instalments of $212.00 is equivalent to $1,000 down. ,138.20 " 10 " " 113.82 " ,219.95 " 15 " " 81.33 " " " " " ,305.20 " 20 " " 65.26 " ,394.00 " 25 " " 55.76 " " " " " ,485.90 " 30 " " 49.53 " " ,680.00 " 40 " " 42.00 " " " " " ,886.50 " 50 " " 37.73 " " " " " Policies are often so drawn that the beneficiary is com- pelled to receive the money in instalments and in no other way. In that case it is usual to make the policy for a round amount and reduce the premium to correspond. For example, a policy for $10,000, payable in ten annual instal- ments of $1,000 each, would be issued at age thirty-five, on the ordinary life form, for a premium of $246.97, whereas a similar policy payable in a lump sum would call for a premium of $281.10. 130 THE LIFE INSURANCE COMPANY POLICIES PAYABLE IN BONDS Many husbands and fathers are attracted by insurance which provides practically for the investment of the insur- ance at maturity. Example A policy for $10,000 is so drawn that the money is not paid to the beneficiary at the maturity of the policy, but remains with the company, which delivers a BOND to the beneficiary, under which an income (according to the agreement) is paid for twenty years ; after which the bond will mature for its face value, $10,000. POLICIES CONVERTED INTO ANNUITIES Or the value of the insurance may be converted into an annuity payable to the beneficiary for life. Example A man, at age thirty-five, takes a policy for $10,000 in favor of his daughter, who is seventeen years of age at the time. The con- tract is so drawn that, at the father's death, the $10,000 shall be converted into an annuity to be paid to the daughter for life. The father lives and supports the daughter for, say, thirty years, dying at age sixty-five, when the daughter is forty-seven years of age. She will therefore receive from that time a yearly income for life of $610.90. 1 1 See annuity table, pages 151-154. CHAPTER XXV EXCEPTIONAL KINDS OF INSURANCE THE foregoing explanations relate to standard policies. There are others that are exceptional, because they are sel- dom desired, or are eccentric in form, or of a complex char- acter made by combining two or more simpler forms. Single premium policies (already described) belong to the first of these categories. So also do yearly renewable term policies. The Continuous Instalment Endowment, described on page 138, belongs to the last category. THE YEARLY RENEWABLE TERM POLICY This is the only standard policy on the natural premium basis issued by the regular companies. It is referred to on page 75. It is the simplest kind of insurance issued, notwithstanding the fact that the premium increases from year to year. This is because it is issued in only one form. Premiums continue, and the policy continues, for life unless the insurance is permitted to lapse. There is no dividend complication, for the premium is so moderate that no dividends are allowed. There is no complication about loans or surrender values, for the premium each year barely pays for the insurance for that year, and there is no return if the policy is allowed to lapse. This policy must not be confused with the ordinary or " regular " term policy referred to on pages 52, 135, and 136. 131 NTAL AGE PREMIUM 21 $11.78 In consideration of the application for this policy, which is hereby made a part of this contract, and of the payment in advance of Eleven Dollars and seventy-eight cents, and of the payment- thereafter, on or before the fifteenth day of January in every year during the continuance of this contract, of an annually increasing premium on the basis of the table on the third page of this policy, THE EXPERIMENTAL LIFE INSURANCE COMPANY hereby insures the life of Richard Roe (hereinafter known as the Insured) and on receipt of satisfactory proofs of the death of the said Insured, provided this policy is then in force, promises to pay the sum of One Thousand Dollars at its office in the City of New York, to Martha Roe, his wife (hereinafter known as the Beneficiary) or in the event of the Beneficiary's prior death, then to the executors, administrators, or assigns of the Insured. It is understood and agreed by and between the parties hereto BENEFITS AND PROVISIONS stated on the Second and Third pages hereof form a part of this contract as fully as if recited at length over the signatures hereto affixed. New York, January 15, 1905. SKTH*V. jr SECOND PAGE OF RENEWABLE TERM POLICY BENEFITS AND PROVISIONS I. PREMIUMS Each premium is due and payable at the Head Office of the Com- pany in the City of New York, but will be accepted elsewhere when duly paid in exchange for the Company's receipt signed by the President or Secretary, and countersigned by the person authorized to receive the same. That part of the year's premium, if any, not due and unpaid at the maturity of this policy shall be deducted from the amount of the claim. II. RESIDENCE, TRAVEL, AND OCCUPATION This policy is without restriction as to residence, travel, and occupa- tion after one year from its date of issue, except that for military or naval service in time of war permission must be obtained at the Company's regular rates. III. INCONTESTABILITY This policy shall be incontestable after one year from its date of issue provided premiums have been duly paid. IV. ADMISSION OF AGE The Company will admit the age of the Insured upon satisfactory proof. Failing such proof, if the age shall have been understated, the amount of insurance shall be the amount which the premium charged would have purchased at the Company's rates for the Insured's true age. V. ASSIGNMENTS. The Company declines to notice any assignment of this policy until the original assignment or a certified copy thereof shall be filed in the Company's Head Office. The Company will not assume any responsi- bility for the validity of an assignment. VI. SUICIDE Self destruction, sane or insane, within one year from the date of issue of this policy is a risk not assumed by the Company under this contract. VII. NO SURRENDER VALUE On the non-payment of any premium when due, this policy shall lapse and, together with all premiums paid thereon, shall forfeit to the Company. VIII. DIVIDENDS No dividend will be declared on this policy unless it should be exchanged for one of another form, in which case the first premium on the new policy may be reduced by any dividend which may then be apportioned by the Company on this policy. The new policy, if issued on a participating form, will, subject to its terms, participate in dividends apportioned from surplus earned thereafter. 133 THIRD PAGE OF RENEWABLE TERM POLICY IX. THE CONTRACT This policy and the application therefor taken together constitute the entire contract, which can not be varied except in writing by one of the executive officers of the Company. X. TABLE OF PREMIUM RATES For a policy for $1,000. (Larger amounts in proportion.) EXPLANATION. As the premium is adjusted to the probability of death during each year separately, it must necessarily increase with advancing age. For example, on a policy issued at age 21 the premium would be as follows : 1st year, age 21 For $1,000, $11.78; for $10,000, $117.80; for $25,000, $294.50, etc. 2d " " 22 " " 11.86; " " 118.60; " " 296.50, " 3d " " 23 " " 11.94; " " 119.40; " " 298.50, " ANOTHER ILLUSTRATION. To determine the first premium on a $25,000 policy issued at age 37, find the rate for $1,000, and multiply that by 25 thus : $13.85x25=$346.25. Similarly the premium for the second year would be the rate at age 38 thus : $14.11x25=$352.75, and so on from year to year. Age. Successive Annual Premiums. Age. Successive Annual Premiums. Age. Successive Annual Premiums. Age. Successive Annual Premiums. Age. Successive Annual Premiums. 21 22 23 24 25 26 27 28 29 $11.78 11.86 11.94 12.02 12.10 12.20 12.30 12.40 12.52 30 31 32 33 34 35 36 37 38 $12.64 12.77 12.91 13.08 13.25 13.42 13.63 13.85 14.11 39 40 41 42 43 44 45 46 47 $14.38 14.69 15.01 15.38 15.78 16.24 16.75 17.34 18.00 48 49 50 51 52 53 54 55 56 $18.76 19.66 20.67 21.81 23.08 24.50 26.09 27.86 29.83 57 58 59 60 61 62 63 64 $32.00 34.40 37.08 40.04 43.32 46.94 50.91 55.31 If continued beyond age 64 the full premium charged by the Company for an ORDINARY LIFE POLICY taken out at age 65 must be paid, after which there will be no further increase in the premium rate. XL THIS POLICY MAY BE EXCHANGED This policy may be exchanged at any time during its continuance, without medical re-examination, for any other form of policy then issued by the Company, for any amount not exceeding the amount of this policy, on written request and the due surrender of this policy to the Company while in force; the date of issue of the new policy to correspond with the date on which this policy expires, and the premium on the new policy to be the regular premium on such policy at the age then attained by the Insured. 'I CA JONjervu/^xTxx President. 134 EXCEPTIONAL KINDS OF INSURANCE 135 THE REGULAR TERM POLICY The ordinary or " regular " term policy has been de- scribed on page 52 and needs no further elucidation here. It is seldom issued, although there are many popular policies that have the term element embodied in them. The premium (unlike the Yearly Renewable Term rate) is on the level basis. See table, page 136. THE SIMPLE ENDOWMENT The Simple Endowment is described on page 51. It is seldom issued by itself, but is utilized in constructing all endowment insurance policies, and in some other insur- ance contracts. It is the converse of the " regular " term policy : nothing is paid unless the insured survives a stipu- lated period. THE CHILD'S ENDOWMENT The Child's Endowment is a species of simple endow- ment. It enables a father to set a son up in business, or to provide a marriage portion for a daughter. Example A father secures such an endowment on the life of his son, who is one year old, by agreeing to pay the company an annual premium of $367.90. When the son reaches the age of twenty-one the com- pany will pay to the father (or directly to the son) the sum of S10,000. 1 THE RETURN PREMIUM POLICY It is possible to insure the premiums for a term of years on any standard policy. Take an illustration: A man 1 One form of child's endowment, in consideration of a higher pre- mium, stipulates that if death intervenes and the insurance is thus can- celed, the father shall receive back the total amount he has paid in premiums thus (so to speak) insuring the premiums. 10 136 THE LIFE INSURANCE COMPANY TERM RATES ANNUAL PREMIUM TO SECURE $1,000 IF DEATH OCCURS WITHIN THE PERIOD NAMED Without Profits AGE. 10 Years. 15 Years. 20 Years. AGE. 25 $12.98 $13.23 $13.55 25 26 13.17 13.45 13.80 26 27 13.37 13.67 14.06 27 28 13.59 13.92 14.35 28 29 13.82 14.18 14.66 29 30 14.07 14.47 15.00 30 31 14.34 14.77 15.37 31 32 14.63 15.11 15.78 32 33 14.94 15.47 16.23 33 34 15.27 15.86 16.72 34 35 15.63 16.30 17.27 35 36 16.02 16.78 17.87 36 37 16.45 17.30 18.52 37 38 16.92 17.89 19.25 38 39 17.43 18.53 20.05 39 40 18.00 19.23 20.93 40 41 18.62 20.01 21.89 41 42 19.31 20.88 22.95 42 43 20.08 21.83 24.12 43 44 20.93 22.88 25.40 44 45 21.87 24.05 26.81 45 46 22.92 25.33 28.36 46 47 24.08 26.74 30.05 47 48 25.36 28.30 31.90 48 49 26.78 30.01 33.92 49 50 28.34 31.88 36.12 50 51 30.05 33.93 38.51 51 52 31.93 36.18 41.10 52 53 33.99 38.63 43.89 53 54 36.26 41.31 46.91 54 55 38.74 44.23 50.15 55 56 41.45 47.40 52.62 56 57 44.42 50.86 55.34 57 58 47.68 54 60 58.32 58 59 51.24 58.64 61.57 59 60 55.12 63.00 65.12 60 EXCEPTIONAL KINDS OF INSURANCE 137 thirty-five years old applies for a twenty-year endowment policy for $10,000. The regular premium is $524.70, but if he sees fit to pay a higher rate, namely, $616.80, the company will agree that if he dies before the expiration of the endowment period the beneficiary shall receive not only $10,000, but in addition, the sum of the premiums already paid. For example, if after paying for eight years the insured dies, the beneficiary will receive $14,934.40. In the case of a life policy if the insurance is on the deferred dividend plan with an accumulation period of twenty years, the premium would ordinarily be $281.10. But if the insured sees fit to pay $330.40, the beneficiary will receive in addition to the face of the policy ($10,000) the sum of all premiums paid, provided death occurs before the end of the accumulation period. The guarantee to re- turn premiums will expire, however, at the end of that period, and if the policy is continued, the premium will fall back to the regular rate, namely, $281.10. Policies are also issued under which there is a partial return, such as 50 per cent, or 25 per cent of the amount paid in premiums. THE DOUBLE ENDOWMENT POLICY This is an excellent form of insurance for a young man who has no immediate need for the protection of life insurance, but who may need it later on, and who in any event wishes to save something for his own future use. It is also a safe policy from the company's point of view, because the return to the beneficiary is less in the event of premature death. Example A young man twenty-one years old, by paying a premium of $85.91, can secure a policy which will return $1,000 to the bene- ficiary in the event of his death at any time within twenty years. 138 THE LIFE INSURANCE COMPANY But if he is alive at the end of twenty years, upon the completion of the endowment period, he will receive double the original amount, namely, $2,000. THE JOINT LIFE POLICY A policy may be issued on two or more lives, the in- surance to be paid when the first death occurs. THEORETICALLY ONE POLICY IS AS GOOD AS ANOTHER Theoretically one policy is as good as another; the value according to the premium paid is presumably the same. But, practically, one form is often found to be of more value than another in the individual case because it adapts itself precisely to the special needs of a particu- lar man. Moreover, the modern policy is flexible, and may often be changed to correspond with the changing circum- stances of the insured. To illustrate the thought and ingenuity which may be brought to bear in constructing a modern insurance con- tract let us consider a single case. THE CONTINUOUS INSTALMENT ENDOWMENT POLICY A man who has no one to provide for but his wife hesitates to take an ordinary policy for her protection, for she may die first, and he may himself need the money for his own support when he is too old to continue to earn a living. So he takes a Twenty -year Continuous Instalment Endowment policy, for (say) $40,000. This will prove effective under any and all circumstances, as the following explanation will show: 1. If this man and his wife are living at the end of twenty years the policy will mature ; and the company instead of paying $40,000 will pay only one-twentieth of that amount, namely, $2,000. But EXCEPTIONAL KINDS OF INSURANCE 139 that $2,000 may be regarded as income rather than principal, for at the end of the year the company will pay $2,000 more, and so on every year for twenty years ; and if the husband and wife (or either of them) survive that period the company will go on paying an annuity of $2,000 a year until the one who lives longest is dead. 2. If shortly after the policy is issued, and consequently before all the twenty premiums have been paid, the wife should die, then the husband would go on paying premiums (at a reduced rate) until the maturity of the original policy, after which he would receive a life income of $2,000. 3. If, on the other hand, the husband should die prematurely, and his wife thus be deprived of his support, she would not be re- quired to wait until the completion of the endowment period to en- joy the fruits of the insurance, for the policy would instantly ma- ture, and she would at once begin to receive her life income of $2,000. 4. If both husband and wife should die prematurely, they would neither of them have need of further protection, but the insurance would be paid all the same. The policy would mature instantly in consequence of the husband's death, and his heirs would receive $40,000, payable in twenty instalments of $2,000 each. (And if the heirs should prefer a lump sum to these instalments the com- pany will pay the "commuted" value of the instalments.) 1 Thus a seemingly complicated contract is made by graft- ing a deferred annuity, covering two lives, upon an ordi- nary twenty-year endowment policy it being a part of the agreement that the insurance shall be paid in instal- ments instead of in one lump sum. 1 A policy of this character is also issued on the Ufe form for the pro- tection of a mother, sister, wife, daughter, son, grandchild, or servant but it protects one beneficiary only and not two as in the case above. CHAPTER XXVI THE GENERAL UTILITY OF LIFE INSURANCE THE crowning glory of life insurance is that it protects the widow and enables her to rear and educate her children. But one of the most significant facts about modern life in- surance is that the scope of its usefulness has been mar- velously extended. It has been truly said that, " The sys- tem is adapted to nearly every contingency of a pecuniary nature connected with human life." 1 This is indicated by the number and variety of the policies already described, and may be illustrated still further by a few general re- marks. IT CREATES AND PROTECTS CAPITAL Life insurance has done much to break down the bar- rier which has grown up between the rich and the poor. Every man who has any surplus income, even if he is with- out capital, can instantly become a capitalist by converting his annual savings into a premium ; for every man who maintains a policy for $1,000, or for $10,000, or for $100,- 000, is a capitalist to that extent. IT PROTECTS THE WEALTHY AGAINST DESTITUTION Now that good investments are hard to find, it is the rule with wealthy men to insure. Men of affairs know how valuable a round sum of ready money is for the pro- 1 Encyclopaedia Britannica. 140 THE GENERAL UTILITY OF LIFE INSURANCE 141 tection of a large estate. Many an estate has been saved by a policy of life insurance; and -in ninety-nine cases out of a hundred, life insurance protects an estate against shrinkage. In many cases, also, the family of a rich man is embarrassed by the lack of ready funds, if death comes suddenly and unexpectedly to the head of the house, unless an insurance company contributes some ready cash for im- mediate use. But how many cases there are where men of wealth lose their fortunes and leave nothing for their dependents but their insurance ! Hence, the rich do well to insure. IT PROTECTS MORTGAGED REAL ESTATE The man who buys a home protects it against loss by fire, and if there is a mortgage on it he will do well to protect it also by means of a life insurance policy. For example, if he has a mortgage of $10,000 on his house he will presumably be able to pay the interest on the mortgage from year to year, and be able in (say) twenty years to wipe out the indebtedness. But if death should intervene it may be necessary to sell the house over the heads of his wife and children to satisfy the mortgage. If, however, he sees fit to take a policy for $10,000 on the twenty-year endowment plan, the mortgage will be taken care of in the event of his premature death, or if he is alive at the end of the twenty years, the insurance will liquidate it. IT PROTECTS BUSINESS ENTERPRISES Fifty years ago the prediction that before the end of the nineteenth century men would begin to insure their lives for a million apiece would have been received with the same incredulity as a prophecy about the phonograph, or the X-ray, or office buildings thirty stories high, or wire- 142 THE LIFE INSURANCE COMPANY less telegraphy. But at least one such policy matured be- fore the advent of the twentieth century. A Minneapolis merchant died unexpectedly, and the insurance companies paid to his executors one million dollars. This money was paid to his business associates to enable them to protect the enterprises in which he had been interested. This was in addition to a large amount of insurance taken to protect his family. It is usual in these days for partners in business to insure the lives of one another. Nor is it uncommon for a man who borrows money on stocks or bonds from a bank or trust company to protect the obligation with a policy, so that if death intervenes the loan may be paid off and the securities freed. I knew a very successful business man in Philadelphia to whose wife the companies paid a large amount of insur- ance at his death. He had been engaged in a great variety of enterprises. Some had turned out well and some were of uncertain value. It was found that his rule of life had been, whenever he became doubtful about some enterprise, to insure his life for the amount of that venture, in order that in the event of his death his wife should have a sum sufficient to protect her against any possible shrinkage. IT ENABLES A MAN TO GIVE, WITHOUT ENCROACHING UPON HIS CAPITAL The man who is willing to give away a portion of his income from year to year, but who wishes to leave his capital intact to his heirs, can leave a round sum of money to any deserving or benevolent object, such as a library, a college, or a hospital, by means of a life insurance policy. It is not unusual, for example, for clergymen of the Cath- olic Church, who have no families, to insure for the bene- fit of the work of the Church. THE GENERAL UTILITY OF LIFE INSURANCE 143 IT ENABLES A MAN IN ADVERSE CIRCUMSTANCES TO RE- TRIEVE HIS FORTUNES Many a man, during some period of financial disaster, or whose investments have turned out badly, has seen the savings of years swept away. Such a man has often maintained his courage and again achieved success, because he has been able to protect himself and those de- pendent on him by life insurance. If a man has health and strength and can earn a liberal income, he can thus replace lost capital. If through some accident death inter- venes, the insurance takes the place of the money he has lost. If, on the other hand, life is prolonged, he is given time and opportunity to retrieve his fortunes, and will have meanwhile, as an anchor to windward, the protection of the insurance. In the latter case, his estate may, at his death, consist of his insurance increased by his new accu- mulation of capital. IT IS BETTER THAN A SAVINGS-BANK DEPOSIT It trains young men in habits of thrift. This is one of its chief merits. It is better than a savings-bank de- posit, (a) because of the larger return in case of death, (b) because the obligation to lay by a fixed amount from year to year is definitely assumed, and (c) because these savings can not be spent as readily as uninvested money deposited in bank. IT GIVES SUPPORT TO THE AGED Every man who takes insurance on the endowment plan knows that at the end of the endowment period the insur- ance may be utilized either for his own support or for the support of his dependents, And most of the modern con- Of THE UNIVERSITY 144 THE LIFE INSURANCE COMPANY tracts of insurance are so drawn that at a certain time some species of cash settlement can be made, or the insur- ance can then be converted into an annuity for the future support of the policy-holder himself. Innumerable other illustrations of the general utility of life insurance could be given, but space does not permit. COMPOUND POLICIES It may be said here, in passing, that although from time to time many new contracts of insurance are an- nounced to the public, few, if any of them, nowadays, are absolutely new. Most modern policies are made by simply combining two or more elementary forms, and the novelty is usually only in a difference in the blend. Thus by means of different blends varying tastes are satisfied. Lemon- juice by itself is intolerably acid ; sugar by itself is oversweet ; but in combination the one extreme offsets the other and a palatable beverage results. Thus it is that many of these compound policies are as useful and popular as they are ingenious in construction. CHAPTEK XXVII THE BUSINESS OF GRANTING ANNUITIES IN dealing with annuities the subject divides itself into two parts: (a) the use made of annuities in framing life insurance contracts, and (b) the selling of annuities pure and simple. The latter is a separate branch of business, and there are financial organizations other than life insur- ance companies that sell them. The man or woman, who determines to invest in an annuity, however, does well to apply to an insurance company for it, provided the com- pany is financially strong. The reason for this is that the annuity business is an eminently safe business for a life company to engage in. The more annuity business a life company can transact, provided it is not done at a loss, the better for the company. We have seen that an annuity is the converse of a life policy. Hence, the annuity business serves as a sort of balance or counterweight. If, for example, in any given year the mortality experience of the company is high, the insurance loss will be to some extent compensated for by the saving on annuities. On the other hand, if mortality is light and fewer annuitants drop out, the consequent disadvantage to the company is more than counterbalanced by the saving to the insurance branch of the business by the fewer deaths among the in- sured lives. What is advantageous for the company is also advantageous for the customer, and this is the reason that it is prudent to buy annuities from insurance com- panies. 145 146 THE LIFE INSURANCE COMPANY THERE ARE MANY KINDS OF ANNUITIES Just as there are many kinds of insurance policies, there are many kinds of annuities. Some, as we have seen, run for life, others for a definite period of years and then expire, others are perpetual. 1 The reader who wishes to go further into this subject will do well before reading the following explanations to refresh his memory by rereading Chapter VIII, page 44, especially the definitions on page 46. On pages 151-154 standard tables are given showing (a) the deposit to be made at any age to obtain an ordinary life annuity for $100, and (b) the annuity which $1,000 will purchase. RATES FOR WOMEN The rates on female lives are slightly higher than on male lives, because the experience of all companies has proved that, on the average, the women who buy annuities live longer than the men who buy them. Just here it may be well to state that in old times sta- tistics seemed to indicate that, on the average, women who insured, died earlier than men who insured. This may seem puzzling in view of the fact that female annuitants exhibit greater longevity. This has been explained by the assertion that formerly women seldom thought of insuring unless conscious of some impairment, and that in general they were more reticent about their physical condition than men. On the other hand, it was claimed that when a woman thought of buying an annuity, necessitating the relinquishment of her capital the absolute sinking of her principal she became exceedingly cautious. For reasons 1 British Consols are perpetual annuities. The theory is that the Government need never return the principal but must continue to pay the income forever. THE BUSINESS OF GRANTING ANNUITIES 147 such as these the companies felt justified in charging women more than men, both for insurance and for annuities. In recent years, however, some of the companies have changed this practise, and now that women are insuring more gen- erally they are being placed on the same footing with men and are charged the same premiums for life insurance policies, although they are still required to pay higher rates for annuities. CONTRASTS BETWEEN LIFE INSURANCE AND ANNUITIES The younger a man is the less it costs to obtain a policy of life insurance. In the case of an annuity the reverse is true. If a man is old a given sum will yield a large annu- ity: if he is young the same sum will yield but a small annuity. In the case of life insurance the longer the policy-holder lives the greater the advantage to the company ; hence, the company insists upon medical examinations in order that it shall not assume risks on impaired lives. In the case of the annuity, on the other hand, no examination is re- quired, because the sooner the annuitant dies the less the company will have to pay. Hence there is no need for the company to protect itself by an examination. As the an- nuitant is well aware of this fact there is no danger that he will sink his capital unless he believes himself to be in good health. The man who has the greatest need of life insurance is the one who has a family dependent upon him : the man who invests in an annuity is usually one who has no dependents. DIFFERENT KINDS OF ANNUITIES A joint life annuity is issued on two or more lives, and terminates on the death of the first of the two or more annuitants. 148 THE LIFE INSURANCE COMPANY - A two life annuity is based on two lives and continues to h paid as long as either survives. Such an annuity is appropriate for a man and his wife who are without children. A survivorship annuity goes into effect upon the death of one person, and is payable thereafter during the lifetime of another. Such an annuity is often attached to an insur- ance contract ; that is to say, it is often provided that upon the death of the insured the insurance money, instead of being paid in cash, shall be converted into an annuity de- pendent on the life of the beneficiary. Deferred Annuities. Many a man who is in the enjoy- ment of a liberal income and who is able to save something from year to year, longs to make his plans so that he may be able to retire from business when he reaches a certain age. Consider the case of such a man forty-five years old, who wishes to retire soon after reaching the age of sixty. By making a single payment of $5,071.20 (or by paying $463.15 a year for fifteen years) he can secure a life in- come of $1,000 ; the first annuity to be paid at the end of his sixtieth year, and the rest annually thereafter. Or consider the case of a man thirty years of age who has a lucrative business and who has by some lucky venture unexpectedly realized a profit of $10,000. He does not need this money in his business ; he does not need it for his current expenses ; as it has come easily it may go easily unless he voluntarily places it beyond his reach. Now, if he sees fit to invest it in a deferred annuity to start when he reaches the age of fifty, he will effectually place it be- yond his reach, and after he arrives at the age of fifty, it will yield him an income of $1,682 a year as long as he lives. JTIIK PREMIUM AGE 50 ANNUITY $i,40<> $100 In consideration of the application for this Annuity, which is hereby made a part of this contract, and of the payment in advance of Fourteen Hundred and Five Dollars THE EXPERIMENTAL LIFE INSURANCE COMPANY does hereby promise and agree to pay on demand at its office in the City of New York to Richard Roe an Annuity payable in annual instalments of One Hundred Dollars each, the first payment to be made on the fifteenth day of January Nineteen hundred and six, and subsequent instalments to be paid annually there- after during the lifetime of the said Richard Roe said, instalments to cease with the last regular Annuity pay- ment before the death of the said Richard Roe. It is understood and agreed that this" Annuity is granted upon the declaration that the said Richard Roe was born on the twentieth day of February, 1855, and that if the said declaration shall be found untrue, then this Annuity shall be void and the said consideration shall be retained by the Company for its use.* It is expressly stipulated that the said Company shall be furnished at the time of each Annuity payment with satisfactory evidence of the existence of the life of the said Richard Roe and no payment will be made until such evidence shall have been received. This Annuity and the application therefor, taken together, consti- tute the entire contract, which cannot be varied except in writing by one of the executive officers of the Company at its Home Office in New York. New York, January 75, 7905. President. Secretary. *The severity of this clause is to deter designing persons from pretending to be older than they are. In case of an error made inadvertently the Company is always ready to readjust the transaction on the basis of the facts. 150 THE BUSINESS OF GRANTING ANNUITIES 151 LIFE ANNUITY RATES MALES Age PBIC E OP $100 ANN UITY. ANNUITY PURCHASED BY $1,000. Aee Last Birth- day. $100 Annually. $50 Semi- Annually. $25 Quarterly. Annual Payment. S.-llli- Annual Payment. Quarterly Payment. l-.iHt Birth- day. 3 $2,341.00 $2,366.00 $2,378.50 $42.72 $21 . 13 $10.51 3 4 2,332.00 2,357.00 2,369 . 50 42.88 21.21 10.55 4 5 2,321 . 00 2,346.00 2,358.50 43.08 21.31 10.60 6 6 2,310.00 2,335.00 2,347.50 43.29 21.41 10.65 6 7 2,297.00 2,322.00 2,334.50 43.54 21.53 10.71 7 8 2,283 . 00 2,308.00 2,320.50 43.80 21.66 10.77 8 9 2,268 . 00 2,293 . 00 2,305.50 44.09 21.81 10.84 9 10 2,252.00 2,277 . 00 2,289.50 44.40 21.96 10.92 10 11 2,236.00 2,261.00 2,273 . 50 44.72 22.11 11.00 11 12 2,220.00 2,245.00 2,257 . 50 45.05 22.27 11.08 12 13 2,203.00 2,228.00 2,240.50 45.39 22.44 11.16 13 14 2,185.00 2,210.00 2,222 . 50 45.77 22.62 11.25 14 15 2,167.00 2,192.00 2,204.50 46.15 22.81 11.34 15 16 2,149.00 2,174.00 2,186.50 46.53 23.00 11.44 16 17 2,130.00 2,155.00 2,167.50 46.95 23.20 11.54 17 18 2,112.00 2,137.00 2,149.50 47.35 23.40 11.63 18 19 2,094.00 2,119.00 2,131.50 47.76 23.60 11 73 19 20 2,076.00 2,101.00 2,113.50 48.17 23.80 11.83 20 21 2,064.00 2,089 . 00 2,101.50 48.45 23.93 11.90 21 22 2,051 . 00 2,076.00 2,088.50 48.76 24.08 11.97 22 23 2,037.00 2,062.00 2,074.50 49.09 24.25 12.05 23 24 2,023 . 00 2,048.00 2,060.50 49.43 24.41 12.13 24 25 2,007 . 00 2,032 . 00 2,044 . 50 49.83 24.61 12.23 25 26 1,990.00 2,015.00 2,027 . 50 50.25 24.81 12.33 26 27 1,973.00 1,998.00 2,010.50 50.68 25.03 12.44 27 28 1,955.00 1,980.00 ,992.50 51.15 25.25 12.55 28 29 1,937.00 1,962.00 ,974.50 51.63 25.48 12.66 29 30 1,918.00 1,943.00 ,955.50 52.14 25.73 12.79 30 31 ,898.00 1,923.00 ,935.50 52.69 26.00 12.92 31 32 ,878.00 1,903.00 ,915.50 53.25 26.27 13.05 32 33 ,857.00 1,882.00 ,894.50 53.85 26.57 13.20 33 34 ,835 . 00 1,860.00 ,872.50 54.50 26.88 13.35 34 35 ,813.00 1,838.00 ,850.50 55.16 27.20 13.51 35 36 ,791.00 1,816.00 ,828.50 55.83 27.53 13.67 36 37 ,767.00 1,792.00 ,804.50 56.59 27.90 13.86 37 38 ,743.00 1,768.00 ,780.50 57.37 28.28 14.04 38 39 ,718.00 1,743.00 ,755.50 58.21 28.69 14.24 39 40 ,693 . 00 1,718.00 ,730.50 59.07 29.10 14.45 40 41 ,667 . 00 1,692.00 ,704.50 59.99 29.55 14.67 41 42 ,640.00 1,665.00 ,677.50 60.98 30.03 14.90 42 43 ,613.00 1,638.00 ,650.50 62.00 30.53 15.15 43 44 ,585 . 00 1,610.00 ,622 . 50 63.09 31.06 15.41 44 45 ,556.00 1,581.00 ,593 . 50 64.27 31.63 15.69 45 11 152 THE LIFE INSURANCE COMPANY LIFE ANNUITY RATES MALES (Continued) Aee Last Birth- day. PRICE OP $100 ANNUITY. ANNUITY PURCHASED BY $1,000. Age Last Birth- day. $100 Annuity. $50 Semi- Annuity. $25 Quarterly. Annual Payment. Semi- Annnal Payment. Quarterly Payment. 46 $1,527.00 $1,552.00 $1,564.50 $65 . 49 $32.22 $15.98 46 47 1,498.00 1,523.00 1,535.50 66.76 32.83 16.28 47 48 ,467.00 1,492.00 1,504.50 68.17 33.51 16.62 48 49 ,436.00 1,461.00 1,473.50 69.64 34.22 16.97 49 50 ,405.00 1,430.00 1,442.50 71.17 34.97 17.33 50 51 ,373.00 1,398.00 1,410.50 72.83 35.77 17.73 51 52 ,340.00 1,365.00 1,377.50 74.63 36.63 18.15 52 53 ,307.00 1,332.00 1,344.50 76.51 37.54 18.60 53 64 ,274.00 1,299.00 1,311.50 78.49 38.49 19.06 54 55 ,240.00 1,265.00 1,277.50 80.65 39.53 19.57 55 56 ,206.00 1,231.00 1,243.50 82.92 40.62 20.11 56 57 1,171.00 1,196.00 1,208.50 85.40 41.81 20.69 57 68 1,136.00 1,161.00 1,173.50 88.03 43.07 21.31 58 59 1,101.00 1,126.00 1,138.50 90.83 44.40 21.96 59 60 1,066.00 1,091.00 1,103.50 93.81 45.83 22.66 60 61 1,031.00 1,056.00 1,068.50 96.99 47.35 23.40 61 62 995.00 1,020.00 1,032.50 100.50 49.02 24.21 62 63 959.00 984.00 996.50 104.28 50.81 25.09 63 64 923.00 948.00 960.50 108.34 52.74 26.03 64 65 888.00 913.00 925 . 50 112.61 54.76 27.01 65 66 856.00 881 . 00 893 . 50 116.82 56.75 27.98 66 67 825.00 850.00 862 . 50 121.21 58.82 28.99 67 68 796.00 821 . 00 833.50 125.63 60.90 30.00 68 69 768 . 00 793 . 00 805 . 50 130.21 63.05 31.04 69 70 742 . 00 767 . 00 779 . 50 134.77 65.19 32.07 70 71 717.00 742.00 754.50 139.47 67.39 33.14 71 72 694.00 719.00 731.50 144.09 69.54 34.18 72 73 671.00 696.00 708.50 149.03 71.84 35.29 73 74 650.00 675.00 687 . 50 153.85 74.07 36.36 74 75 630.00 655.00 667 . 50 158.73 76.34 37.45 75 76 610.00 635 . 00 647.50 163.93 78.74 38.61 76 77 592.00 617.00 629.50 168.92 81.04 39.72 77 78 574.00 599.00 611.50 174.22 83.47 40.88 78 79 558.00 583 . 00 595 . 50 179.21 85.76 41.98 79 80 543.00 568 . 00 580.50 184.16 88.03 43.07 80 81 528.00 553.00 565 . 50 189.39 90.42 44.21 81 82 513.00 538.00 550.50 194.93 92.94 45.41 82 83 498.00 523.00 535.50 200.80 95.60 46.69 83 84 483.00 508.00 520.50 207 . 04 98.43 48.03 84 85 468.00 493.00 505.50 213.68 101.42 49.46 85 NOTE. For ages older than eighty-five the rates are the same as for age eighty- five. A pro rata allowance will be made for each quarter of a year elapsed since last birthday. THE BUSINESS OF GRANTING ANNUITIES 153 LIFE ANNUITY RATES FEMALES Age Last Birth- day. PRICE OF $100 ANNUITY. ANNUITY PURCHASED BY $1,000. Age Last Birth- day. $100 Annually. $50 Seml- An u ually. $25 Quarterly. Annual Payment. Semi- Annual Payment. Quarterly Payment. 3 $2,400.00 $2,425.00 $2,437.50 $41.67 $20.62 $10.26 3 4 2,394.00 2,419.00 2,431.50 41.77 20.67 10.28 4 6 2,386.00 2,41 1 . 00 2,423.50 41.91 20.74 10.32 5 6 2,377 . 00 2,402.00 2,414.50 42.07 20.82 10.36 6 7 2,366.00 2,391 . 00 2,403.50 42.27 20.91 10.40 7 8 2,355.00 2,380.00 2,392.50 42.46 21.01 10.45 8 9 2,343 . 00 2,368 . 00 2,380.50 42.68 21.11 10.50 9 10 2,330.00 2,355 . 00 2,367.50 42.92 21.23 10.56 10 11 2,317.00 2,342.00 2,354 . 50 43.16 21.35 10.62 11 12 2,304.00 2,329.00 2,341 . 50 43.40 21.47 10.68 12 13 2,290.00 2315.00 2,327 . 50 43.67 21.60 10.74 13 14 2,276.00 2,301 . 00 2,313.50 43.94 21.73 10.81 14 15 2,261.00 2,286.00 2,298.50 44.23 21.87 10.88 15 16 2,246.00 2,271.00 2,283 . 50 44.52 22.02 10.95 16 17 2,231.00 2,256.00 2,268.50 44.82 22.16 11.02 17 18 2,217.00 2,242.00 2,254.50 45.11 22.30 11.09 18 19 2,203 . 00 2,228.00 2,240.50 45.39 22.44 11.16 19 20 2,190.00 2,215.00 2,227.50 45.66 22.57 11.22 20 21 2,175.00 2,200.00 2,212.50 45.98 22.73 11.30 21 22 2,160.00 2,185.00 2,197.50 46.30 22.88 11.38 22 23 2,145.00 2,170.00 2,182.50 46.62 23.04 11.46 23 24 2,129.00 2,154.00 2,166.50 46.97 23.21 11.54 24 25 2,113.00 2,138.00 2,150.50 47.33 23.39 11.63 25 26 2,096.00 2,121.00 2,133.50 47.71 23.57 11.72 26 27 2,079.00 2,104.00 2,116.50 48.10 23.76 11.81 27 28 2,061.00 2,086.00 2,098.50 48.52 23.97 11.91 28 29 2,043 . 00 2,068.00 2,080.50 48.95 24.18 12.02 29 30 2,025 . 00 2,050 . 00 2,062.50 49.38 24.39 12.12 30 31 2,006 . 00 2,031 . 00 2,043 . 50 49.85 24.62 12.24 31 32 1,987.00 2,012.00 2,024.50 50.33 24.85 12.35 32 33 1,968.00 ,993.00 2,005 . 50 50.81 25.09 12.47 33 34 1,949.00 ,974 . 00 1,986.50 51.31 25.33 12.59 34 35 1,929.00 ,954 . 00 1,966.50 51.84 25.59 12.71 35 36 1,909.00 ,934.00 1,946.50 52.38 25.85 12.84 36 37 1,889.00 ,914.00 1,926.50 52.94 26.12 12.98 37 38 1,867.00 ,892.00 ,904 . 50 53.56 26.43 13.13 38 39 1,845.00 ,870.00 ,882 . 50 54.20 26.74 13.28 39 40 1,822.00 ,847 . 00 ,859.50 54.88 27.07 13.45 40 41 1,798.00 ,823 . 00 ,835.50 55.62 27.43 13.62 41 42 1,774.00 ,799 . 00 ,811.50 56.37 27.79 13.80 42 43 1,748.00 ,773.00 ,785 . 50 57.21 28.20 14.00 43 44 1,722.00 ,747.00 ,759 . 50 58.07 28.62 14.21 44 45 1,694.00 ,719.00 ,731.50 59.03 29.09 14.44 45 154 THE LIFE INSURANCE COMPANY LIFE ANNUITY RATES FEMALES (Continued) Age Last Birth- day. PRICE OP $100 ANNUITY. ANNUITY PURCHASED BY $1,000. Age Last Birth- day. $100 Annually. $50 Semt- Annually. $25 Quarterly. Annual Payment. Semi- An nual Payment. Quarterly Payment. 46 $1,666.00 $1,691.00 $1,703.50 $60.02 $29.57 $14.68 46 47 1,637.00 1,662.00 1,674.50 61.09 30.08 14.93 47 48 1,607.00 1,632.00 1,644.50 62.23 30.64 15.20 48 49 ,576.00 1,601.00 1,613.50 63.45 31.23 15.50 49 60 ,544 . 00 ,569 . 00 1,581.50 64.77 31.87 15.81 50 51 ,511.00 ,536.00 1,548.50 66.18 32.55 16.15 51 52 ,478.00 ,503.00 1,515.50 67.66 33.27 16.50 52 53 ,444.00 ,469 . 00 1,481.50 69.25 34.04 16.88 53 54 ,409.00 ,434.00 1,446.50 70.97 34.87 17.28 54 55 ,374.00 ,399.00 1,411.50 72.78 35.74 17.71 55 56 ,338 . 00 ,363 . 00 1,375.50 74.74 36.68 18.18 56 57 ,301.00 ,326.00 1,338.50 76.86 37.71 18.68 57 68 ,264.00 ,289 . 00 1,301.50 79.11 38.79 19.21 58 69 ,227.00 ,252.00 1,264.50 81.50 39.94 19.77 59 60 ,189.00 ,214.00 1,226.50 84.10 41.19 20.38 60 61 ,151.00 ,176.00 1,188.50 86.88 42.52 21.04 61 62 ,113.00 ,138.00 1,150.50 89.85 43.94 21.73 62 63 ,075.00 ,100.00 1,112.50 93.02 45.45 22.47 63 64 ,037 . 00 ,062.00 1,074.50 96.43 47.08 23.27 64 65 ,000.00 ,025 . 00 1,037.50 100.00 48.78 24.10 65 66 963.00 988.00 1,000.50 103.84 50.61 24.99 66 67 928.00 953 . 00 965.50 107.76 52.47 25.89 67 68 893.00 918.00 930.50 111.98 54.47 26.87 68 69 860.00 885 . 00 897 . 50 116.28 56.50 27.86 69 70 828 . 00 853 . 00 865 . 50 120.77 58.62 28.89 70 71 797.00 822.00 834.50 125.47 60.83 29.96 71 72 768.00 793.00 805.50 130.21 63.05 31.04 72 73 740.00 765.00 777.50 135.14 65.36 32.16 73 74 714.00 739.00 751.50 140.06 67.66 33.27 74 75 690.00 715.00 727.50 144.93 69.93 34.37 75 76 668 . 00 693.00 705.50 149.70 72.15 35.44 76 77 647.00 672.00 684.50 154.56 74.40 36.52 77 78 628.00 653 . 00 665.50 159.24 76.57 37.57 78 79 610.00 635 . 00 647.50 163.93 78.74 38.61 79 80 592.00 617.00 629 . 50 168.92 81.04 39.72 80 81 574.00 599.00 611.50 174.22 83.47 40.88 81 82 556.00 581.00 593 . 50 179.86 86.06 42.12 82 83 538 . 00 563 . 00 575 . 50 185.87 88.81 43.44 83 84 520.00 545.00 557 . 50 192.31 91.74 44.84 84 85 502.00 527.00 539 . 50 199 . 20 94.88 46.34 85 NOTE. For ages older than eighty-five the rates are the same as for age eighty- five. A pro rata allowance will be made for each quarter of a year elapsed since last birthday. CHAPTEE XXVIII MISCELLANEOUS FACTS IN conducting the business of life insurance there are a multitude of rules and customs, a vast assortment -of blanks and forms, and an infinite number of facts of more or less interest, which officers, agents, and clerks must be familiar with, but which are of little importance to the general reader. A few of these, however, deserve a passing glance. A policy is a legal instrument, and if there is any dis- pute regarding it w r hich the parties in interest can not settle for themselves, the courts may be appealed to. But as pre- vention is better than cure, the insured should see to it that his policy is written in accordance with his actual requirements, thus avoiding subsequent disputes. Sometimes a man asks for what he does not really want and subsequently blames the company for his own blunder. For example, a man may instruct the company to restrict the payment of the insurance to his wife, or minor child. At a later date he may be irritated to find that he has tied his own hands; that he has no right to make the desired change without the consent of the wife; or (if the bene- ficiary is a minor) without having a guardian appointed. To avoid complications such as these, the companies have, during recent years, aimed to concentrate the control 155 156 THE LIFE INSURANCE COMPANY of the policy in the insured himself as long as he lives. To this end, a clause is inserted in many modern policies giving the insured the right to change the beneficiary at will. But there are sometimes cases where the insured wishes to relinquish this control, either to protect the pol- icy against creditors, or for some other reason. In such a case any clause in the contract authorizing a change of beneficiary, must be eliminated ; or, after the policy has been issued, it must be assigned to the desired beneficiary. If the transaction is thus made permanent and fixed, the insured must not complain if later on he changes his mind, for the company can not go beyond its own sphere and disregard the law of the land. Thus it is in other departments of business : If a man, for example, gives to his minor daughter a deed to a piece of real estate, he knows that he can not at will, and without due legal process, re- gain the title. Sometimes there are two rival claimants for the insur- ance under a single policy. The company is ready to pay, but each claimant has warned it not to pay to the other. It is not uncommon in such a case for the company to pay the money into court and leave the contestants to settle their differences there. LEGAL CONTESTS Considering the great volume of business transacted by the insurance companies, it is remarkable that there is so little litigation. Every company must expect to be forced occasionally to protect the body of its policy-holders against what it regards as an unwarrantable claim on the part of an ignorant, or prejudiced, or grasping individual. Sometimes a beneficiary demands more than the company will pay, so he appeals to the courts. Sometimes a claim- ant interprets an insurance contract in one way, and the MISCELLANEOUS FACTS 157 company interprets it in another, and thereupon litigation ensues. Sometimes a policy is permitted to lapse, and later on, upon the death of the policy-holder, the bene- ficiary claims the amount of the insurance. This may lead to a contest at law. Sometimes the company refuses to pay on the ground that a fraud has been committed. The practise of differ- ent companies varies in this respect. It is the usage among many to exercise special vigilance in advance, or during the first year (or for the first two or three years), in order that errors may be corrected and frauds detected promptly, thus enabling the company to stipulate that thereafter the policy shall be incontestable ; thus estopping all subsequent litigation. 1 Some companies refuse to pay if the insured commits suicide. Others refuse to insure against suicide during the first year, but- pay suicide claims thereafter. 2 THE APPOINTMENT OF A TRUSTEE Often the insured wishes to establish a trust and have the insurance money, at the maturity of the policy, dealt with under that trust. As a rule life insurance companies are not in a position to act as trustees, but it is easy for the policy-holder to have the policy drawn in his own favor and then to assign it to a trustee of his own selection. Many modern policies are, however, drawn in such a way that the company, although not technically a trustee, becomes a practical guardian of the insurance money. This is the case when the money is retained by the company and an interest-bearing bond is issued to the beneficiary; or when the insurance is converted into an annuity payable to the beneficiary for life. 1 In reference to incontestability, see page 103. 2 As to suicide, see page 104. 158 THE LIFE INSURANCE COMPANY PKEMIUM DATES A policy is sometimes dated back, either to secure the advantage of a lower premium, or in order that subsequent premiums may fall due at a certain period of the year. Policies are sometimes dated forward in order that the premiums may fall due at a convenient time. It is not unusual in the latter case for the insured to pay an irreg- ular premium to cover the interval which must elapse be- fore the first regular premium will fall due. N. T. O. POLICIES Sometimes an applicant changes his mind, refusing to accept the policy which the company has entrusted to the agent to deliver. In such a case (if the applicant is not held to his bargain) the E". T. O. (not taken out) policy must be promptly returned to the company for cancelation. ALTERNATE AND ADDITIONAL POLICIES Sometimes an applicant applies for a policy of one kind when it is not certain that one of another kind may not suit him better. Occasionally the company is willing to write two policies, the first in accordance with the application, and the second, known as an " alternate policy," on some other form. The applicant is then at liberty to take either contract, and the one discarded is returned to the company for cancelation. Sometimes a company is willing to issue an " addi- tional policy." A man, let us say, has applied for $10,000. The agent is convinced that the man is able, and can be persuaded, to take an additional amount, and agrees that if the company will send him a second policy for $10,000 (or for some other designated amount) he will see to it MISCELLANEOUS FACTS 159 that the second policy does not leave his hands until the applicant has duly executed an application for it, and has paid the premium on it. DISCOUNTING PREMIUMS AND CLAIMS Sometimes a man wishes to pay several premiums in advance, in which case the company is usually willing to allow him a discount on those not yet due. Sometimes the beneficiary under a policy applies to the company to make payment before the claim falls due. If the case is one where the company can safely and prop- erly do this, it is usual to allow a reasonable discount. For example, where a man has an endowment policy for $10,000 which will mature in two months, the company may be willing to pay the claim to-day less a reasonable allowance for interest. RESIDENCE Every applicant must state in his application the ad- dress to which he wishes the company to send premium notices, and it is the rule with companies to send notices to the address thus given until written request is received from the insured (or the assignee, if the policy is assigned), that he wishes the notice sent to a new address. It is the practise of the companies, as provided by law, to send premium notices to the insured. When a policy is assigned a notice is sent, not only to the insured, but to the assignee as well. CHANGES If a policy-holder wishes to change the method of pay- ing his premiums, from annual to semiannual, for ex- ample, an appropriate blank is furnished by the company to facilitate the change. i? S 2 t J .c s 1 * ^ 1 t3 '^ C C3 QJ l> JG 5 -41 UJ -^ E ^ 3 C > tu C .0 u ck -^ J . o 0- 7" ^ Qj C3 f*> t *^\ w CX v U- Ou J 1 > ^ S O a U 6 z '5 u 2 INSURANCE ge in Policy " 1 1 premiums r/^ premiums. c > ^ O- U Q < ^ >^ bo ^ s 5 2 ^ **" pj i Zi-a S * - c * UJ "^ w . c S u OL f O 2i jj "o M au lc U S T3 C 'I U P, C 0) u E ^ 8 1 D C/5 J- 1 ^ -S O s ^-> C ^, ~ P S 1" U* M OJ W /T* A _f J g p H bfi 1 I 1 CO c 5) 11 PU "o ^C 1| Ss tst a V- c 1 1 = r T i ^*^ ^ X'^_> ^\ c^ w Ct; -B *2 1 -4 C C3 c/ a i: J >% ^ 8 jf . I j P .S ^ Q '1 % w |l C ou U 6 C a 1 f <^ o ^ * (+y/ "Q K D Ou y , I Q/) l ^ D -S CT/] OH ti *- ^ J v- a) p 3 1 i 1 H ^ 'f. "o C U-) s . S 1 1 J ^ tU -^ ^2 ^ u. c- ^ y P Xvj Z3 ~ c : surance has passed the billion-dollar mark and is now steadily ap- proaching the two-billion-dollar mark. THE NEW YORK LIFE INSURANCE COMPANY The New York Life Insurance Company was launched on April 12, 1845, under a charter granted to the Nautilus Insurance Com- pany in 1841. On the 17th of April its first two life insurance policies were issued, each for $5,000. For a short time the com- pany transacted a small fire insurance business also, but the practise was soon voluntarily discontinued. 2 The original charter authorized the company to accept the notes of intending policy-holders for premiums falling due in the future, and to negotiate them so as to obtain ready money for the payment of early death claims and other obligations. The amount thus subscribed reached the sum of $55,815.25. Of the fifty-six original subscribers, forty-six took policies in the company. The notes were to be retired when the accumulations of the company reached $200,000. And on the 30th of November, 1850, when the cash assets amounted to upward of $200,000, the notes were canceled. 1 These facts are gathered from early official publications of the Mutual Life Insurance Company. 2 For many years it has been a wise provision of the law in this country that life and fire risks shall not be assumed by the same corn- any. 260 THE LIFE INSURANCE COMPANY The makers of these subscription notes acquired no special rights in the company, which, from its inception, was made a purely mutual organization. Beginning with May, the business of the company in 1845 averaged about twenty policies a month. In January, 1846, thirty- six policies were issued, and in February 119 policies. The first death claim was paid in November, 1846, and was for a small amount. In closing the books for the first year, it was found that 449 policies had been issued, insuring $929,038, of which 359 policies; insuring $799,000, remained in force. The premium income had been $22,602.71, and the total expenses, $5,140.76. 1 What has been said of the growth of the Mutual since its organ- ization may also be said of the New York Life. It has passed the billion-dollar mark and is already nearing the two-billion-dollar mark. THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY The Northwestern Mutual Life Insurance Company, originally called The Mutual Life Insurance Company of the State of Wis- consin, was incorporated March 2, 1857. The charter required that at least $200,000 of insurance should be applied for before any policies should be issued; and on November 25, 1857, applications for $300,000 having been secured, the company was organized and its first policies issued. On June 1, 1859, when the first report was made, there were 137 policy-holders; the insurance in force was $408,800, and the total assets of the company amounted to $9,337. 2 This company has no capital other than the assets contributed by the policy-holders. It conducts its business on the mutual plan, and confines its operations to the United States. Its assets have been largely invested in loans on real estate, and it has in the past realized high rates of interest on these mortgage loans. 1 These facts are gathered from " The Semi-Centennial History of the New York Life Insurance Company," published in 1895. 2 These facts are gathered from a pamphlet issued by the company, entitled "The Northwestern Mutual Life Insurance Co. Its History, Plans, and Methods." INFANCY OF REPRESENTATIVE COMPANIES 261 On January 1, 1905, it had over seven hundred million dollars of insurance in force, and it is steadily growing. THE EQUITABLE LIFE ASSURANCE SOCIETY The Equitable Life Assurance Society of the United States was chartered on the 26th of July, 1859, to transact business on the mutual basis, subject to the insurance laws of 1853. It opened its doors on the 28th of July. On that day fourteen policies were written, insuring $100,500. On January 1, 1860, when the com- pany was five months old, it had issued 277 policies, insuring the sum of $1,175,500. On the 1st of January, 1861, when a little less than a year and a half old, the insurance in force amounted to $2,641,500, and its annual income to $76,070.76. The first death among the company's policy-holders occurred in April, 1860, and was for $3,000. The first office of the Equitable was a single room rented at the rate of $900 a year. The company started with four executive officers who divided among themselves the work of the office, the only assistants being an office-boy, at $1.50 a week, and an outside copyist. It was not until August, 1860, that an accountant was secured to relieve the Actuary of the arduous duty of keeping the books. A second clerk was engaged in 1861, and a third during the following year. 1 This company has also passed the billion-dollar mark and is well on its way to the two-billion-dollar mark. If space permitted it would be interesting to study the growth of these and other companies from year to year, but the facts are to be obtained elsewhere, and it is only necessary to call attention here to these small beginnings as contrasted with the conspicuous positions now attained by these and a great number of other life insurance com- panies throughout the civilized world. 1 These facts are gathered from the official publications of the Society. 262 THE LIFE INSURANCE COMPANY BIG AND LITTLE COMPANIES There are now extant throughout the world between four and five hundred life insurance companies conducted on the scientific basis described in this book. Some are large and some are small. Which are to be preferred ? The managers of the small companies contend that they have special facilities for protecting the interests of indi- vidual members ; that they are able to give special atten- tion to individual cases ; that small companies being more compact are more easily handled just as it is easier to drive a single horse than a four-in-hand ; that the executive officers are able to take a more comprehensive grasp of the affairs of the company are able to scrutinize with more care the workings of each department; and finally, that there is less waste and greater economy. The managers of the larger companies, on the other hand, seek to combat such arguments. They claim that with large transactions a better system can be developed; that the machinery for conducting the business can be made more effective ; that the cost of administrations will be less- ened if shared by a larger number of policy-holders ; that a large company secures more reliable averages; is less affected by local disturbances, and finally, that a company with a large fund for investment attains a power and in- fluence enabling it to make more money for its policy- holders than otherwise would be possible. They claim also that the volume of business transacted measures public ap- preciation (although it should be remembered that the vol- ume of business depends in part on the price paid for it, and that it is easy for any solvent company to increase its business by increasing its expenditures). But this is not the place for deciding the merits of such a debate. There are advantages and disadvantages on either side ; and it is doubtless well that there are both INFANCY OF REPRESENTATIVE COMPANIES 263 large companies and small companies, and that those who want insurance can choose between them. Every company founded on a scientific basis, with a business of sufficient volume to secure adequate averages, may be certain of permanent success if it is judiciously managed. If it is believed, on the other hand, that there is danger that the larger companies may become unwieldy, it must be remembered that these companies are all com- paratively young, and have grown rapidly because they are only now reaching maturity. Hereafter their growth will necessarily be more deliberate. As the average age of the insurance on the books of a company increases, its policies mature with greater rapidity, and the effort which during the earlier years was chiefly revealed in increasing bulk must now be expended in filling up the many gaps made by the rapid maturity of existing contracts. As the com- panies grow older, moreover, the large surplus accumulated on deferred dividend policies will be distributed more rap- idly, because of the larger number of maturing policies. GROWTH OF MODERN LIFE INSURANCE There are two w r ays of illustrating the growth of life insurance. One is to note the magnitude attained by in- dividual companies. The other is to observe the combined transactions of all the companies now in existence. The first of these methods has already been employed. The second, and more striking method, remains for our consideration here. And the following aggregates will show that while the individual companies already named have contributed much, the greater part of the recorded business has been furnished by the many small companies and those of moderate size, which lack of space prevents our considering individually: 18 264 THE LIFE INSURANCE COMPANY ESTIMATE OF THE INSURANCES IN FORCE ON THE BOOKS OF THE REGULAR LIFE INSURANCE COMPANIES OF THE WORLD IN 1905 Foreign Companies 84 British companies $3,339,796,434 223 Continental companies 4,599,757,817 18 Australasian companies 520,681,260 25 Canadian companies 432,963,472 43 scattering foreign companies (in the Far East, in Central and South America, etc.) 242,273,910 United States Companies 16 companies of the Eastern States.. . 1,576,196,605 23 companies of the Middle States (excluding the Mutual, New York Life, and Equitable) 2,402,840,408 45 companies of the Southern and Western States (excluding the Northwestern) 747,722,694 Total for small companies and those of moderate size 13,862,232,600 Total for the four larger companies ex- cluded above 5,680,316,147 Grand total.. . .... $19,542,548,747 CHAPTER IV GROWTH OF MODERN LIFE INSURANCE INDUSTRIAL COMPANIES THE companies already described transact their busi- ness on what is loosely called the " ordinary " plan. There are, in addition, a number of so-called " industrial " com- panies. But it is to be noted, that many of the industrial companies now transact more or less business on the " ordi- nary " plan. Three of these companies (if their indus- trial and ordinary policies are added together) may now be classed as to volume of business with the companies named in Chapter III. They are the Prudential of Lon- don, organized in 1848 ; the Metropolitan of New York, organized in 1867, and the Prudential of New Jersey, or- ganized in 1876. 1 The industrial companies offer insurance to the work- ing classes and to those who are unable to insure for amounts larger than $500, or w r ho are unable to pay quar- terly premiums by check. The business is organized to meet the necessities of such people. Policies are issued for very small amounts, the maximum limit being usually $500. Weekly pay- ments are accepted, and agents are sent to the homes of 1 Originally, the Metropolitan transacted only an " ordinary " busi- ness. It became an " industrial" company in 1879, three years after the organization of the Prudential. 265 266 THE LIFE INSURANCE COMPANY the policy-holders to collect their premiums. There is infinite detail in the organization and administration of this branch of the insurance business, involving in the case of a large company vast office space, an enormous army of officials, clerks, and agents, and an elaborate and skilfully adjusted system. The central office of such a company with its complicated and smoothly running mechanism presents an admirable example of modern ingenuity and efficiency. In consequence of the enormous detail ; the added ex- pense; the difficulty of carefully selecting risks; the tend- ency to waste resulting from early lapsing and to other considerations, the charges are higher than for ordinary in- surance just as it costs more to buy coal by the pailful than by the ton ; and this is to be regretted, for the poor are less able to pay than the rich. But it is obvious that some difference is unavoidable, and if the charges are made as moderate as prudence will justify it is eminently fitting that strong and well-managed companies should exist whose chief mission it shall be to bring the protection of reliable insurance within the reach of those who need it most. It is not easy in all cases to separate the industrial business from the ordinary business of the various compa- nies, but it is safe to estimate that on January 1, 1905, the outstanding industrial business of the world aggregated not less than four billions of dollars. The table on page 264 does not include industrial busi- ness or the transactions of assessment, fraternal, and benevolent organizations. If industrial risks should be in- cluded (still excluding all the rest) the grand total might readily be increased to nearly twenty-five billions of dollars! Of this enormous aggregate the part belonging to the United States has been accumulated almost altogether within the last half century. It is estimated that the outstanding risks of the Amer- GROWTH OF MODERN LIFE INSURANCE 267 ican companies in 1855 amounted to only $106,200,000. Whereas to-day the American companies alone have $12,- 500,000,000 at risk. It is hard to grasp such figures. Hence, the diagram on the following page is inserted that the eye may serve as an aid to the mind. VOLUME OF THE BUSINESS OF THE AMERICAN COMPANIES FIFTY YEARS AGO AND TO-DAY. OUTSTANDING INSURANCE FIFTY YEARS AGO January 1, 1855 8106,000,000 OUTSTANDING INSURANCE TO-DAY January 1, 1905 $12,500,000,000 268 CHAPTER V HOW TO SELECT A COMPANY HENRY WARD BEECHER shrewdly answered the ques- tion, " How shall we know what companies are sound and well managed ? " as follows : " Just as you know what banks are good and what bad by in- quiring; by using your common sense. Just as you find out a good doctor, a good lawyer, a good school, a good hotel." The applicant for insurance has special facilities for determining the merits of the companies transacting busi- ness in the United States. As a preliminary he must, of course, resolve to have nothing to do with any company whose business is transacted on fallacious principles. Then, he must take the position that he will be satisfied with nothing but the best; that is to say, a company sol- vent beyond all peradventure, and whose policies are ade- quate, and appropriate to the needs of the insuring public. As to the particular company, he can post himself by referring to the published Report of one of the prominent insurance departments. The companies are required to file with these departments from year to year exhaustive statements embodying, (a) the balance-sheet of the com- pany, revealing its exact condition ; (b) a report in detail of the transactions of the previous year; (c) a classified exhibit of the policy contracts of the company, showing the number and amount of policies outstanding at the beginning 270 THE LIFE INSURANCE COMPANY of the year, the number and amount issued, the number and amount terminated, and the number and amount in force at the end of the year; (d) a schedule of the real estate upon which the company's bond and mortgage loans are made; (e) a complete list of the buildings and land owned by the company ; (f ) a detailed schedule of the loans protected by stocks and bonds; (g) a list of the policy loans outstanding, and (h) a minute schedule of the securities in which the rest of its assets are invested. In scrutinizing assets two things are to be considered : (1) the way in which they are invested, and (2) their amount as compared with liabilities. In this connection it is proper to note that most companies have certain as- sets which may have great intrinsic value, but which, nev- ertheless, must be ignored by the insurance departments because they do not come under the rigid department rules. These are called " unadmitted assets/' The bulk of the assets of the company are called " admitted assets." And the difference between the admitted assets and the total liabilities shows the " admitted surplus," although the ac- tual surplus is increased by the value, whatever it may be, of the unadmitted assets. The chief item of liabilities is the reserve the amount necessary, with future interest and future premiums, to meet all policy obligations. But there are minor liabili- ties which must be added in, to arrive at the total liabilities of the company. Among these items are usually death claims that are reported and which will ultimately be paid but which have not as yet been settled, and occasionally there are claims in dispute which the company refuses to pay- The Report contains answers to numerous questions, such as the amount of insurance in force in the State to which the particular report is sent. All these reports are duly signed, sealed, and acknowl- HOW TO SELECT A COMPANY 271 X, edged before a notary public, and if designed for a foreign government a consular certificate must be appended. The first point to determine is, of course, the solvency of the company; that is, to determine whether the assets are sufficient to provide for all liabilities and leave an ade- quate balance of surplus assets to insure the permanent strength of the organization. Whether the investigator should make a cursory or a minute examination is a mat- ter of choice with him. He may note the relation between receipts and disbursements, study expense ratios, and ob- serve whether business is increasing or decreasing. But if he goes into questions of expense and volume of business he must proceed with discrimination, for at first blush a com- pany that is conducted with economy may seem to be ex- travagant, whereas a company that is paying more than it ought to pay for its new business may seem to be admin- istered on an exceptionally economical basis. 1 There are no corporations whose transactions are con- ducted more openly than those of the insurance companies. All their acts are conspicuous in the white light of pub- licity. 2 Hence, the ease with which the merits of indi- vidual companies may be determined. 1 See page 185. 2 While publicity is desirable, there is a certain pertinence in the following remarks of Prof. Edward Sherwood Meade : "It is not required, as some corporation officials seem to fear, that the full measure of publicity which is necessary to acquaint the investor with the facts about a property, should surrender the secrets of the business to competitors. A Philadelphia accountant, in conversation with the writer, recently illustrated the possibility of harmonizing publicity with necessary secrecy. This gentleman was engaged to make a report on a newspaper property which was about to be sold by order of the court. The report was especially full and detailed, but not sufficiently explicit to suit certain persons, who requested in- formation as to the returns from advertising and the amount paid for salaries. The Master in Chancery refused to al^ow this information to be given on the ground that competitors wou-d discover the secrets 272 THE LIFE INSURANCE COMPANY of the business. The accountant pointed out to the writer, however that by presenting merely the totals, without mentioning individual items, this danger could be avoided and at the same time the investor could be fully informed. The competitors of this paper could not have profited from the information as to the aggregate salaries paid or the total amount of advertising receipts. What they were con_ cerned to discover, was the amount paid to certain individuals on the staff, and the terms of particular advertising contracts. This infor- mation would be of no service to the investor. "It is impossible, in most manufacturing enterprises, to conceal from competitors the cost of operation. This can be told from the known facts of the industry. The special arrangements with individual buyers and sellers, however, can be kept back from the public, while at the same time abundant information as to the financial condition of the company can be given." Trust Finance, D. Appleton & Co., New York, p. 371. CHAPTER VI A RETROSPECTIVE GLANCE IT would be interesting to trace the history of life insurance carefully from its earliest beginnings, following its evolution from period to period, and studying the phi- losophy of its development up to the present time, but space admits of only the most cursory review. As we have seen, England may claim to have been the cradle of scientific life insurance, for the first companies worthy of the name were originated there. The business also took root early in other European countries, but on the Continent in the beginning its growth was slow. The speculative period which came first in England was followed by a scientific period beginning with the estab- lishment of the " Old Equitable " in 1762. After that the business exhibited a wholesome growth, but before long abuses began to creep in, and certain companies, weak- ened by injudicious management and unable to stand alone, were absorbed by others, until in turn the vitality of the latter was sapped and disaster ensued. Many companies in England and elsewhere went by the board, and the popu- larity of life insurance in the Eastern hemisphere was temporarily arrested. But vital seed had by that time been sown in American soil, and there life insurance had already begun to sprout. At first the American companies were imitative. The President of one of them, speaking in 1865 of the early 273 274 THE LIFE INSURANCE COMPANY history of his own institution, made the following remarks of general application : "In inaugurating the business, in entering upon a new and untried field of enterprise, we followed, for a time, in the beaten track of those who had preceded us in this path. Forms, customs, principles, habits, were all borrowed. It became us to be wary, and not wreck our bark in the very outset of its career by the intro- duction of novelties. " But time and experience, and increasing knowledge of the business, derived from its daily and practical pursuit, brought us to a conviction, impossible to resist, that life insurance, as a science, should no more remain stationary than any other branch of science ; that, like all other branches, it was capable of development and im- provement ; that, in order to be successful, or even to hold its own, it must be progressive in proportion to the demands and exactions of this progressive age. Guided by the experience of the past, and judging so far as we might of the probable future by a calm and anxious survey of the field before us, we have, from time to time, deviated from the old track and struck out new paths, our course at times proving startling to those who clung with obduracy to old habits, forms, and opinions. "The aspect of the age has changed since we came upon the field; new methods of conducting business have been introduced; new methods of thought have been developed, and to all these changes must the mode of business be adapted in order to be suc- cessful. "To remain stationary; to adhere blindly to old dogmas, ex- cept when founded on the certainty of mathematical science, would be as irrational as to require the full-grown man to wear the habili- ments in which he had been clad in infancy." But this growth and expansion was not at all times what it should have been. Weeds sprang up and threat- ened to choke the good grain that had been sown. Im- perceptibly and insidiously an antagonism rose up between the companies and their policy-holders. Interests which ought to have been identical began to clash. Whenever A RETROSPECTIVE GLANCE 275 a company drifted into a dispute with a claimant and the case was taken into the courts and the company suffered defeat, its lawyer was apt to advise the introduction of a new clause in the policy-contract for the future protection of the company. Thus policies became overburdened with supplementary clauses. The comic journals began to take the matter up. One paper pictured the chagrin of the president of some com- pany upon finding that a clause had inadvertently crept into his policies which made it possible for a claimant here and there to collect the insurance. " Don't insure ! " cried the alarmist. " If you do you will leave your widow a lawsuit for a legacy." And such warnings, although extravagant, were not altogether without reason. Some companies had begun to take advantage of very technical points. The insured was compelled to warrant the state- ments made by him as true in all respects whether ma- terial or immaterial, and he was forced to agree that any inaccuracy or omission, or any failure on his part to live up to every provision of the contract, should thereupon render the policy null and void. It was distinctly stipu- lated that if the insured passed beyond certain prescribed limits or engaged in any one of a long list of prohibited occupations, the policy would be vitiated thereby. The courts were compelled to interpret these contracts literally. The following is the language of one decision : "If an insurance policy in plain and unambiguous language makes the observance of an apparently immaterial requirement the condition of a valid contract, neither courts nor juries have the right to disregard it or to construct, by implication or otherwise, a new contract in the place of that deliberately made by the parties. . . . Such contracts are open to construction, . . . but are sub- ject to it only when, upon the face of the instrument, it appears that its meaning is doubtful or its language ambiguous or uncer- tain. An elementary writer says : ' Indeed the very idea and pur- 276 THE LIFE INSURANCE COMPANY pose of construction imply a previous uncertainty as to the meaning of a contract, for when this is clear and unambiguous there is no room for construction and nothing for construction to do.'" In one case where the insured died accidentally from a self-administered overdose of laudanum, the company in which he was insured based its defense on a clause in the policy which stipulated that " It is declared and agreed that the self-destruction of the person, whether voluntary or involuntary, whether he is sane or insane at the time, is not a risk assumed by this company" On the strength of this clause the judge instructed the jury to find for the company, and in commenting on it said : " This is a contract, and the courts are forced to enforce it, al- though to the mind of the court it does seem hard that after a man has paid premiums and secured what he supposed to be a com- petency for his family after his death, they should be deprived of it by an act which he never intended to result in death." In these days it seems beyond belief nevertheless it is true that a death claim was once contested by some company on the sole ground that the insured in answering the question whether married or single, had answered " sin- gle," when he should have said " married." Evils of various kinds developed rapidly. The breach between company and policy-holder grew wider, and the fair fame of life insurance was seriously threatened. The fault lay not so much with the companies as with irre- sponsible brokers who sought to foist bad risks upon them, or with adjusters who were paid a percentage on what they saved. But soon a remedy was found for these and kin- dred evils, as we shall see later on. STEIFE AMONG THE COMPANIES Keen competition bred another evil, namely, warfare among the companies. The aim of many of them seemed A RETROSPECTIVE GLANCE 277 to be to take every possible advantage of competitors to pull down rather than to build up the institution of insur- ance. The country was flooded with pamphlets loaded down with partisan comparisons and personal attacks. Agents sought to obtain business not by dwelling upon the value of life insurance, but by criticizing the management of all rival organizations. But some years ago a reform was instituted, and to-day, although competition is as keen as ever, although agents are as zealous as ever, a spirit of amity has grown up among the companies. This has placed competition on a higher plane ; has given a new dignity to the business, and has done much to further the spread and development of life insurance throughout the world. CHAPTER VII THE PKESENT AND THE FUTURE THE SITUATION TO-DAY THE evils referred to in the last chapter were remedied quickly because from the beginning there were many in- surance experts who fought consistently and valiantly within their sphere of influence against them. Soon the companies began to refuse to do business with irrespon- sible brokers ; the adjusters were discharged ; more care was taken in the selection of risks, and, instead of attempt- ing to rectify blunders in the end, the aim was to avoid them in the beginning. A period of active reform succeeded. The policy- contract was simplified and liberalized. A clause was in- serted under which the company estopped itself from con- testing the payment of the claim on any ground whatso- ever as soon as a short probationary period had elapsed. Instead of paying a claim three months ofter presentation, the machinery of the business was so nicely adjusted that it became not only practicable but the rule to pay the claim, on its presentation, like a sight draft. Every policy- holder after being identified with the company for a short period was given absolute freedom as to residence, travel, and occupation. New guarantees were introduced into the contract, the choice of various advantageous methods of settlement were provided for, and many new and attract- 278 THE PRESENT AND THE FUTURE 279 ive policies were introduced. These and other improve- ments gave the business an impetus which has never flagged, and has resulted in the steady and uninterrupted growth of life insurance throughout the United States. Fifty years ago, as we have already seen, the American companies had only $106,200,000 at risk. To-day they have $12,500,000,000. 1 THE FUTURE OF LIFE INSURANCE Life insurance has become so firmly planted in the United States, and in all other civilized lands, that it is inconceivable that it can ever be uprooted. It is true that if the world should come suddenly to an end its mission would cease. It is equally true that if the elixir of life should be discovered, and if men should become immortal its usefulness would be at an end. But I firmly believe that as long as the sun rises and sets; as long as seed time and harvest succeed each other ; as long as the foun- tains of the great deep are not broken up, insurance will be utilized in some form, and that if abuses creep in, they and not the beneficent institution of life insurance will be swept away. ITS POWER FOR GOOD The civilizing influence of life insurance is seen and read of all men. To the savage life insurance would be meaningless. He takes no thought for the future. He gorges himself to-day because he fears that he may have nothing to eat to-morrow. He makes no provision for the winter because the summer sun warms his naked body. He squanders his resources because he knows of no means of preserving what he has acquired. He leaves all to chance. 1 See diagram, page 268. 19 280 THE LIFE INSURANCE COMPANY A writer on this branch of the subject characterizes insurance in general as : " An institution peculiar to the modern world, the origin and growth of which attest the remarkable change in man's ideas and habits of thought ; a change, the character and extent of which, if fully traced, would fill an impressive chapter in the history of civil- ization. ... Its essential elements are foresight and cooper- ation; the former, the special distinction of civilized man; the latter, the means for social progress. ... To the savage life is a lottery. In hunting, rapine, and war all his interests are put at hazard. The hopes and fears of the gambler dominate his im- pulses. "As nature is studied and subdued, and as society is developed, the element of chance is slowly eliminated from life. In a progress- ive society, education, science, invention, the arts of production, with regular government and civil order, steadily work together to narrow the realm of chance and to extend that of foresight. But after they have done their best to conquer the forces of nature and regulate human passions, so that achievement shall follow purpose with uniformity, there remain certain events which may disturb all anticipations, and in spite of any man's best wisdom and effort may deprive him of the fruits of his labor. These are mainly of two classes: (1) damage to property ... (2) premature death." 1 Life insurance steps in just here, and completes a work which would be uncertain and inadequate without it. Life insurance also aids in a juster distribution of wealth. It lessens the gap between the rich and the poor. It alleviates misery and want, but it does not stop there: it does a far more important work in preventing misery and want. With facts such as these before us what are we to look for in the future ? Do not all signs point to even greater and more brilliant achievements than have ever been re- corded ? There can be but one answer to such a question. 1 Encyclopedia Britannica (1902), vol. xxix, p. 506. THE PRESENT AND THE FUTURE 281 And yet the answer must be qualified. Satisfactory prog- ress can only be hoped for if (a) the business is not ham- pered hereafter by unjust legislation, burdensome taxation, and unreasonable government restrictions; and if (b) the companies continue to be managed with the care and pru- dence that have characterized their administration hereto- fore. The importance of good management was clearly rec- ognized by a former Superintendent of the Insurance Department of the State of New York, the Hon. O. W. Chapman, when he said in his official report, published in 1875: "No matter how the subject be approached, the word man- agement is the keystone of the arch, not simply in the matter of investment, selection of agents and medical examiners, or in office requirements, but in everything pertaining to the company's whole administration . ' ' I/ . INDEX Abuses, 273. Accumulation Period, 115, 191, . 204. Actuarial Society of America, 170. Actuary's Department, 256. Actuary's Duties, 13. Additional Policies, 158. Adequacy of premium charges demonstrated, 25, 26, 29-31, 40, 41, 49, 53. Admission of Age, 100, 104. Adverse Selection, 95, 240. Advertising, 187. Advertising Department, 254. Age, 13, 19, 24-29, 35, 36, 39, 45, 79, 94, 104, 166. Agency Department, 248. Agency Managers, 178. Agents, 93-96, 165, 178-181, 220- 228, 238, 248, 249. Agents, Classes of, 178. Agent's Influence, 226. Powers, 179, 220-223. Reports, 250. Responsibility, 220-228. Aggregate business, 264. Alternate Policies, 158. Amendment to Insurance Law, 87. American Companies, imitative at first, 273, 274. American Experience Table of Mortality, 18, 24, 25, 209. Annual Dividends, 83, 84, 90-92, 108, 109, 161, 162. Annual vs. Deferred Dividends, 190-195, 205-207. Annuitant, 46. Annuities, 44-50, 130, 139, 145- 148. Annuity Definitions, 46. Annuity Due, 48. Annuity Policy, 149, 150. Annuity Rates for men, 146, 153, 154. Annuity Rates for women, 146, 153, 154. Anonymous Life Insurance Co., 60-63. Applicant, 13-15, 93-98. Application Department, 249. Apportioning Surplus, 85-89, 90- 92, 190-197, 204-207. Assessment Insurance, 77-82. Assets, 62, 69. Assignment, 100, 155, 157. Attitude of Clergy, 198-199. Average, Law of, 14-16. Average duration of life, 16-20. Balance sheet, 60. Basis of Settlement, 126, 128-130, 138, 139, 159, 162, 190, 191. Beneficiary, 97, 99, 105, 155, 156. Benefits, 98, 99-101. 283 284 INDEX Binding Receipt, 94, 95. Blue Book, 169. Board of Directors, 245. Bond and Mortgage Department, 253. Books on Insurance, 168-171. Branch Offices, 250. British Board of Trade, 169. British Offices Mortality Table, 18. Brokerage Contracts, 179. Business of granting annuities, 145-154. Canvassing material, 166, 254. Capital created by insurance, 9. Capital Stock, 86-89. Certainty regarding average dura- tion of life, 16-20. Change of Beneficiary, 105, 156. Changes in policies, 105, 159, 160. Changing mode of paying pre- miums, 103, 159. Characteristics of good agent, 181, 223, 224. Child's Endowment, 135. Claim Department, 256. Classic, A Life Insurance, 168. Classification of policies, 126. Clergy, Opinions of, 199. Commissions to agents, 179, 180. Committees, 245. Companies, large and small, 262, 264. Companies of the world, 264. Comparison between natural and level premiums, 35, 36, 41- 43, 65, 66. Compensating agents, 179, 180. Compound interest, 21. policies, 144. Computation of net natural pre- mium, 25, 26. Computation of net single pre- mium, 29, 30. of net level premium, 36-39. of term policy premium, 53. Conditional receipt, 94, 95. Conditions, 98-101. Contesting claims, 274-276. Contract binding, 275, 276. Contract provisions, 98-101. Contribution plan, 91. Contributions, 91. Cooperative companies, 77-82. Corporate form essential, 8. Correspondence Department, 252. Cost of risk incurred in beginning, 211. Dating premiums, 158. Death, 5, 11, 12, 13, 16, 17, 24, 75, 106, 108, 162, 166, 199, 200, 241, 276. Death, Uncertainty regarding, 162. Death Claim Department, 256. Decline in Dividends, 237, 238. Deferred Annuity, 148. Deferred Dividends, 90, 114, 115, 190-197, 202-207. Deferred Dividends simplifying surplus problem, 192-195. Deferred Premiums, 70. Definition of insurance in general, 7. De Morgan, 176. Department Reports, 269. DIAGRAMS AND TABLES: Annual Dividend Policy, Ordi- nary Life form, 99-102. Application, 94. Change of Beneficiary form, 104. Deferred Dividend policy, En- dowment form, 121, 122. INDEX 285 DIAGRAMS AND TABLES (Cont'd). Deferred Dividend policy, Lim- ited Payment Life form, 118- 120. Deferred Dividend Policy, Ordi- nary Life form, 114, 115. Dividend Notice, 109. Financial Statement, 60. Gross Level Premium rates, 58, 59. Mortality Table, 24. Net Level Premium rates, 34, 56. Net Natural Premium rates, 34. Net Single Premium rates, 32. Premium Notice, 107. Premium Receipt, 111. Early restrictions, 100, 103, 104, 229, 239. Easy problems, 241. Economy, 84, 180, 181, 183, 187, 271. Education, Importance of, 223, 238. Elementary books, 169. Employment, 233. Encyclopedia Britannica, 8, 140, 169, 210, 280. Encyclopedias, 18, 169. ENDOWMENT: Double, 137. Child's, 135. Continuous Instalment, 138- 139. Insurance, 54-56, 59, 120-122. Simple, 51, 135. Endowment, Gross level rates, 59. Endowment Policy, 54, 55, 120- 122, 209. Enterprise of American Com- panies, 267, 273, 278. Environment, 232. Epidemics, 241. Equitable of London, 19, 79, 228. Equitable of New York, 261. Erroneous ideas about life insur- ance, 8-10. Errors, 162, 220-222, 275, 276. Examination by physician, 95, 165. Exceptional kinds of insurance, 131-139. Expectation of life, 17, 166, 167. Expense of securing policy at start, 211. Expense problem, 177, 179, 182- 188. Expenses, 23, 26, 57, 69, 70, 74-76, 177, 180, 181, 182-188,271. Experimental Company, 13-154. Expert Talent, 8, 13, 20, 175, 187, 188, 228, 247, 281. Explanations, 162, 221. Extended Term Insurance, 101, 105, 112. Extension Department, 253. Extra hazardous risks, 230-234. Extra Premiums, 230. Extravagance, 182-186, 271. Extravagance concealed, 185, 271. Failures, 19, 20, 74, 78, 83, 273. Fallacies of assessment system, 77-82. Fallacy that reserve belongs to policy-holder, 209-214. Favoritism, 240. Financial Statement Anonymous Co., 60-63. First Premium, 106. Foreign Languages, 252. 286 INDEX Form of policy, 126, 127. Foundation strength, 5, 19, 20, 83, 176, 189. Fraud, 157, 238, 239. Futility of granting insurance at less than cost, 74, 75, 79. Future of Insurance, 279-281. Gambling idea, 201. General agents, 178. Germ of life insurance, 11-12. Government supervision, 215. Grace, 100, 107, 110. Gross Level Premium Rates, 58, 59. Gross Premium, 57-59. Growth of modern insurance, 263, 265-268. Growth of American business, 267. Hazardous occupations, 232-234. Hereditary tendencies, 96, 232. Holladay, Waller, opinion of, 202- 207. How should a company invest? 187, 188. How to select a company, 269-272. Hypothetical dividend tables, 91. Imaginary company built up, 12. Immediate payment, 257, 278. Immorality, Idea of, 198-207. Impetus to business, 278, 279. Importance of sound manage- ment, 281. Incontestability, 100, 103, 239. Industrial companies, 265, 266. Influence of agents, 226. Infancy of important companies, 258-261. Influence of interest, 21. Information Bureau, 246. Inspection Department, 239, 250. Institute of Actuaries, Text Book of, 170. Insurance Department Reports, 269. Insurance Departments, 217, 269, 270. Insurance granted at less than cost disastrous, 74. Insurance in force in 1905, 264. Insurance (in general), definition, 7. Insurance Library, 255. Insurance must not be granted at less than cost, 66, 74-82, 182- 184. Insurance obligations, 62-68. Interest, 20-22, 62, 63, 69, 187, 188. Interest, Influence of, 21. Interests of company, agent, and policy-holder identical, 242. Intermediate Premium Rates, 231. Investigating merits of com- panies, 269-272. Investment Insurance, 236. Is Surplus a Liability? 70, 195- 197. Joint Life Annuity, 148. Joint Life Policy, 138. Key Stone of the arch, 281. Kind of policy, 126. Large or Small Surplus, 83, 189, 190, 194, 195, 271. Large vs. Small Surrender Values, 208-214. Law Department, 255. Law Library, 255. INDEX 287 Law of Average, 14-16. Law of Mortality, 16-18, 24, 25. Legal Contests, 156, 157, 275. 276. Legislation, 218. Legitimate scope of life insurance, 235, 236. Letters, 252. LEVEL PREMIUM, 33-43. derived from single premium, 36-39. computation, 36-39. computation verified, 40. equivalent to present worth of annuity, 47-49. Level Premium rates (gross), 58, 59. Level Premium rates (net), 34-35. Liabilities, 61, 70. Liabilities less than policy obliga- tions, 62. Liberal Surrender Values on old policies, 212. Liberality, 278. Library, 255. Lien Policies, 231. Life Annuity, 45-50, 145-148. LIFE INSURANCE: Its future, 279-281. Its germ, 11. Its growth, 258-268. Its past, 273-277. Its practise, 93-171. Its present, 278. Its principles, 23-92. Its problems, 175-242. Its scientific basis, 15-22. What it is and is not, 8, 9. Life Insurance explained, 169. Life Insurance literature, 168-171. Limited-payment-life level rates (gross), 58, 59. Limited-payment-life policy, 55, 56, 117-120. Literary Department, 254. Literature, Life Insurance, 168- 171. Loaded Premium, 57. Loans on policies, 101, 105. Local agents, 178. Lost policies, 162. Lowest adequate premium rate, 75, 76, 131-134. Management, 20, 175, 281. Massachusetts Department estab- lished, 217. Mean Reserve, 67. Medical Department, 249. Medical Director, 249. Medical Examination, 95, 147, 165. Medical Report, 96. Medical Service, 95, 147, 165, 229. Meetings of directors and com- mittees, 245. Method of using Mortality Table, 25, 26. Methods of Settlement, 126, 128- 130, 138, 139, 159, 162, 190, 191. Minimum Premium Rates, 72, 74- 82. Miscellaneous facts, 155-166. Mismanagement, 20, 281. Mistaken ideas, 8-10. Misunderstandings, 220. Mixed plan, 88. Modern company, 245-257. Modern Liberality, 230. Mortality Tables, 17, 18, 24, 25. Mutual plan, 87-89, 195, 197. Mutual Life Co., 258. Natural premium, 23-26. Natural Premium rates, 26, 34. 288 INDEX Necessity for large averages, 14- 16, 45. Net level premium rates, 34, 35. Net natural premium rates, 34. Net Premium, 23. Net single premium rates, 32. New York Department estab- lished, 217. New York Life Co., 259. New York Life Insurance Law, 87. New Problems, 241. Non-Participating Policies, 86, 123, 124. Northwestern Co., 260. Not-Taken-Out Policies, 158. Occupation, 100, 231, 234, 275. Office, 246. Office premium, 57. Old Equitable of London, 19, 79, 228. Opinions of clergymen, 199. Options, 191. Ordinary business, 264. Ordinary-life gross level rates, 58, 59. Overcharges not necessarily in- jurious, 72, 73, 83. Paid-up insurance, 101, 105, 108, 112, 161. Panics, 5, 241. Partnership insurance, 10. Period, 115, 126, 127, 190, 194. Perpetual Annuity, 146. Policies, Various kinds of, 125- 139. Policies, Relative value of, 138. Policy Contract, 97, 106, 114-139, 149, 150, 275, 276, 278. Policy Valuations, 66. Popularity of mutual plan, 88, 89, Power for good, 279. Premium dates, 158. Premium loading, 57. Premium Notice Department, 251. Premium, on natural basis, 23-26. PREMIUMS : Level, 33-43. Natural, 23-26. Net, 23. Single, 27-32. Premium Receipt, 106, 111. Premium Receipt Department, 251. Present value, 37, 46, 47. Present worth, 37, 46, 47. President's duties, 12, 20, 246. Printing Department, 254. Probabilities, Theory of, 17, 166, 167. Problem of dividing Surplus sim- plified by deferring dividends, 192-195. Problems easy of solution, 241. PROBLEMS OF MANAGEMENT: Administration, 187. Adverse Selection, 240. Advertising, 187. Agents' compensation, 179. Agents' influence, 226. Agents' powers, 220. Dividends, 190, 192. Easy problems, 241. Expenses, 182. Fraud, 238. Gambling, 198. Government Supervision, 215. Hazards, 229. Immorality, 198. Investments, 187. Legislation, 218. Scope, 235. Size of risks, 239. INDEX 289 PROBLEMS OF MANAGEM'T (Con'd) . Stability, 175. Surplus, 189, 195. Surrender Values, 208. Taxation, 218. Prompt payment, 257. Proofs of Death, 108. Propriety companies, 86, 87. Prospectuses, 169, 254. Province of the Agent, 178-181, 220-228. Publicity, 271. Purchasing Department, 253. Pure Endowment, 51. Pure Premium, 23. Real Estate Department, 253. Rebating, 180, 225. Receipts, 69. Reforms, 278. Regular insurance companies, 264. Regular Term Policy, 135, 136. Reinstatement, 100, 110, 112. Remittances, 251. Renewal Commissions, 179. Remuneration of Agents, 179, 180. Representative Companies, In- fancy of, 258-261. Representative Modern Company, 245. Reserve, 61-68. Reserve not policy-holder's prop- erty, 209-214. Residence, 100, 159, 229-231. Responsibility of agents, 220-228. Restrictions, 100, 103, 229, 239, 275, 276. Retrospective glance, 273-277. Return-Premium Policy, 135, 137. Safe and profitable investments, 187, 188. Safe and unsafe employments, 233. Safety of Life Insurance, 5, 18-20, 175, 176. Salaries to agents, 179. Schooling, William, 169. Scientific publications, 170. Second Premium, 110. Secretary's duties, 255. Security, 175-177. Security Department, 253. Simple Endowment, 51. Single Net Premium rates, 32. Single Premium, 27-32. computation, 29, 30. computation verified, 31. Single premium, present worth of level premium, 47-49. Size of risks, 239, 240. Solvent Company, when it should go out of business, 186. Sound management, 281. Special Agents, 178. Special Hazards, 231. Spectator Year Book, 169. Stability, 175. Standing Committees, 245. State vs. National Supervision, 216-218. Statement, Anonymous Co., 60- 63. Statistical Department, 254. Statistics regarding companies, 169, 258-261, 264, 266-268. Stipulated Premium Companies, 81. Stock Exchange Insurance, 82. Stock plan, 86, 87. Stock-Rate Policies, 86, 123, 124. Strife among companies, 276, 277. Students, Advice to, 12, 29, 168- 171. Suicide, 100, 104, 230. 290 INDEX Superintendent of Office, 255. SUPERVISION: Government, 215. National, 216-218. State, 216. Surplus, 70, 83, 84, 90, 92, 189- 197. Surrender Value Department, 256. Surrender Values, 101, 105, 112, 161, 163, 164, 208-214, 256. Survivorship Annuity, 148. Table of Mortality, American Ex- perience, 24. Taxation, 218. Technical rulings, 275, 276. Tendency to lower dividends, 237, 238. Term policy, 52. Term Policy Premium computa- tion, 53. Text Book of Institute of Ac- tuaries, 170. Theory of probabilities, 17, 166, 167. Three methods of conducting busi- ness, 85, 89. Three per cent standard, 21, 22. Time, essence of an insurance con- tract, 13, 106, 182. Travel, 100, 103, 229-234. Tropical Premium Rates, 230. Trustee, 157. Twisting, 224. Two-Life Annuity, 148. Uncertainty as to death, 162. Uncertainty of an individual's life, 14, 16. Under average risks, 231, 232. Universal Cyclopedia, 169. Unreported Premiums, 70. Unsafe employments, 233. Utility of Life Insurance, 140-144. Valuing policies, 66. Van Amringe, J. H., 169. Variety of Annuities, 146, 148. Variety of policies, 125-139. Vice-President's duties, 247. Walford, Cornelius, 168. Walford's Insurance Guide and Hand Book, 168, 233. Wives' prejudice, 9, 200. 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