UC-NRJLF 571 77b H 1 Bl'K 1E THREE SYSTEMS LIFE INSURANCE m LIBRARY OF THE UNIVERSITY OF CALIFORNIA. THE THREE SYSTEMS OF* LIFE INSURANCE I. THE LEVEL PREMIUM SYSTEM. II. THE NATURAL PREMIUM SYSTEM. III. THE ASSESSMENT SYSTEM. Originally compiled by the late MERVIN TABOR, (formerly actuary of the Insurance Department of Illinois), and carefully corrected and revised to the year 1900, NEW YORK. THE SPECTATOR COMPANY. 1900. RAL Copyright, 1900 THE SPECTATOR COMPANY NEW YORK PUBLISHER'S PREFACE. The first edition of "The Three Systems of Life Insurance" was prepared by the late Mervin Tabor, at one time actuary of the Illinois Insurance Department, and issued in 1885. So warm was the reception accorded the work on account of its being written in a manner so clear and concise, as to ap- peal to the public at large, that it speedily ran through several large editions, The Spectator Company having meantime pur- chased the copyright and electroplates, on the death of Mr. Tabor, and the work having since been issued under its aus- pices. In this, the eighth edition, the publishers have caused the work to be carefully revised in accordance with the principles of modern life insurance practice. Inasmuch as the division of life insurance under three systems, as laid out by Mr. Tabor, has not undergone any material change, the same division has been followed in the current edition. The lead- ing system is, of course, the level premium or old line, under which premiums remain fixed as at age of entry, a larger amount than is absolutely necessary being collected in the earlier years in order to avoid increasing the cost in later years when the increased number of deaths causes a larger drain upon the funds. The natural premium system is equally as scientific as the level premium, differing only by collecting for each year the actual cost as indicated by the mortality tables, which implies steadily increasing premiums. The as- sessment system merely aims to collect from year to year an amount sufficient to pay the claims actually incurred during that year; no provision is made for increasing cost, and, as a result, the assessments increase after a few years, both in number and amount to the great dissatisfaction of those hold- ing assessment policies. "Three Systems of Life Insurance" is not only an exposi- tion of the methods of conducting the business, but is also largely historical. In revising the book, therefore, the pub- lishers have kept in mind its value as a book of historical reference, and have caused such matter to be added as will bring the work up to date, thereby furnishing a condensed history of life insurance on general lines brought down to the year 1900. "Three Systems of Life Insurance" has long been accepted as a standard authority. It gives a variety of information 115512 4 PREFACE. unobtainable elsewhere, and is written in such a simple and graphic style that the ordinary layman can understand every word of it. The work is not filled with technical terms or scientific formula. Wherever it has been necessary to use such terms or formulae they have been carefully and clearly explained. It is hardly necessary to say that the book was originally written without bias or prejudice, and that the re- vision has been conducted in the same spirit. The publishers offer this new and revised edition with the confidence that it will serve for the enlightenment of the public on the im- portant subject of life insurance as well as past editions have done. THE SPECTATOR COMPANY. CONTENTS. [Full Index will be found in the last pages of the book.] PAGE. Introduction 7 CHAPTER I. Fire Insurance. Life Insurance. The Law of Mortali- ty. How Mortality Tables Are Made. The Two Tables Used Most Extensively in America 15 CHAPTER II. Actuary. Assets. Brokerage. Commissions. Stock Companies. Mixed Companies. Contribution Sys- tem of Dividends. Cash Dividends. Reversionary Dividends. Expectation of Life. Forfeiture. Lapse. Loading. Loss. Mortality 20 CHAPTER III. Policy. Single-Payment Life. Five-payment Life. Ten-Payment Life. Fifteen-Payment Life. Twenty- Payment Life. Ordinary Life. Term Life. Re- newable Term Life 25 CHAPTER IV. Endowment Insurance. Ordinary Endowments. Lim- ited-Payment Endowments. Endowment Compared with Term Insurance. The Investment Element. The Insurance Element 29 CHAPTER V. Tontine Insurance. Semi-Tontine Insurance. Senate Resolution No. 100 of the Ohio Legislature. A Com- mittee of Investigation. Report of the Committee. Lapses of Tontine as Compared with Non-Tontine Insurance. Dividends on Tontine and Non-Tontine Policies. Accumulative Dividend. Distribution. Bonus Policies, etc 37 CHAPTER VI. Premiums. Premium Notes. Surplus. Value of a Policy. The Reserve. Abstract of Net Values. Life Insurance Failures. Life Insurance Expenses. Growth of Life Insurance 5 2 CHAPTER VII. The Level Premium System. Its Distinguishing Charac- teristics. Requisites for Soundness and Perma- nency. Analysis of a Level Premium. The Reserve Element. The Mortality Element. The Expense Element. Sources of Dividends. Lapses and For- feitures. Cash Surrender Values, etc., etc 63 6 CONTENTS. CHAPTER VIII. Modern Level Premium Contracts. Numerous New Forms. Elimination of Restrictions. Extension of Non-Forfeiture Principles. Instalment and Continu- ous Instalment Contracts. Investment Insurance. . 74 CHAPTER IX. Non-Forfeiture Laws. The Massachusetts Non-Forfeit- ure Law of 1880. Letter from Elizur Wright and Massachusetts Life Companies. Amendments of 1887 and 1896. New Law of 1900 79 CHAPTER X. The Non-Forfeiture Laws of Maine. Michigan. Ken- tucky. Missouri 92 CHAPTER XL The New York Insurance Law of 1880 Amendment of 1892. Non-Forfeiture Laws of California, Colorado and New Jersey. Deposit Laws of Iowa and In- diana. Law with Reference to Reserves. An As- sumed Example of a Deferred Dividend Policy. Re- sults of Matured Tontine Policies. Surrender Values in a Deferred Dividend Contract 99 CHAPTER XII. The Natural Premium System. Its Distinguishing Char- acteristics. Requisites for Soundness and Perma- nency. The Elements of a Level Premium Com- pared with the Elements of a Natural Premium. Uniform Per Centum Loading Discussed 114 CHAPTER XIII. The Assessment System. Its Distinguishing Characteris- tics. Requisites for Soundness and Permanency. Assessment Failures. Stipulated Premium. The New York Stipulated Premium Law 126 CHAPTER XIV. Synopsis of the Massachusetts Law of 1885 on Assess- ment Insurance, by John K. Tarbox. "Co-operative Business," by John A. McCall. "Co-operative In- surance," by Ephraim Williams. Remarks on the Grouping of Different Ages for Purposes of Assess- ment. Fraternal Orders. Fraternal Congress Mor- tality Table 145 CHAPTER XV. Article on Interest Interest Laws of the States and Ter- ritories. Penalties for Violation of the Same 156 Explanation of the Tables 160 Tables 166-200 INTRODUCTORY. INTRODUCTION. The following, from the introductory remarks of Mervin Tabor to the first edition of The Three Systems, explains the object of the work: The idea of publishing the work here presented did not sug- gest itself until much of the material that it contains had accu- mulated for private use. Many letters from different localities throughout the United States and Territories, and from Canada, asking for informa- tion, came to the author, covering a wide range of inquiry upon subjects involving the elementary principles of Life Insurance. The following, copied at random from a few of these letters, will convey an idea of their general scope: 1. What is a Mortality Table, and where can I obtain one? 2. What is the difference between the reserve and the surplus of a company? 3. Why is the dividend on a Life Policy larger the tenth, than it is the fifth, year? 4. I have one policy that was taken out nearly thirty years ago, but the dividend this year is not so large as it was ten years ago. I have another tJiat is only six years old, and the dividend has increased every year. Why is this? 5. Why can't Life Insurance be done tlie same way that Fire In- surance is? 6. Please explain Endowment Insurance. 7. What is Tontine Insurance? 8. What is meant by the expression, " Actuaries' 4 per cent."? 9. Please explain the new Massachusetts 1 Non- Forfeiture Law. 10. WJiat do you think of the Homans plan of Insurance? Isn't it Assessment Insurance in a new dress? 11. Which is the best ASSESSMENT COMPANY ? 12. An agent tells me that the New York Non- Forfeiture law com- pels all New York companies to pay a definite amount, in cash, for a policy after it has been running three or more years. Please explain this, How does it differ from the Massachusetts' law? 8 INTRODUCTORY. 13. Is there any good Assessment Company that issues Endowment Life Insurance policies? 14. What is meant by " T7ie Expectation of Life," a phrase used so often by Life Insurance men? 15. What are the sources of dividends in the " Old Line" com- panies? Why can't we pay less for insurance and not receive any dividends? 16. I want $10,000 life insurance to be paid for in ten years, as an estate to go to my wife and children after my death. I also want $10,000 payable to my boy, now six years old, when he is twenty-one, or to a trustee for him should I die before he does; and I want $10,000 for the next ten or fifteen years, the cheap- est insurance that can be had consistent with security. Please give me the information necessary for an intelligent selection of companies, and send bill for services. 17. An agent has been in to see me several times trying to insure me for $10,000 on what he calls the " The Reserve Addition" plan, or " The Accumulation" plan, I think it is. I am to pay for it in ten years, and he says that at the end of nine- teen years I will recewe the $10,000, in cash, if I live until then, but if I die before that time my wife will receive the whole amount. Do you think a company can do such a thing? Please ansicer in detail and send your bill. 18. If 1 insure for $10,000, and die the first year, how can a com- pany afford to pay my wife and children the $10,000? I don't understand it. Please explain and send charges. 19. What is an actuary? Do they have actuaries in fire insur- ance companies? 20. How can an ASSESSMENT COMPANY safely issue Endowment 21. What are REVERSIONARY ADDITIONS or DIVIDENDS? 22. What is the difference between "OLD LINE" insurance and ASSESSMENT insurance? Are not the principles upon which they are based the same? 23. Is there any good ASSESSMENT COMPANY that makes assess- ments only three or four times a year, at stated fixed dates? Please reply . 21,. Why are the "OLD LINE" called "LEVEL PREMIUM'* companies? 25. Why is it necessary that so many of the Mutual (i OLD LINE" INTRODUCTORY. 9 companies Jiave so much money ' ' in reserve" as they call it? If they are Mutual, why don't they pay back to their members this money, and not pile it up to be preyed upon, perhaps, by avaricious officers? I don't understand it. Please explain. 26. What is a " natural premium"? 27. I have had a policy in the Company for nearly sixteen years, and I asked what they would pay me for it, in cash, and they won't pay a red cent! They say that they are selling insurance, not buying it. (This gentleman describes his policy tells how much he has paid on it, in cash, and wants to know if it is worth anything.) The above extracts from a few of the thousands of letters received sufficiently indicate the eagerness with which the general public are seeking impartial and reliable information on the subject of life insurance. One object, therefore, in the publication of this book, was to more fully supply this de- mand. Nearly every question given above is answered in this book more completely than could be done by letter, and at much less expense to the correspondent; besides it gives much additional information that could not possibly be com- municated in one or fifty letters. The book has been written from an absolutely impartial stand-point, as the reader will readily perceive in the perusal of its pages, and therein consists one of its principal merits. The Three Systems of Life Insurance find expres- sion in the different conditions, tastes and surroundings of the insured and the insurable, in every community. They exist, be- cause there is a demand for them. One person desires cheap insurance combined with Invest- ment. The investment is the principal idea. He would not take the insurance, no matter how cheap, without the invest- ment; but to secure the investment, he will accept the insur- ance. This man represents a large class in every populous community. The Level Premium System, with its Endow- ment and Accumulative Dividend policies, by whatever names designated, supplies the demand. Another wants Life Insurance as an estate. He thinks that every one who has a family to support, ought to indemnify them against possible loss, and consequent suffering, by his death. He does not regard life insurance as an investment. Indemnity first ; an estate, afterwards, are the leading ideas. He be- lieves that he can take care of his family while he lives, and, if the payments be limited to ten, fifteen or twenty years, he can pay for such a policy during the productive 10 INTRODUCTORY. period of his life. He wants a good policy contract; one that will be Non-Forfeitable and incontestable, after a certain number of years. If he were to become a lunatic after the payment of several premiums, and were to commit sui- cide, perhaps, he does not want to involve his family in a lawsuit with a rich corporation. If from reverses in business he were to become despondent, and dissolute in his habits, he does not want his reserves in the company's possession confiscated. He wants a policy -contract and he will accept no other that, after the payment of two or three years' premiums, in cash, will be, with- out further stipulation or negotiation, good for a certain amount of paid-up insurance covering the whole period of life; or, one that will be extended for its full face value until the reserve has been exhausted in payment for such extension. Dividends with him are of secondary consideration. This man represents a very large class, and its demands must be responded to. If a selection of companies be wisely made, The Level Premium System, with its 10, 15, or 20 annual payment life policies, fully supplies the demand. There is another who represents a different class from those already mentioned. He wants life insurance; believes in it, but thinks that he can handle his own money better than any in- surance company can handle it for him. He can make his own investments, as he expresses it. He wants pure insurance, for a definite amount guaranteed in the policy, without any " ifs" or "provideds" about it, and he wants it for only the productive period of his life, and it must be cheap. He prefers to pay for it, quarterly, in advance. When he pays his premium, he wants to know how much he is paying for insurance; how much for expenses, and how much for contingencies. He is willing to pay an equitable amount, from quarter to quarter, for a definite amount of insurance, including expenses and contingencies, but not one penny, additional, to accumulate in the treasury of the company, and that can not be used, if necessary, in payment of current death claims. He is willing to pay for such insurance at an increasing cost from year to year, as age increases. To this demand from a very numerous class, The Natural Premium System responds. And there is yet another who represents an entirely different class. Neither of the two systems named conforms to either his ideas or his purse. He wants to pay for a thing when he gets it ; not before. The idea of fifty or a hundred, or several hun dred individuals, more or less, associating themselves together in a kind of society, or brotherhood, and, whenever one of their number dies, each of the remaining members to pay a certain sum named to the bereaved family, this plan of insurance, as he calls it, seems to commend itself to him. They may all be engaged in the same occupation, conductors, engineers, &c., &c.; INTRODUCTORY. 11 or, they may be employed In the different departments of the same corporation, or of s'milar corporations in different parts of the country ; or, they may be members of the same secret society, board of trade, or produce exchange, and, although no definite sum is named to be paid to the widow and children of a deceased brother, yet each contributes what he had pledged, when the emer- gency occurs. Such societies exist in response to the demands of a very large class of respectable people. They are called assessment societies. It is true that not one scientific prin- ciple upon which sound life insurance is based except that of association enters into the organization of this kind of socie- ties ; but in thousands of instances the contributions, thus made, have paid all the funeral expenses, and a very considerable sum has been left with which to provide shelter, food, fuel, and clothing for the bereaved family ! Who can have a heart so pulseless and cold as to not feel glad that the otherwise shelter- less, homeless, penniless, widowed mother, and the fatherless children have thus found relief, though it be but temporary, through the benefactions of these most primitive assessment societies ? In some of them are to be found well to-do men. Many of them are insured in other organizations, and in the Level premium companies, but they have become members of these societies, mainly, in a great many instances, to help and encourage those who are not able to pay for any other kind of indemnity. Among them are foremen of the different departments of large manufacturing establishments, and, not infrequently, the manufacturers and the railroad officials themselves. There is another class of assessment societies that has been organized on quasi scientific principles. A mortality table, or the rates of some Level premium company, was consulted; but, in a large number of cases, the leaders who took the initiative in the organizations, were not sufficiently familiar with the sci- ence of life insurance to know how to utilize them. The mem- bership is separated into classes, according to their ages, each class including several ages. " Once in a class always in the same class/' is their motto, and the assessment for each death is never to be increased. This distinctive feature is kept well in the foreground as one of the reasons for becoming a member. "Your assessment will never be increased." The reason given by one of this class, for not increasing the rate of assessment, as the age increases and consequently the cost, is the following : " And as they advance in age the cost to a member does not in- crease, for every death in the ranks is replaced by a vigorous young mernlxT, and the average mortality forever remains about the same." The organizers of this class of societies did not seem to com- prehend the fact that when a member was classified at age 60, 12 INTRODUCTORY. for instance, with a permanent rate of assessment at, say, $1.80 for each death, he might live to be 75, when the cost of carrying him would be more than three and a half times as much as when he entered the society. It is at this class of societies that the Level premium companies have fired their most effective missiles, and with the most fatal results. Hundreds of them have run for a few years and then retired, the direct results of unscientific rating. Such societies may be found all over this country, strug- gling to perpetuate an existence. Their efforts remind one of an attempt to build a high tower, at an angle of thirty-three and one-third degrees off the perpendicular. Such a tower may be built, quite high, if the base be broad ; but, if continued, after a time the center of gravity will fall outside the base when the structure will tumble ; not necessarily because the workmen were inefficient, nor that the bricks and mortar were of bad materials, but because they were building against the great law of gravita- tion. It might be propped up for a time, and the work of con- struction be continued, but eventually the structure will fall to the ground, a shapeless mass of bricks and mortar. Thus has it been, and it always will be, with this class of assessment socie- ties. When one of these has been in existence long enough for its center of gravity to fall outside its base, it has tottered, reeled, and then fallen to the ground. They have fallen like dead leaves of the forest before the autumnal blasts ! There is nothing known in the whole range of life insurance mathematics and experience that can compensate for such unscientific rating. New blood can not do it. It may postpone the day of retribu- tion, for several years, even, but it is sure to come. It is the pen- alty for violation of the great law of mortality, that pervades the entire human family. It is not the province of this work to advocate any one system of life insurance to the exclusion of the others. Its purpose is to portray the characteristic features of the THREE SYSTEMS, and to point out the requisites for soundness and permanency as dictated by scientific and recognized business principles. No comparisons are made except to define technical terms, and to illustrate principles. The examples of real policies used quite freely are for the sole purpose of illustration, and, in order to avoid the very appearance of favoritism the names of the com- panies that issued them, and, also, of the persons insured by them, are purposely omitted. Considerable space is occupied in explaining the various forms of insurance, because there seems to be at the present time a demand for unbiased and reliable information on these subjects. Tontine insurance was vigorously assaulted for years through the leading press, East and West. Mr. Wolcott, of INTRODUCTORY. 13 the Ohio Senate, expressed it in the preamble of his reso- lutions, calling for an investigation of the subject, as follows: "WHEREAS. Complaints for several years past have become general in Ohio, against the inequitable and unjust plans and methods of the Tontine insurance business as conducted by such companies foreign to Ohio ; and, 1 ' WHEREAS. The leading journals of this and other States have recently made startling exposures, if true, of such plans and methods, which are most unjust to policy-holders in such companies ; and "WHEREAS. Legislation seeking to arrest abuses and to protect the people of Ohio has been instituted by this GENERAL ASSEMBLY; now, therefore, for the purpose of aiding such legislation and furnishing necessary information to the insurance department of Ohio as a basis for future legislation, Be it Resolved, aid when due. If the Company accept the policy afterwards, upon certificate of health, or otherwise, the policy is then known as a "Restored Policy." A policy is "forfeited " when one or more of its con- ditions of non forfeiture are violated. These conditions vary in the different companies, and in the different kinds of policies issued by the same company. The margins made, therefore, on lapses and forfeitures, depend not only upon the company that issued the policy, but also upon the kind of policy issued. A policy, in some companies, may lapse and not l>e forfeited; or, it may be forfeited without lapsing. In other companies a lapsed policy is also a forfeited policy, until restored, or a paid-up be issued in exchange. Every kind of a policy in every company will lapse, if the premium be not paid when due; but the conse- quences to the policy-holder, of the lapse, would be widely different in different companies and in different forms of policies. If the lapsed policy is a Life or Endowment Policy, having been in force two or three years, the consequences depend entirely upon the policy contract of the company that issued it. If in a a certain class of companies, it may be restored upon giving certificate of health , or exchanged for a smaller paid-up, if attended to within a limited time; or, it may be surrendered for cash, [f in another class of companies the policy would be con- tinued, so long as the dividend accumulations, if any, would carry it, at the orignal premium rate; if in another class, the lapsed policy, itself, would, immediately, without notice or application, become a paid up for a smaller amount payable when the original policy would have been ; if in still another class, it wculd be continued, for the full amount, so long as the reserve would carry it, at single payment term rate, without any action on the part of the insured, and so on. The conditions and consequences of forfeiture are as multi- form as are those of lapses, but more disastrous to the insured, depending upon the companies selected. Prompt payment of premium is not always a safeguard against forfeiture. Incorrect statements intentional or otherwise, material or immaterial made in answer to questions asked in the application for insur- OP LIFE iNbUKANCE. 73 ance, sometimes forfeit the policy, although in modern prac- tice the incontestable clause debars a company from declaring such forfeiture except within a period of from one to three years, or, in the cases of some companies, during the lifetime of the insured. Suicide by the insured, whether sane or in- sane, voluntary or involuntary; excessive use of intoxicants; going beyond the prescribed limits of travel; engaging in certain occupations, etc., etc., are forbidden by the terms of a majority of the companies' policies during a certain number of years after the issuance of the contract. Most policies provide, however, that in case of such violations of their terms the company will be liable only for the amount of the reserve accumulated at time of forfeiture, or in some cases the sum of the premiums paid. The tendency of the modern contract is toward greater simplicity, so that the insured, having once been accepted, the company virtually binds itself to pay the policy on the sole condition that the premiums have been regularly paid. No agent has authority to waive a lapse or forfeiture, so that when it occurs the entire reserve and divi- dend accumulations are in imminent peril. 5. Dividends from Cash Surrender Values. The expression. '* Cash surrender value," means, practically, this: If a company were to offer $500 in cash, for a policy, that rtrould be the cash surrender value of that policy in that company. In another company it might be $800, or even $1,000! The cash surrender values of policies issued by companies of less than half a dozen states are regulated by law; but, with these ex- ceptions, the cash surrender value of a policy is whatever the company that issued it offers for it. It is now generally stip- ulated in the policy, but is sometimes left an open question until applied for by the policy-holder. The basis of cash surrender values, in all American Companies, is the reserve values. 6. Dividends arising 1 from changes. It sometimes occurs that a policy-holder, after having been insured a few years, desires to change his policy for one of another kind. It may be an Ordinary Life Policy and he prefers an Endowment or one upon which all the premiums may be paid in ten, fifteen, or twenty years ; or, he may wish to reduce the amount of his present policy. As a general rule any such change is attended with more or less loss to the insured, and a corresponding profit to the company. 74 THE THREE SYSTEMS CHAPTER VIII. MODERN LEVEL PREMIUM CONTRACTS. NUMEROUS NEW FORMS. ELIMINATION OF RESTRICTIONS. EXTENSION OF NON-FORFEITURE PRINCIPLES. INSTAL- MENT AND CONTINUOUS INSTALMENT CONTRACTS. IN- VESTMENT INSURANCE. Managers of the several life insurance companies of the United States during the past twenty years have devoted a large amount of time and labor to the preparation of new forms of policies designed to attract the insuring public by their adaptibility to varying circumstances. Many of these forms have been in evidence for awhile, and then been with- drawn to make room for others still more advantageous. As in every other line of business, so in life insurance, only the fittest survive, and this applies to contracts as well as to companies. The ordinary forms of policy, such as whole life, limited payment life and endowments, payable either at the end of a specified period or on attaining a certain age, still retain their popularity, and doubtless will continue to comprise the great majority of the contracts issued annually so long as life insurance shall last. The improvements in these contracts have been mainly in the direction of brevity and simplicity of language, the elimination of onerous con- ditions and the virtual -placing of the control of the contract in the hands of the policy-holder. The restrictions as to residence, travel and occupation have now been so modified as to leave the policy-holder untrammeled after the lapse of a comparatively short period, while in some cases the policies are practically unrestricted from the date of issue. The sui- cide clause now, as a general rule, applies for not more than three years after date of issue, while the old forfeiture pro- vision for the excessive use of intoxicants or narcotics has almost entirely disappeared. It is in the direction of non-forfeiture, however, that the most improvement has been made. The old forms of poli- OF LIFE INSURANCE. 75 cies, Tontine and Non-Tontine alike, were particularly harsh on those policy-holders who failed to keep up their premium payments. Non-payment of premium on a certain day for- feited the contract, and the policy-holder was left at the mercy of the company for any return of his equity in the contract. Non-forfeiture laws are still few in number, and some of them make it compulsory on the policy-holder to apply for the surrender value within a certain time, but in this case, what legislation has neglected competition has effected. One after another the life insurance companies have fallen into line and recognized the rights of the policy-holders to an equita- ble surrender value after the payment of premiums for a cer- tain number of years. A majority of the companies now offer three options of surrender value, one of which is auto- matic and takes effect without action on the part of the in- sured. These three options are the stipulated value in cash, or in paid-up insurance, or in extended insurance, one of the two latter, according to the practice of the several companies, being automatic. A few companies are still more liberal in their non-forfeiture regulations, their policies providing that they cannot lapse so long as there is an amount of reserve standing to their credit sufficient to pay a quarterly premium. Such advances with interest are charged against the policies, and the insured have the option at any time of paying up all or part of the advances, thereby restoring the value of the contracts in whole or in part. Another improvement is the loan feature under which policy-holders, after the lapse of two or three years, may borrow on the security of their con- tracts certain sums, in most cases equal to the reserve on the policies at the end of the existing policy year. This feature enables many a policy-holder to continue in the com- pany, whereas, under the older forms, he would have had to drop out for non-payment of premium. The object of the companies in granting all these benefits is to hold the policy- holder, and, although premiums are due promptly on the date specified, it has become customary to grant thirty days of grace during which the insurance remains in full force, subject only to the .deduction of the premium due, with in- terest, in the event of death before the thirty days expire. Having thus summarized briefly the liberalized conditions of the policies generally it is desirable to call particular atten- tion, to some special forms. In the first place it may be said that the introduction of the deferred dividend forms has done much to popularize life insurance. It is no longer a case of having to die to win, but the prudent man may so adjust his insurance as to reap the whole benefit of it himself when the 76 THE THREE SYSTEMS need of protection for his wife and family has passed away. By taking a contract with a ten, fifteen, or twenty-year de- ferred dividend period he finds at the end of the time selected a number of options presented to him for a choice. If he still needs the insurance as a protection it is there, but if, on the other hand, the need for life insurance protection has passed away and ready cash will suit him better, the cash is at his disposal. Or he may provide himself with an annuity for life or for a fixed period of years, or if none of these suit him some one of various combination options may be selected. In short, whatever may be his changed circumstances some option will suit them. So numerous are the forms of policy contract now offered to the public that extended reference to all is impossible in a work of this character, but some are particularly deserving of mention. Instalment policies are of comparatively recent origin, and they answer a purpose which every prudent man can deeply appreciate. The sudden placing of a large sum of money in the hands of a widow or a person unacquainted with the investment of funds has often resulted in heavy loss, thereby depriving the beneficiaries of that protection which the husband and father had labored so hard to provide. The instalment policy offsets this by paying only a certain per- centage of the face at death and the balance in equal annual instalments, extending over a period selected by the insured at the time of taking out the contract. Thus, a $10,000 policy payable in twenty annual instalments provides $500 at the death of the insured and $500 per annum thereafter for nine- teen successive years. Should the beneficiaries die before all the instalments have been paid the remaining instalments will be paid, as they fall due, to the heirs, or commuted into a lump sum. The insured generally has the option of direct- ing that the policy be paid in a lump sum instead of in instal- ments, in which case the company simply computes the pres- ent value of twenty successive annual instalments at date of death and pays the beneficiary. This lump sum is, of course, less than the face of the policy, as the question of interest during the time the money would be in the hands of the com- pany if paid in instalments, has to be taken into account. The instalment feature can be applied to any ordinary form of contract, and many companies do not issue special instal- ment contracts, but simply attach a proviso to the regular forms that the face may be paid in equal annual instalments together with interest on unpaid balances. Continuous Instalment policies are an outgrowth of the OF LIFE INSURANCE. 77 instalment idea, and have been described by some competent authorities as the most valuable improvement in life insur- ance practice ever devised. A continuous instalment contract provides that should the beneficiary live beyond the period during which the specified number of instalments have been paid, the company will continue to pay the annual instalments so long as the beneficiary shall live, thus enabling a man to provide a sure and certain life income for his beneficiary. In figuring the premiums on such contracts the age of both the insured and the beneficiary must be taken into account, for it is obvious that a beneficiary aged twenty has a greater life expectation than one aged forty. On endowment con- tracts the continuous instalment feature works out particu- larly favorable. For example, a man aged twenty-five takes out a twenty-year endowment policy for $10,000, making his wife, aged twenty, the beneficiary. Assuming that he is living at the end of twenty years, the company immediately begins paying him an annual income of $500, and continues it so long as he lives, whether that.be ten, twenty or even fifty or more years. Should he die after receiving one or more in- stalments, or even before the end of the twenty-year endow- ment period, and his beneficiary survive him, the company will pay her the instalments so long as she may live, whether it be twenty or fifty years. Should both insured and bene- ficiary die before twenty annual instalments have been paid, the commuted value of the unpaid instalments is payable to the estate. By these continuous instalment contracts the benefits of life insurance are certain both to the insured and beneficiary to the utmost possible limit. Investment Insurance. Many contracts of life insurance nave been devised with the idea of appealing to investors. To this class belong those contracts which provide for an income at an agreed rate of interest for a specified number of years, at the end of which time the face value of the con- tract becomes payable. The investment idea is emphasized by calling these contracts bonds, and their safety is still further emphasized by the use of the word "gold." A twenty-year five per cent, gold bond is the favorite form of this contract, and it is issued either on the whole life, twenty-payment life, or twenty-year endowment form. On the maturity of the contract, by death or otherwise, the company issues as many thousand-dollar bonds as the face of the contract calls for, the principal of which is due in twenty years, and on which five per cent, interest is paid semi-annually in advance. A pur- chaser of these bonds, therefore, provides a five per cent, in- 78 THE THREE SYSTEMS come for his beneficiaries for twenty years with a lump sum at the end of the period. In the endowment forms, if the in- sured survive the endowment period, he receives the income himself, together with the proceeds of the bonds at maturity. In view of the increasing difficulty in securing good invest- ments yielding over three per cent, net, these so-called gold bonds and investment contracts generally offer attractions to investors. OF LIFE INSURANCE. 79 CHAPTER IX. NON-FORFEITURE LAWS. THE MASSACHUSETTS NON-FORFEITURE LAW OF 1880. LET- TERS AND ANSWERS. EXAMPLES ILLUSTRATING THE LAW. In the original edition of The Three Systems the author went very thoroughly into the benefits of the Massachusetts Non-Forfeiture law, passed in 1880. This law was amended in 1887 and again in 1896, and by a bill passed in 1900 will be entirely supplanted as to all new contracts issued on and after January i, 1901. As, however, the old law still applies to existing contracts, and is of considerable historical in- terest, the data is retained here, being followed by the amended laws of 1887 and 1896 and the new law of 1900. The companies doing business under The Level Premium System may be properly grouped into the following classes : CLASS A. This class includes all the Life Companies chartered by and doing business under the authority and supervision of the com- monwealth of Massachusetts. They are distinguished from all other companies doing business in America because of "An Act limiting the Forfeiture of Policies in Life Insu- rance Companies," approved April 23, 1880, taking effect on the fifth day of March, 1881, in compliance with which all their policy contracts are drawn. The law is given in full, as follows: Public Statutes, Chap. 119, Sections 161-166. Sect. 161. No Policy of Life or Endowment Assurance issued after the thirty-first day of December, in the year eighteen hun- dred and eighty by a domestic company shall become forfeited or void for non-payment of premium after two full annual pre- miums have been paid thereon, in cash or note, or both ; but up- on default in a subsequent premium payment such policy shall become subject to the conditions expressed in the four following sections, any stipulation or condition of forfeiture contained in the policy or elsewhere to the contrary notwithstanding ; and any waiver by the assured of the provisions of this and the four fol- lowing sections shall be void ; but the provisions of this section and of said sections shall not prevent the performance of any 80 THE THREE SYSTEMS stipulation or condition in any policy issued before the fifth day of March, in the year eighteen hundred and eighty-one. Sect. 162. In case of default in the payment of a third or of any subsequent annual premium on any such policy, then, with- out further negotiation or stipulation, such policy shall be bind- ing upon the company for an amount of paid up insurance which the then net value of the policy, less any indebtedness of the assured to the company and a surrender charge as provided in the following section, will purchase as a net single premium for Life or Endowment Assurance maturing or terminating at the same time and in the same manner as provided in the original policy contract ; that is to say, no condition of the policy con- tract other than for the payment of premiums shall be affected by the provisions of sections one hundred and sixty one to one hundred and sixty-five inclusive ; nor shall any change be made in the terms of said contract on account of default in premium payment, after two full annual premiums have been paid as pro- vided in the preceding section, except as herein set forth. The net value of the policy, including all dividend additions declared thereon at the date of said default, shall be ascertained according to the " combined experience," or " Actuaries'" rate of Mor- tality, with interest at four per cent, per annum ; and from such value shall be deducted any indebtedness of the insured to the company or notes held by the company against the insured, and a surrender charge to be determined as provided in the following section. Sect. 163. Said surrender charge shall be determined as fol- lows : Assuming the rate of mortality and interest mentioned in the preceding section, the present value of all the normal, future, yearly costs of insurance which by its terms said policy is ex- posed to pay in case of its continuance shall be calculated, and eight per cent, of this sum shall be the legal surrender charge. Sect. 164. When after the payment of two annual premiums as provided in section one hundred and sixty-one the insurable interest in the life of the insured has terminated, the net value of the policy, subject to the conditions named in section one hun- dred and sixty two, shall be a surrender value payable in cash ; and upon the termination of such insurable interest the holder of a policy upon which by its terms no further premiums are paya- ble may upon any anniversary thereof claim and recover in cash from the company a surrender value computed as aforesaid ; but upon policies of prudential or industrial insurance, on which the premiums are five cents per week and upwards, but not exceeding fifty cents, the surrender value shall in all cases be payable in cash. Sect. 165. The insurable interest named in the preceding sec- tion shall be construed to have terminated when the insured has no minor or dependent child ; and his wife, if he has one, and any living beneficiary or beneficiaries named in the policy, shall join in the application for surrender thereof. Sect. 166 The provisions of the seven preceding sections shall not apply to foreign life insurance companies. As there have been many contradictory statements made with reference to a policy-holder's legal claim, under this law, for cash surrender values, a communication was addressed to the HON. ELIZUR WRIGHT with reference to it. The communication and his answer are as follows: OF LIFE INSURANCE. 81 "CHICAGO, 111., Aug. 24, 1885. floN. ELIZUR WRIGHT, Boston, Mass. Dear Sir.- Referring to the Non-Forfeiture Law of Massa- chusetts, 1880, Public Statutes, Chap. 119 Sects. 161-166, inclu- sive, of which you are the recognized author, will you please state under what form of policy, if any; or, under what conditions a policy-holder can not claim the cash surrender value of a policy issued under this law, after two or more full annual premiums shall have been paid, in cash, and no conditions of non-forfeiture named in the policy having been violated Very truly, MERVIN TABOR, State Actuary." "BOSTON, Aug, 26, 1885. MERVIN TABOR, ESQ., Chicago, 111. Dear Sir.--I was not the author of that particular feature of the Massachusetts law about which you inquire. Undoubtedly, whoever was the author, he meant to prevent tho payment of any surrender value, in cash, whenever "a minor or dependent child" existed who could be benefited by the policy, and to limit that benefit to further insurance. As it the adult beneficiary, if one should exist, and the insured father himself, were not better protectors of that child than the state or the courts could pro- vide! That feature, in my judgment, is a little worse than worth- less, as too many laws are, and it is practically inoperative, be- cause it can apply only to a policy whenever the holder has neg- lected to have the cash surrender value for each year of its term, subsequent to the second, endorsed upon it. This endorsement is always made, I believe, by the company at issue, when requested, and I don't suppose the law means to preclude the company from performing any positive promise of cash. Yours truly, ELIZUR WRIGHT." After receiving Mr. Wright's letter, it was thought advisable to communicate with the companies, themse ves, and accordingly the following communication was addressed to the President of each of the Massachusetts companies under date of Sept. 8th, 1885: Dear Sir. Inquiries are being made at this office with refer- ence to the conditions requisite for obtaining the cash surrender value of a policy under Chap. 119, Sect's 161-166, Public Statutes of Mass. There seems to exist a wide difference of opinion. Some claim that whenever a policy holder is entitled to a paid up bv operation of the law, he is also entitled to the cash surrender value, instead, if desi;ed; while others assert that no cash sur- render values can be paid when the insured has a minor or de- pendent child. Earnestly desiring to not misrepresent you, and, after consultation with the Auditor of Pub. Accounts, who is Ex- Officio Supt. of the Insurance Department of this State, it has been thought best to address this communication asking your in- terpretation of the law, and your practice, bearing on the point under discussion. If it be your practice to extend cash surren- 82 THE THREE SYSTEMS der values beyond what, in your opinion, the law demands, to certain forms of policy contract, please make the distinction very plain between the cash surrender values secured by the law, and those voluntarily offered by the company's indorsement of the same. Very respectfully, MERVIN TABOR, State Actuary. In reply, the following communications nave been received : Prom the New England Mutual Life Insurance Company. " BOSTON, Sept. 12, 1885. MERVIN TABOR, ESQ., 185 Dearborn St., Chicago, 111. Dear Sir. Your favor of the 8th inst. is received. The policy of this company in the matter of the payment of cash surrender values of policies under the n on forfeiture law of 1880 is fully shown in the inclosed circular. Under this law, after two full payments of premium the insured is entitled to paid-up insu- rance without further negotiation or stipulation, or at his option may in all cases that come under the provisions of the circular receive the cash value of his policy. The law of 1880 is subject to interpretation by the courts, but until the matter has been ad- versely decided upon, we shall abide by and pay cash values as stated in the circular. Very truly, (Signed) BENJ. F. STEVENS, President. The following is a copy of the circular referred to by President Stevens : * ' The attention of the public is requested to the two distinc- tive features of the Massachusetts Non -Forfeiture Law pertaining to Life Insurance by which a cash value or paid-up insurance is assured to each Policy. FIRST. Every Policy, upon which two or more Annual Pre- miums have been paid, has a cash value payable to the holder of the same, when application is made therefor, upon the anni- versary of any subsequent Premiums, provided a legal discharge can be given by all parties interested. A policy made for the benefit of the insured can be legally surrendered by himself, if living, or, by his administrator or executor, in case of his death. A Policy made for the benefit of a married woman can be surren- dered upon her receipt and that of her husband. If made for the benefit of children, it must be shown, to the satisfaction of the company, that the insured has no minor or dependent child. SECOND. If the cash surrender value of a Policy is not ap- plied for, upon the anniversary of the payment of an Annual Premium, as above mentioned, then such Policy, by lapse of pay- ment of premiums, shall become, in the words of the law, " without further negotiation or stipulation/' binding for an amount of Paid up Insurance which is determined according to the provisions of the law. If desired, the amounts of cash sur- render values and Paid-up Insurance will be put upon the Policy, and their payment guaranteed by the company. It is believed that this law which applies only to Massachusetts companies, OF LIFE INSURANCE. 83 and not to foreign companies represented in the State is the nearest approach to equity yet reached by State legislation. No other State has, upon its Statute Book, a law compelling com- panies to give to the insured an equivalent for the amount of premiums they have paid. (Signed) BENJ. F. STEVENS, President A letter received from Walter C. Wright, Actuary of the New England Mutual Life Insurance Company, under date of Sept. 10, 1885, written during the absence of President Stevens, closed with the following sentence: * ' We endorse values on all policies, and we are well satisfied with the working of the law." From the State Mutual Life Assurance Co. "WORCESTER, Mass., Sept. 22d, 1885. MERVIN TABOR, ESQ., Actuary Insurance, Dept., Illinois. 185 Dearborn St., Chicago, 111. Dear Sir. Our interpretation of the Non-Forfeiture Law of this State upon the points which you inquire about is this : In most cases a policy-holder when his policies lapse has the option of deciding whether he will take the cash surrender value of the same, or let it stand for a paid up Insurance value as determined by the law. After lapse, if there be minor or dependent children, the cash surrender value cannot be paid to the insured. While the Company is under no obligation to pay cash surrender values except at the anniversary of the policy after the second, it fre- quently does pay these values at other times when asked to do so by the policy-holder. As, in nine cases out of ten, the cash sur- render value is requested while the policy is still in force, fre- quently, therefore, the existence of minor or dependent children does not prevent payment. The distinction* you see is this: The law applies only to lapsed policies, and gives the minor or de- pendent children a vested interest in the cash surrender value so that it cannot be paid to the insured. As we generally deal with policies that are in force we make the payment of the cash sur. render value to the insured whether there are minor children or not. I believe this covers the questions you ask. Yours very truly, (Signed) A. G. BULLOCK, President." From the Massachusetts Mutual Life Insurance Company. "SPRINGFIELD, Mass., Sept. llth, 1885. MERVIN TABOR, Actuary, 185 Dearborn St., Chicago, 111. Dear Sir. Your favor of the 8th came duly to hand. I have asked our Secretary and Actuary to give me their interpre- tations of the sections of Chap. 119, of Mass, laws referred to by you. Their replies I enclose herewith, and I trust they may an- swer your purpose. These opinions were written independently; 84 THE THREE SYSTEMS each officer being ignorant of what was written by the other, and so they may fairly be said to represent the company's understand- ing of the law. I would add that I fully concur with the views expressed in these letters Yours truly, (Signed) E. W. BOND, President" " SPRINGFIELD, Mass., Sept. llth, 1885. E. W. BOND, President: Dear Sir. As requested by you, I have read Mr. Tabor's letter of the 8th inst., and to the questions therein, I reply as follows: " Our understanding of the Massachusetts Law of 1880, is that at any of the times when a cash value would be claimed, as a right, by an insured person who had no minor or dependent child, the same cash value may be asked as a favor by an insured person who has a minor or dependent child, and the company may law- fully comply with this request, if a proper surrender can lie ob- tained from the insured and the beneficiaries. In practice, this company is in the habit of so complying, but it does not bind it- self to pay cash values in cases where the same are not required by the law, except that it agrees to pay the cash values on fifteen and twenty payment life policies (on the all cash plan) after they have become fully paid-up, on full surrender of each such policy on the anniversary of its date. Very truly, (Signed) OSCAR B. IRELAND, Actuary." SPRINGFIELD, MASS., Sept. 11, 1885. E. W. BOND, ESQ., President: Dear Sir. In response to your request that I give you my interpretation of the so-called Non-Forfeiture Law of 1880, I would say that according to my understanding of sections 161 to 166, Chap. 119 of our Public Statutes, we cannot be compelled to pay the cash value fixed therein for a policy issued under the law, no matter whether the policy be written for the benefit of one's estate or for the benefit of wife, children or other persons, except when the insured has no minor or dependent children. When the insured has no minor or dependent children, he may insist upon such cash value, provided his wife or any other beneficiary mentioned in the policy, joins in the surrender to the company; and if the insured be in a condition to insist upon the cash value, he can only claim it on a second or subsequent anniversary of the policy. The law places no obstacle whatever in the way of the company's buying its policies issued under it, for cash, if they choose to do so, even when the insured is not in a condition to insist upon a cash value, provided the insured desires cash, and can give a clear and valid surrender of the policy by himself and all beneficiaries mentioned therein. Our practice is to buy Act of '80 policies, paying their legal cash value after two years, provided we can get a valid surrender by the insured and all beneficiaries mentioned in the policy, but we at all times, reserve the right to stand upon the conditions of the law, if any circumstance should seem to make it advisable for the company to do so. The values under the law under consider- OP LIFE INSURANCE. 85 atlon, both In cash and paid up insurance, are endorsed on the back of our policy, and the printed matter in connection with the law itself, which is printed on the policy, plainly shows the rights of the insured and the rights of the company. To two classes of policies issued by us, viz: 15 and 20 payment life policies, on all cash plan, we attach a rider, agreeing to pay the legal cash value at the end of 15 or 20 years from the date of the policy, or on any anniversary thereafter; provided we can get a valid surrender of the policy, regardless of whether the insured has minor or dependent children or not. You of course know that under such a policy, it might occur that the insured could demand the cash value of his policy nt any time within the 15 or 20 years; so that our voluntary agreement embodied in the rider mentioned, may be said to be a promise addition il to the rights to which the law entitles him; and a waiver of a right which might exist at the end of these terms to decline to pay the cash value. I enclose a copy of the rider referred to, and also the back of our policy form; these show just how this matter is set forth to our members. Very respectfully yours, (Signed) JOHN A. HALL, Secretary." The following is a true copy of the "rider " referred to in the letter of Secretary Hall, for a 15-annual payment life policy. The rider for a 20-annual payment Life policy is the same, except " twenty " is inserted in place of " fifteen." "After the payment of fifteen annual premiums, wholly in cash, on this Policy No. , the cash surrender value of the Policy, (computed according to the method described in sec- tions 162, 163 and 164 of chapter 119, of the Public Statutes of Massachusetts) will be paid on the fifteenth or any succeeding anniversary of the date of its issue, upon full surrender of the Policy to the company by all parties in interest." Printed on the back of the policy to which this ' ' rider " is attached, is the following: " Cash surrender values can only be claimed when the insurable interest has terminated; see sections 164 and 165 of the law/' From The John Hancock Mutual Life Insurance Company. "BOSTON, MASS., Sept. 14, 1885. MERVIN TABOR, ESQ., Chicago, 111. Dear Sir. Enclosed please find form of our policy contract, from which you will please observe that ''the cash surrender 86 THE THREE SYSTEMS values secured by law and those voluntarily offered "by the com pany's indorsement of the same " are identical. Very truly, (Signed) S. H. RHODES, PreM." On the back of the policy referred to is a table of cash, and paid up, values, over which is printed the following: k - The following table shows the amount of cash that can be realized on this policy at end of any year, provided the insurable interest as expressed in the statute (see above) has ceased; also, the amount of paid up insurance due at death (or if an endowment policy at, end of endowment period) in case of non-payment of any premium." From The Berkshire Life Insurance Company. PITTSFIELD, MASS., Sept. 14, 1885. MR. MERVIN TABOR, State Actuary, &c., 185 Dearborn St., Chicago, 111. Dear Sir. In answer to your favor I would say that this office passes upon each application for surrender of policies, and determines as to what is necessary to secure for the company a good acquittance. Our counsel does not construe the act of 1880 as obliging the company to pay a cash surrender value if the in- sured has a minor or dependent child. The company has always endeavored to be liberal, in the construction of such laws as affect the interests of retiring members, but until the Act receives judi- cial construction by courts of competent jurisdiction, no claim as to its practice will be made in its behalf. I am very respectfully, (Signed) JAMES W. HULL, Secretary. Thus we have, in the foregoing correspondence, the full bene- fit of the construction of the present Non-forfeiture law of Massachusetts, by every Life Insurance Company affected by it. These companies have also given u, in an open, candid and frank manner, their practices under the law. They have not dodged a single point in our letter. They are evidently living up to not only the letter, but also the spirit, of the law ; and, judging from this correspondence, we conclude that whenever a doubt arises as to the real meaning of the law they give their policy holders the benefit of such doubt, if they can do so with- out involving themselves and consequently their membership for they are all Mutual Companies in legal complications that might possibly arise through the instrumentality of designing and unscrupulous parties. OF LIFE INSURANCE. 8? The only difference in effect, concerning cash surrender values of policies issued by Massachusetts Companies, be- tween the Massachusetts Insurance law of 1880 and the law of 1887 hereunto appended, is, that under the former law there was a difference of opinion as to whether the holder of a policy except industrial policies could demand the cash surrender value of the same when there were minor or dependent children; the latter law gives the holder of any and all forms of policies the right to demand cash surrender values on any anniversary after two full annual premiums shall have been paid thereon. The law of 1887 also gives the Massachusetts companies the right to deduct five per cent, from the surrender value of all endowment policies; this right, however, has been and is being waived, wholly or in part, by most of the companies of that State. EXTRACT FROM THE MASSACHUSETTS INSURANCE ACT OF 1887. SEC. 76. All policies hitherto issued by any domestic life insurance company* shall be subject to the provisions of law applicable and in force at the date of such issue. No policy of life or endowment assurance hereafter issued by any such company shall become forfeit or void for non-payment of pre- mium after two full annual premiums, in cash or note, or both, have been paid thereon; but in case of default in the pay- ment of any subsequent premium, then, without any further stipulation or act, such policy shall be binding upon the com- pany for the amount of paid-up insurance which the then net value of the policy and all dividend additions thereon, com- puted by the rule of section eleven, less any indebtedness to the company on account of said policy, and less the surrender charge provided herein, will purchase as a net single premium for life or endowment insurance maturing or terminating at the time and in the manner provided in the original policy contract; and such default shall not change or effect the con- ditions or terms of the policy, except as regards the payment of premiums and the amount payable thereon. Said sur- render charge shall be eight per cent, of the insurance value of the policy at the date of default, which insurance value io the present value of all the normal future yearly costs of insurance which by its terms said policy is exposed to pay in case of its continuance, computed upon the rate of mortality and interest assumed in section eleven ("Combined Experience" or "Actu- aries' Table" rate of mortality with interest at the rate of four per cent, per annum). Every such policy, after the payment * Section 1 of this law says " the woid * domestic ' designates those companies ncorporated or formed in this Commonwealth." 88 THE THREE SYSTEMS of two full annual premiums thereon, shall have a surrender value which shall be its net value, less the surrender charge, and less any indebtedness to the company on account of the said policy, and its holder may, upon any subsequent anni- versay of its issue, surrender the same and claim and recover from the company such surrender value in cash: Provided, that from the surrender value of all endowment policies the company may deduct five per cent. ****** Upon surrender, on any anniversary of its issue, of a policy which has become paid up after the payment of two full annual p r e- miums, by force of the statute upon default in payment of premium, the holder shall be entitled to its net value, pay- able in cash: Provided, that from such net value of all en- dowment policies the company may deduct five per cent. But no surrender of a policy shall be made without the writ- ten assent of the person to whom the policy is made payable. Any condition or stipulation in the policy or elsewhere, con- trary to the provisions of this section and any waiver of such provisions by the assured, shall be void. In 1896 the law was again amended so as to provide that the surrender charge on all policies, both life and endow- ment, should be eight per cent, of the insurance value, the amendment of 1887 allowing a five per cent, surrender charge on endowments. It was also provided that the surrender values of prudential or industrial policies, with weekly pre- miums of not more than fifty cents each, should be payable in cash. The amended law is as follows: All policies hitherto issued by any domestic life insurance company shall be subject to the provisions of law applicable and in force at the date of such issue. No policy of life or endowment insurance hereinafter issued by any such com- pany shall become forfeit or void for non-payment of pre- mium after two full annual premiums, in cash or note, or both, have been paid thereon; but in case of default in the payment of any subsequent premium, then, without any further stipulation or act, such policy shall be binding upon the company for the amount of paid-up insurance which the then net value of the policy and all dividend additions there- on, computed by the rule of section eleven, less any indebted- ness to the company on account of said policy, and less the surrender charge provied herein, will purchase as a net single premium for life or endowment insurance maturing or termi- nating at the time and in the manner provided in the original policy contract; and such default shall not change or affect the conditions or terms of the policy, except as regards the payment of premiums and the amount payable thereon. Said surrender charge shall be eight per cent, of the insurance value of the policy at the date of default, which insurance value is the present value of all normal future yearly costs of OF LIFE INSURANCE. 89 insurance, which by its terms said policy is exposed to pay in case of its continuance, computed upon the rate of mortality and interest assumed in section eleven. Every such policy, after the payment of two annual premiums thereon, or when by its terms it has become paid-up, shall have a surrender value, which shall be its net value, less the surrender charge, and less any indebtedness to the company on account of the said policy, and its holder may, upon any subsequent anni- versary of its issue, surrender the same and claim and recover from the company such surrender value in cash. On policies of prudential or industrial insurance on which the weekly premiums are not more than fifty cents each, the surrender value in all cases shall be payable in cash. Upon surrender, on any anniversary of its issue of a policy which has become paid up after the payment of two full annual premiums, by force of the statute upon default in payment of premium, the holder shall be entitled to its net value, payable in cash. But no surrender of a policy shall be made without the written assent of the person to whom the policy is made payable. Any condition or stipulation in the policy or elsewhere, con- trary to the provisions of this section and any waiver of such provisions by the insured, shall be void. Sec. 76, chap. 470, laws of 1896. The following examples illustrate the benefits of the law, and are based on the amendment of 1896: Example I. Ordinary Life Policy. Age of insured, 35; amount, $10,000; annual premium, $273, payable for life. End of Yr. Cash. 2 $59 3 180 4 306 5 435 6 569 7 707 8 851 9 998 10 1,149 11 1,304 12 1,461 13 1,622 14 1,785 15 1,952 16 2,121 17 2,292 Paid-up. $165 495 821 1,142 1,459 1,772 2,081 2,384 2,681 2,971 3.252 3,526 3,792 4,050 4,301 4,544 End of Yr. Cash. Paid-up. 18 $2,466 $4,779 19 2,641 5,007 20 2,819 5,227 21 2,999 5,441 22 3,180 5,647 23 3,362 5,846 24 3,547 6,039 25 3,732 6,225 30 4,658 7,056 35 5,556 7,731 40 6,391 8,273 45 7,144 8,704 50 7,821 9,055 55 8,465 9,360 60 9,015 9,600 65 10,000 90 THE THREE SYSTEMS Example II. Twenty-Payment Life Policy. Age of in- sured, 35; amount, $10,000; annual premium, $354, payable for twenty years. EndofYr. Cash. Paid-up. End of Yr. Cash. Paid-up. 2 $236 $663 18 $4,520 $8,761 3 434 1,192 19 4,885 9,259 4 640 1,717 20 5,265 10,000 5 854 2,240 21 5,383 6 1,076 2,760 22 5,503 7 1,308 3,277 23 5,623 8 1,549 3,790 24 5,745 9 1,800 4,301 25 5,867 10 2,060 4,807 30 6,478 11 2,330 5,309 35 7,069 12 2,609 5,807 40 7,620 13 2,899 6,301 45 8,116 14 3,199 6,794 50 8,563 15 3,511 7,285 55 8,988 16 3,834 7,776 60 9,351 17 4,170 8,267 65 10,000 Example III. Twenty- Year Endowment Policy. Age of insured, 35; amount, $10,000; annual premium, $510, payable for twenty years. EndofYr. Cash. Paid-up. EndofYr. Cash. Paid-up. 2 $580 $1,086 12 $4,831 $6,496 3 925 1,679 13 5,370 6,971 4 1,287 2,262 14 5,935 7,435 5 1,664 2,832 15 6,528 7,888 6 2,058 3,391 16 7,151 8,330 7 2,470 3,939 17 7,806 8,762 8 2,902 4,475 18 8,497 9,184 9 3,352 4,998 19 9,227 9,596 10 3,823 5,510 20 10,000 11 4,316 6,009 In the year 1900 a bill was introduced and passed by the Massachusetts legislature providing for a change in the re- serve standard on all new policies issued on and after Jan- uary i, 1901, from the Actuaries' table, with four per cent interest, to the American table, with three and one-half per cent interest. A proviso was further made that the com- panies might, if they choose, value such new policies by the American table, with three per cent interest. The same law provided for a change in the surrender charge on the new contracts, making it five per cent of the present value of the future net premiums at the date of default instead of eight per cent of the insurance value of the policy, and also making the contracts non-forfeitable at the end of three years instead of two, as provided by the old law. Following is the amended law so far avS it relates to non-forfeiture; OF LIFE INSURANCE. 91 SEC. 76. All policies issued prior to Jan. I, 1901, by any domestic life insurance company shall be subject to the pro- visions of law limiting forfeiture applicable and in force at the date of their issue. No policy of life or endowment insurance issued after Dec. 31, 1900, by any such company, shall become forfeit or void for non-payment of premium after three full annual premiums have been paid thereon; but in case of de- fault in the payment of any subsequent premium, then, with- out any further stipulation or act, such policy shall be binding upon the company for the amount of paid-up insurance which the then net value of the policy and all dividend additions thereon, computed by the rule of section eleven, less any in- debtedness to the company on account of said policy, and less the surrender charge provided herein, will purchase as a single net premium for life or endowment insurance maturing or terminating at the time and in the manner provided in the original contract; and such default shall not change or affect the conditions or terms of the policy, except as regards the payment of premiums and the amount payable thereon. Said surrender charge shall be (unless fixed at a smaller rate by the policy) five per centum of the present value of the future net premiums at the date of default, which by its terms said policy is exposed to pay in case of its continuance, computed upon the rate of mortality and interest assumed in section eleven. But any company may contract with its policy-hold- ers to furnish, in lieu of the paid-up insurance provided for in this section any other form of life insurance lawful in this commonwealth of not less value. Every such paid-up policy shall have a cash surrender value which shall be its net value, less any indebtedness to the company on account of said policy, and every policy which by its terms has become paid up shall have a cash surrender value, which shall be its net value less five per cent, of one net premium, and the holder of any paid-up policy may, upon any anniversary of its issue, surrender the same and claim and recover from the company such surrender value in cash. But no surrender of a policy shall be made without the written assent of the person to whom the policy is made payable. On policies of prudential or industrial insurance on which the weekly premiums are not more than fifty cents each the surrender value shall in all cases be payable in cash, which shall be a legal claim for not more than two years from the date of lapse. Any condition or stipulation in the policy or elsewhere contrary to the pro- visions of this section and any waiver of such provisions by the insu d shall be void. 92 THE THREE SYSTEMS CHAPTER X. CLASS B. NON-FORFEITURE LAWS OF MAINE, MICHIGAN, KENTUCKY AND MISSOURI. B. CLASS. Into this class are grouped all Life Insurance Companies doing business on the Level Premium plan, that are operating under the Non-forfeiture laws of their respective States except Massachu- settsand also those companies, their States having no Non- forfeiture laws, that have adopted, voluntarily, Non forfeiting forms of policies by which the reserves of their policy-holders are either partially or wholly protected after two or three annual premiums have been paid. The Non-forfeiture Law of Maine. Only one company is doing business under this law, and, in several respects, the company is issuing more liberal forms of policies than the law requires. The law which was passed in 1877 reads as follows: " SECTION I. Every policy of life Insurance issued on and after the first day of April, in the year of our Lord one thousand eight hundred and seventy-seven, by any company chartered by the authority of this State, which may be forfeited for non-pay- ment of premiums, including all notes given for premiums or in- terest thereon after it shall have been in force three full years, and which shall not contain provision for a surrender value at least equivalent to the value arising under the terms of this Act, shall, nevertheless, be continued in force to an extent and for a period of time to be determined as follows, to wit: The net value of the policy, when the premium becomes due and is not paid, shall be ascertained according to the combined experience or actuaries' rate of mortality, with interest at four per centum per annum. After deducting from three-fourths of such net value any indebtedness to the Company, or notes held by the Company against the insured (which notes, if given for premium, shall then be cancelled), what remains shall be considered as a net single premium of temporary insurance ; and the term for which it will insure shall be determined according to the age of the party at the time of the lapse of the policy, and the assumptions of mortality and interest aforesaid; but if the policy shall be an endowment payable at a certain time, or at death if it shall pre- viously occur, then, if what remains as aforesaid shall exceed the net single premium of temporary insurance for the balance of the endowment term for the full amount of the policy, such excess OF LIFE INSUKANCE. 93 shall be considered as a net single premium or simple endowment, payable only at the same time as the original endowment, and in case the life insured survives to such time; and the amount thus payable by the Company shall be determined according to the age of the party at the time of the lapse of the policy, and the assumptions of morality and interest aforesaid." " SECT. 2, If the death of the life insured occur within the term of temporary insurance covered by the value of the policy as determined in the previous section, and if no condition of the insurance other than the payment of premium has been violated by the insured, the Company shall be bound to pay the amount of the policy the same as if there had been no lapse of premium, anything in the policy to the contrary notwithstanding; provided, however, that notice of the claim, and proof of the death, shall be submitted to the Company, in the same manner as provided by the terms of the policy, within ninety dnys after the decease; and, provided, that the Company shall have the right to deduct from the amount insured in the policy the amount, compounded at seven per centum per annum, of all the premiums that had been forborne at the time of the death, including the whole of the year's premium in which the death occurs." The law was amended in 1887, and now reads: Every life insurance policy issued after March 31, 1877, by any company chartered by this State, which may be forfeited for non-payment of premiums, including all notes given for premiums or loans, or interest thereon, after it has been in force three full years, and -which does not provide for a sur- render value, at least equivalent to the value arising under the terms of this and the following section, is nevertheless con- tinued in force to an extent, and for a period to be determined as follows, to wit: the net value of the policy, when the pre- mium becomes due if not paid, shall be ascertained according to the Combined Experience or Actuaries' rate of mortality, with interest at the rate of four per cent, a year: from such net value there shall be deducted the present value of the difference between the future premiums named in the policy, and the future net premiums on said policy, ascertained ac- cording to the rates of mortality and interest aforesaid, in no event, however, to exceed one-fourth of said net value, and in ascertaining said net value, when the premium is payable semi-annually or quarterly, there shall be deducted from the net value of the policy, assuming net annual premiums, the net premiums for the unpaid semi-annual or quarterly instal- ments for that year which shall not be considered an indebt- edness, but as forborne premiums; what remains, after de- ducting any indebtedness to the company on account of the policy, or notes held by the company against the insured, which notes shall be canceled, shall be considered as a net single premium of temporary insurance, and the term for which it will insure shall be determined according to the age of the party at the time of the lapse of the policy, and the assumptions of mortality and interest aforesaid; but if the policy is an endowment, payable at a time certain, or at death if it should previously occur, then, if what remains as afore- said exceeds the single net premium, of temporary insurance for the balance of the endowment term for the full amount of the policy, such excess shall be considered a net single pre- 94 , THE THREE SYSTEMS mium for simple endowment, payable only at the same time as the original endowment, and in case the insured survives to that time; and the amount thus payable by the company shall be determined according to the age of the party at the time ot the lanse of the policy, and the assumptions of mortality and interest aforesaid. If the ceath of the insured occurs within the term of tem- porary insurance covered by the value of the policy as de- termined in the preceding section, and if no condition of the insurance other than the payment of premiums has been vio- lated by the insured, the company shall pay the amount of the policy, as if there had been no lapse of the premium, anything in the policy to the contrary notwithstanding; provided, how- ever, that notice of the claim and proof of the death shall be submitted to the company in the manner provided by the terms of the policy within one year after the death, and pro- vided, also, that the company may deduct from the amount insured in the policy the amount compounded at seven per cent, a year of the ordinary life premiums at age of issue, that had been forborne at the time of the death, including the whole year's premium in which the death occurs, not exceed- ing five in number. But any such company may issue to a resident of any other State or country, a policy conforming to the laws of such State or country, and not subject to this and the preceding section. Sees. 91, 92, chap. 49, laws of 1887. The Non-Forfeiture Law of Michigan, as amended, in 1881: SEC. 17. No policy of insurance on life, issued after this act shall take effect, by any company organized under the laws of this State, shall be forfeited or become void by the non-payment of any premium thereon, after the third, any further than as fol- lows: The net value of the policy when the premium becomes due and is not paid, shall be ascertained according to the " American experience Table " rate of mortality with interest at four per centum per annum. A surrender charge shall be first deducted from such net value on the following basis, to wit: From policies that have paid three full years' premiums, forty (40) per cent.; from policies that have paid four full years' premiums, thirty six (36) per cent. ; from policies that have paid five full years' premiums, thirty two (32) per cent., and so on in like manner, decreasing the discount four (4) per centum for each full years' premium paid, until the discount is exhausted, when no surrender charge shall be mi.de. After deducting the surrender charge from the n' t value, the remainder shall be considered a net single premium of whole life non-participating insurance and the amount it will insure shall be determined according to the age of the party at the time when the unpaid premium became due and the assumptions aforesaid in regard to rate of interest and table of mortality. In case of any indebtedness on any policy, such indebtedness shall be first deducted from the net value remaining, after deduct- ing the discount, and the remainder, if any, shall be used as the net single premium as aforesaid. OF LIFE INSURANCE. 95 Two other States, in addition to those heretofore named, provide for absolute non-forfeiture of a policy after a certain period without action on the part of the insured. They are Kentucky and Missouri, and the laws are as follows: KENTUCKY. SEC. 122. All policies hitherto issued by any domestic life insurance company shall be subject to the provisions of law applicable and in force at the date of such issue. No policy of life or endowment insurance hereafter issued by any such company, shall become forfeit or void for non-payment of premium after, in ordinary insurance two, and in industrial insurance five full annual premiums in cash have been paid thereon; but in case of default in the payment of any subse- quent premium, then, without any further stipulation or act except as herein provided, such policy shall be binding upon the company for the amount of paid-up insurance which the then net value of the policy and all dividend additions thereon computed by the rule of section 116, less any indebtedness to the company on account of said policy, and less the surrender charge as provided herein, will purchase as a net single pre- mium for life endowment insurance maturing or terminating at the time and in the manner provided in the original policy contract; and such default shall not change or effect the con- ditions or terms of the policy, except as regards the payment of premiums and the amount payable thereon: Provided, that policies of industrial life companies shall be surrendered to the company, and application for said paid-up policy be made in writing within eight weeks after said default, on blanks obtainable from the company for that purpose. Said sur- render charge shall be eight per cent, of the insurance value of the policy at the date of default, which insurance value is the present value of all the normal future yearly costs of in- surance which by its terms said policy is exposed to pay in case of its continuance, computed upon the rate of mortality and interest assumed in section 116. Every such policy sub- ject to the conditions as to policies of industrial life com- panies as hereinbefore prescribed, after the payment of, in ordinary insurance two, and industrial insurance five full annual premiums thereon, in cash, shall have a surrender value, which shall not be less than two-thirds of its net value, computed bv the rule of section 116, less any indebtedness to the company on account of said policy; and its holder may, upon any subsequent anniversary of its issue, surrender the same and claim and recover from the company such surrender value in cash. Upon the surrender, on any anniversary of its issue, of a policy which has become paid-up, by force of the statute upon default in payment of premiums, after two full annual ^remiums have been paid, the holder shall be entitled to not less than two-thirds of its then net value, computed by the rule of section 116. On policies of industrial insurance on which the weekly premiums are not more than fifty cents each, the surrender value in all cases shall be payable in cash. Upon the surrender, on any anniversary of its issue, of a policy which has become paid-up, after the payment of five full annual premiums, by force of the statute upon default in payment of premium, the holder shall be entitled to not less )6 THE THREE SYSTEMS than two-thirds of its net value, payable in cash. Any condi- tion or stipulation in the policy, or elsewhere, contrary to the provisions of this section, and any waiver of such provisions of tnis section, and any waiver of such provisions by the assured, shall be void. Approved July I, 1893. SEC. 116. When the actual funds of any life insurance company doing business in this commonwealth are not of a net cash value equal to its liabilities, counting as such the net value of its policies, which shall be, until the 3ist day of De- cember, 1895, valued according to the "American Experience" Table of Mortality, with interest at four and one-half per centum per annum, and on and after that day shall be valued according to the "Combined Experience" or "Actuaries" Table Rate of Mortality, with interest at four per centum per annum, it shall be the duty of the Insurance Commissioner to give notice to such company and its agents to discontinue issuing new policies within tms commonwealth until such time as its funds have become equal to its liabilities, valuing its policies as aforesaid. Any officer or agent who, after such notice has been given, issues a new policy from and on behalf of such company, before its funds have become equal to its liabilities as aforesaid, shall forfeit for each offense not exceeding one thousand dollars. MISSOURI. No policies of insurance on life hereafter issued by any life insurance company authorized to do business in this State, on and after the first day of August, A. D., 1879, shall, after payment upon it of two full annual premiums, be for- feited or become void by reason of the non-payment of pre- mium thereon, but it shall be subject to the following rules of commutation, to wit: The net value of the policy, when the premium becomes due and is not paid, shall be computed upon the American Experience Table of Mortality, with four and one-half per cent, interest per annum, and after deducting from three-fourths of such net value any notes or other in- debtedness to the company, given on account of past pre- mium payments on said policy issued to the insured, which indebtedness shall then be canceled, the balance shall be taken as a net single premium for temporary insurance for the full amount written in the policy, and the term for which such temporary insurance shall be in force shall be determined by the age of the person whose life is insured at the time of de- fault of premium and the assumption of mortality and interest aforesaid; but if the policy shall be an endowment, payable at a certain time, or at death, if it should occur previously, then if what remains as aforesaid shall exceed the net single pre- mium of temporary insurance for the remainder of the endow- ment term for the full amount of the policy, such excess shall be considered as a net Dingle premium for a pure endowment of so much as such premium will purchase, determined by the age of the insured at date of defaulting the payment of pre- mium on the original policy, and the table of mortality and interest as aforesaid, which amount shall be paid at end of the original term of endowment, if the insured shall then be alive. At any time after the payment of two or more full annual premiums, and not later than sixty days from the beginning OF LIFE INSURANCE. 97 of the extended insurance provided in the preceding section, the legal holder of the policy may demand of the company, and the company shall issue, its paid-up policy, which, in case of an ordinary life policy, shall be for such an amount as the net value of the original policy at the age and date of lapse, computed according to the Actuaries' or Combined Expe- rience Table of Mortality, with interest at the rate of four per cent, per annum, without deduction of indebtedness on ac- count of said policy, will purchase, applied as a single pre- mium upon the table rates of the company; and in case of a limited payment life policy, or of a continued payment en- dowment policy, payable at a certain time, or at death, it shall be for an amount bearing such proportion to the amount of the original policy as the number of complete annual pre- miums actually paid shall bear to the number of such annual premiums stipulated to be paid: Provided, that from such amount the company shall have the right to deduct the net reversionary value of all indebtedness to the company on account of such policy; and provided further, that the policy- holder shall, at the time of making demand for such paid-up policy, surrender the original policy, legally discharged, at the parent office of the company. If the death of the insured occur within the term of tem- porary insurance covered by the value of the policy as de- termined in section 5856, and if no condition of the insurance other than the payment of premiums shall have been violated by the insured, the company shall be bound to pay the amount of the policy, the same as if there had been no default in the payment of premium, anything in the policy to the con- trary notwithstanding: Provided, however, that notice of the claim and proof of the death shall be submitted to the com- pany in the same manner as provided by the terms of the policy within ninety days after the decease of the insured; and provided also, that the company shall have the right to deduct from the amount insured in the policy the amount com- pounded at six per cent, interest per annum of all the pre- miums that had been forborne at the time of the decease, in- cluding the whole of the year's premium in which the death occurs, but such premiums shall in no case exceed the ordi- nary life premium for the age at issue, with interest, as last aforesaid. The three preceding sections shall not be applicable in the following cases, to wit: If the policy shall have been issued by any company authorized to do business in this State, and organized under the laws of another State of the United States, which prescribes a surrender value or paid-up or tem- porary insurance in case of default in payment of premiums, and shall contain an agreement for such surrender value, tem- porary or paid-up insurance, as prescribed by such other State as a part of said policy, or if the policy shall contain a provision for an unconditional cash surrender value at least equal to the net single premium for the temporary insurance provided hereinbefore, or for the unconditional commutation of the policy for non-forfeitable paid-up insurance, or if the legal holder of the policy :hall, within sixty days after default of premium, surrender the policy and accept from the com- rany another form of policy, or if the policy shall be sur- rendered to the company for a consideration adequate in the 98 THE THREE SYSTEMS judgment of the legal holder thereof, then, and in any of the foregoing cases, this act shall not be applicable: Provided, that in no instance shall a policy be forfeited for non-payment of premiums after the payment of three annual premiums thereon; but in all instances where three annual premiums shall have been paid on a policy of insurance, the holder of such policy shall be entitled to paid-up insurance, the net value of which shall be equal to that provided for in section 5856 of this article. Revised statutes, 1889, sees. 5856-7-8 and sec. 5859 as amended in 1895. OF LIFE INSURANCE. 99 CHAPTER XI. CLASS C. THE NEW YORK INSURANCE LAW. THREE EXAMPLES OF MATURED ENDOWMENTS. A REMARKABLE LIFE INSUR- ANCE LAW. EXAMPLE IN ILLUSTRATION. ASSUMED EXAM- PLE OF A TONTINE POLICY. ACTUAL EXAMPLES OF MATURED TONTINE POLICIES. C CLASS. This class embraces all companies doing business under the Level Premium System, whose policies, in the main, are not Non- Forfeitable; that is to say, their policy-holders have to do some- thing, WITHIN A SPECIFIED TIME, if payment of premiums be discontinued after the first two or three years, to protect their equities in the reserve and surplus accumulations on the ordinary forms of policies. It includes the companies generally who issue policies in which the deferred dividend element pre- dominates to a greater or less extent. Investment, combined with Cheap Life Insurance, is a prominent idea with 'the companies in this class. The dividends paid by the leading companies of this class, with rare exceptions, if any, on the same kind of policies other things being equal , are larger than those paid by leading companies in the other classes, because their policies are for- feitable; and, generally, any grade of companies in this class can pay larger dividends than can the same grade of companies in the other classes, for the same reason. Every policy-holder in- sured in this class of companies must attend to the prompt pay- ment of his premium, ON OR BEFORE 12 O'CLOCK NOON, of the day when it becomes due, or he will be liable to a greater or less loss, according to the kind and amount of his policy, and the length of time it has been in force ! THE NEW YORK LIFE INSURANCE LAW. On the second of May, 1879, the Legislature of the State of New York passed what has been called, in some of our insurance literature, " The non- forfeiture law of New York. " The following is the law, and we have italicised such clauses as serve to make it wholly useless as a non-forfeiture act. " SECTION 1. Whenever any policy of life insurance hereafter issued by any company organized or incorporated under the laws 100 THE THREE SYSTEMS of this State, after being in force three full years, shall by its terms lapse or become forfeited for the non-payment of any premium, or of any note given for a premium, or loan made in cash on the policy as security, or of any interest on such note or loan, unless the provisions of this act are specifically waived in the application, and notice of such waiver written in red ink on the margin of the face of the policy when issued, the reserve on such policy, including dividend additions, calculated at the date of the failure to make any of the payments above described, according to the American Experience Table of Mortality, and with inter- est at the rate of four and a half per cent, per annum, after de- ducting any indebtedness of the insured on account of any annual, semi-annual or quarterly premium then due ; and any loan in cash on such policy, evidence of which is acknowledged by the insured in writing, shall, on demand made, with surrender of the policy within six months after such lapse, be taken as a single premium of life insurance at the published rates of the company at the time the policy was issued, and shall be applied, as shall have been agreed in the application and policy, either to continue the insurance of the policy in force at its full amount, so long as such single premium will purchase temporary insur- ance for that amount, at the age of the insured at the time of lapse, or to purchase upon the same life, at the same age, paid up insurance payable at the same time, and under the same condi- tions except as to payment of premiums, as the original policy. Provided, that if no such agreement be expressed in the applica- tion and policy, the said single premium may be applied in either of the modes above specified, at the option of the owner of the policy ; notice of such option to be contained in the demand hereinbefore required to be made to prevent the forfeiture of the policy. Provided, also, that the net value of the insurance given for such single premium under this section, computed by the standard of this State, shall in no case be less than two- thirds of the entire reserve after deducting the indebtedness as speci- fied ; but such insurance shall not participate in the profits of the company. " SEC 2. If the reserve upon any endowment policy, applied according to the preceding section as a single premium of tem- porary insurance, be more than sufficient to continue the insur- ance to the end of the endowment term named in the policy, and if the insured survive the term, the excess shall be paid in cash at the end of such term, on the conditions on which the original policy was issued. ''SEC. 3. This act shall take effect on the first day of January, 1880." By the revision of the Insurance Code in 1892 the phrase- ology of the law was slightly changed, without, however, affecting its general tenor. The law now reads: Whenever any policy of life insurance issued after January i, 1880, by any domestic life insurance corporation, after being in force three full years, shall, by its terms, lapse or become forfeited for the non-payment of any premium or any note given for a premium or loan made in cash on such policy as security, or of any interest on such note or loan, the reserve on such policy computed according to the American Ex- perience Table of Mortality at the rate of four and one-half per cent, per annum shall, on demand made, with surrender OF LIFE INSURANCE. 101 of the policy within six months after such lapse of forfeiture, be taken as a single premium of life insurance at the pub- lished rates of the corporation at the time the policy was issued, and shall be applied, as shall have been agreed in the application or policy, either to continue the insurance of the policy in force at its full amount so long as such single pre- mium will purchase temporary insurance for that amount, at the age of the insured at the time of lapse or forfeiture, or to purchase upon the same life at the same age paid-up insur- ance payable at the same time and under the same conditions, except as to payment of premiums, as the original policy. If no such agreement be expressed in the application or policy, such single premium may be applied in either of the modes above specified at the option of the owner of the policy, notice of such option to be contained in the demand hereinbefore required to be made to prevent the forfeiture of the policy. The reserve hereinbefore specified shall include dividend additions calculated at the date of the failure to make any of the payments above described according to the American Experience Table of Mortality with interest at the rate of four and one-half per cent per annum, after deducting any in- debtedness of the insured on account of any annual or semi- annual or quarterly premium then due, and any loan made in cash on such policy, evidence of which is acknowledged by the insured in writing. The net value of the insurance given for such single pre- mium under this section, computed by the standard of this State, shall in no case be less than two-thirds of the entire reserve computed according to the rule prescribed in this section, after deducting the indebtedness as specified; but such insurance shall not participate in the profits of the cor- poration. If the reserve upon any endowment policy applied accord- ing to the provisions of this section as a single premium of temporary insurance be more than sufficient to continue the insurance to the end of the endowment term named in the policy, and if the insured survive that term, the excess shal) be paid in cash at the end of such term, on the conditions on which the original policy was issued. This section shall not apply to any case where the pro- visions of the section are specifically waived in the application, and notice of such waiver is written or printed in red ink on the margin of the face of the policy when issued. In addition to New York the legislatures of three other States have passed laws relating to non-forfeiture, which may be classed in the same category as that State, in that they require some action on the part of the insured before becoming effective. The States referred to are: California, Colorado and New Jersey; the laws being as follows: CALIFORNIA. Every contract or policy of insurance hereafter made by any person or corporation organized under the laws of this State, or under those of any other State or country, with and 102 THE THREE SYSTEMS upon the life of a resident of this State, and delivered within this State, shall contain, unless specifically contracted be- tween the insurer and the insured for tontine insurance or for other paid-up insurance, a stipulation that when, after three full annual premiums shall have been paid on such policy, it shall cease or become void solely by the non-payment of any premium when due, its entire net reserve, by the American Experience Mortality, and interest at four and one-half per cent, yearly, less any indebtedness to the company on such policy, shall be applied by such company as a single premium, at such company's published rates in force at the date of original policy, but at the age of the insured at time of lapse, either to the purchase of non-participating term insurance for the full amount insured by such policy, or upon the writ- ten application by the owner of such policy, and the surrender thereof to such company within three months from such non- payment of premium, to the purchase of a non-participating paid-up policy, payable at the time the original policy would be payable if continued in force; both kinds of insurance to be subject to the conditions, except as to payment of premiums, as those of the original policy. It may be provided, how- ever, in such stipulation, that no part of such term insurance shall be due or payable unless satisfactory proofs of death be furnished to the insuring company within one year after death, and that, if death shall occur within three years after such non-payment of premium, and during such term of in- surance, there shall be deducted from the amount payable the sum of all the premiums that would have become due on the original policy if it had continued in force. If the reserve on endowment policies be more than enough to purchase temporary insurance, as aforesaid, to the end of the endow- ment term, the excess shall be applied to the purchase of pure endowment insurance, payable at the end of the term, if the insured be then living. If any life insurance corporation or company shall deliver to any person in this State a policy of insurance upon the life of any person residing in this State, not in conformity with the provisions of this section, the right of such corporation or company to transact business in this State shall thereupon and thereby cease and determine, and the Insurance Commissioner shall immediately revoke the certificate of such corporation or company authorizing it to do business in this State, and publish such revocation, daily, for the period of two weeks, in two daily newspapers, one published in the city of San Francisco, and the other in the city of Sacramento. Law of 1880. Note that while this law provides for extended insurance automatically, its effect is nullified by admitting of special agreement as to what shall be granted. COLORADO. All life insurance companies, authorized to transact busi- ness in this State, shall provide in their policies that, after three or more annual premiums have been paid upon a policy of life insurance, and default is made in payment of ^ any sub- sequent premiums when due, then, notwithstanding such OF LIFE INSURANCE. 103 default, the company shall convert the same into a paid-up policy for as many dollars as the value of such policy will purchase, to be determined by the table of surrender values in use by such company at the time of the issue of policy, which shall not be less than the full net value of the policy per Actuaries' Experience Table of Mortality, four per cent interest; provided, that the application be made in writing for such paid-up policy by the assured within six months after default in the payment of premiums shall first have been made. Sec. 9, chap. 2, law of 1883. NEW JERSEY. 1. Whenever any policy of life insurance hereafter issued by any domestic life insurance corporation of this State, after being in force three full years, shall, by its terms, lapse or be- come forfeited for the non-payment of any premium or any note given for a premium or loan made in cash on such policy as security, or of any interest on such a note or loan, the net reserve on such policy, including existing dividend additions, computed according to the American Experience Table of Mortality at the rate of four and one-half per centum per annum, shall, on demand made in writing, with the sur- render of the policy within three months after such lapse or forfeiture, be taken as a single premium of life insurance at the published rates of the corporation at the time the policy was issued, and shall be applied, as shall have been agreed in the application or policy, either to continue the insurance of the policy in force at its full amount, including dividend addi- tions, so long as such single premium will purchase tempo- rarv insurance for that amount at the age of the insured at the time of the lapse or forfeiture, or to purchase upon the same life, at the same age, paid-up insurance, payable at the same time and under the same conditions, except as to pay- ments of premiums, as the original policy; if no such agree- ment be expressed in the application or policy, such single premium may be applied in either of the modes above speci- fied, at the option of the owner of the policy, notice of such option to be contained in the demand hereinafter required to be made to prevent the forfeiture of the policy. 2. If there be any indebtedness on the policy which has been acknowledged by the assured in writing, such indebted- ness shall be paid off in cash before the provisions of this act shall be applicable to the policy. 3. The net value of the insurance given for such single premium under this act, computed according to the American Experience Table of Mortality, with interest at the rate of four and one-half per centum per annum, shall in no case be less than two thirds of the entire reserve, computed according to the rule prescribed in this act; but such insurance shall not participate in the profits of the corporation. 4. If the reserve upon any endowment policy applied ac- cording to the provisions of this act as a single premium of temporary insurance be more than sufficient to continue the insurance to the end of the endowment term named in the policy, and if the insured survive that term, the excess shall be paid in cash at the end of such term, on the conditions on which the original policy was issued. 104 THE THREE SYSTEMS 5. Any policy issued by any insurance company of this State shall be incontestable after two years from its date of issue provided all due premiums have been paid, except that such policy may be adjusted for misstatement of age in the application for original policy. 6. On policies of prudential or industrial insurance, the paid-up value of which, in accordance herewith, shall be less than fifty dollars, it shall be optional with the company issuing such policy to pay to the legal holder or holders thereof the cash equivalent; and upon such payment the com- pany shall be absolutely released from all further claims or demands whatsoever under or by reason of said policy, which shall thereupon be canceled. 7. The provisions of this act shall not apply to policies issued on the lives of persons under twelve years of age until three years after such persons shall attain that age. 8. All acts or parts of acts inconsistent with this act be and the same are hereby repealed. Act of 1895. The following are examples of policies issued by one of the most prominent companies of the O. class. The results speak for themselves: POLICY No. 49,138; AMOUNT, $2,000; DATE, JULY 11, 1866; AGE, 26 ; KIND OF POLICY, 19-YEAR ENDOWMENT REQUIRING NINETEEN ANNUAL PAYMENTS OP $93.84, EACH. The Company paid, July 11, 1885 $2,000.00 And dividend additions 758.90 Total paid by Company 2,758.90 The insured paid $93.84 per year for 19 years of which $86.05 per annum was made to earn, by the Company, five per cent, compound interest, principle and interest amounting, to exactly $2,759.68, a trifle more than the sum paid on maturity of endowment. The difference between $93.84 and $86.05, which is $7.79, was the annual cost of the insurance! (The above premium was paid in two equal semi-annual payments of $46.92, each. POLICY No. 99,074 ; AMOUNT, $3,000 ; DATE, JUNE 28, 1869 ; AGE, 25 ; KIND OF POLICY, 15- YEAR EDDOWMENT REQUIRING FIFTEEN ANNUAL PAYMENTS OF $198.06, EACH. The company paid, June 28, 1884. $3,000.00 And dividend additions 1,030.32 Total paid by company $4,030.32 The insured paid $198.06 per year for 15 years of which $177. 90 per annum was made to earn, by the company, five per cent, compound interest, principle and interest amounting to $4,030.77, a few cents more than the sum paid on maturity of en- dowment. The difference between $198.06 and $177.90, which is $20.16, was the annual cost of the insurance! OF LIFE INSURANCE. 105 POLICY No. 156,482 ; AMOUNT, $5,000 ; DATE, MAY 6, 1874 ; AGE, 25; KIND OF POLICY, 10-YEAR ENDOWMENT REQUIRING TEN ANNUAL PAYMENTS OF $540.40, EACH. The Company paid, May 6, 1884 .$5,000.00 And dividend additions 1,066.55 Total paid by Company $6,066.55 The insured paid $540.40 per annum for 10 years, of which $459.36 per annum w^as made to earn, by the Company, five per cent, compound interest, principle and interest amounting to exactly $6066.66, a trifle more than the sum paid on maturity of the endowment. The difference between $540.40 and $459.36, which is $81.04, was the annual cost of the insurance! (The above premium was paid in two equal semi-annual payments of $270.20 each. A very remarkable Life Insurance Law. In 1868 a very remarkable statute was enacted by the Legislature of Iowa, intended as a complete protection of the reserves of policy holders who insure in companies organized under it, against the possible dishonesty and mal-feasance of Life Insurance officials. The law is as follows : SEC. 1169, chap. 5, of the Laws of Iowa (code of 1873). "As soon as practicable after the filing of said statement of any com- pany organized or doing business under the laws of this State, in the office of the Auditor of State, he shall proceed to ascertain the net cash value of each policy in force, upon the basis of the American Experience Table of Mortality, and four and a-half per cent, interest, or the Actuaries' Combined Experience Table of Mortality, with interest at four per cent. For the purpose of making such valuations, when not already made as aforesaid, the auditor may employ a competent actuary to do the same, who shall be paid by the company for which the service was rendered; but nothing herein shall prevent any company from making said valuation herein contemplated, which shall be re- ceived by the auditor upon such proof as he may determine. Upon ascertaining the net cash value of policies in force in any company organized under the laws of this State, or doing business in this State, and which has not made the deposit required in Section 1164 of this chapter" (refers to the requirements of the States under whose laws the foreign companies were incorpora- ted) "the auditor shall notify said company of the amount, and within thirty days after the date of such notification the officers of such company shall deposit with the auditor the amount of such ascertained valuation of all policies within this State in the securities described in section 1179 of this chapter." RESERVE DEPOSIT feature of the foregoing law; to illlustrate this we give the following example of a policy in force: POLICY, No. 1857; AMOUNT, $3,000; AGE, 18; DATE OF POLICY, MARCH 14, 1874 ; KIND OF POLICY, ORDINARY LIFE KKQUIRING THE PAYMENT OF $26.78, SEMI- ANNUALLY, DURING LIFE. 106 THE THREE SYSTEMS On this policy the dividends have been applied to the purchase of paid-up additions. Dividend, 1875, end 1st year, 19.9 per cent, of annual premium $10 . 68 Paid-up addition to policy 40.52 Dividend, 1876, end2d year, 25.5 percent, of an- nual premium " $13.71 Paid-up addition to policy 51.82 Dividend, 1877, end 3d year, 26. 3 per cent, of an- nual premium $14.12 Paid-up addition to policy 52.38 Dividend, 1878, end 4th year, 27.9 per cent, of an- nual premium $14.98 Paid-up addition to policy 54.52 Dividend, 1879, end 5th year, 29.9 percent, of an- nual premium $16.06 Paid-up addition to policy 57.35 Dividend, 1880, end 6th year, 30.8 percent, of an- nual premium $16.54 Paid-up addition to policy 57.90 Dividend, 1881, end 7th year, 32.8 percent, of an- nual premium $17.60 Paid-up addition to policy 60.45 Dividend, 1882, end 8th year, 34. 6 per cent, of an- nual premium 3*18.55 Paid-up addition to policy 62.55 Dividend, 1883, end 9th year, 36 per cent, of an- nual premium $19.50 Paid up addition to policy 64.35 Dividend, 1884, end 10th year, 37. 9 per cent, of an- nual premium $20 . 35 Paid-up addition to policy 65 . 70 Dividend, 1885, end llth year, 40 per cent, of an- nual premium $21 .46 Paid-up addition to policy 68.00 Total additions in 11 years $635.54 Total premiums paid in 11 years. . . 589.16 Excess of additions over premiums paid.. $46.38 Remark At the end of the llth policy year the reserve of policy and additions, according to the Actuaries' Table, and 4 % interest, the standard required by the State, amounted to $415.94! This amount, according to the preceding law, is now deposited in the office of the State Auditor, in securities prescribed by legisla- tive enactment. DEPOSIT LAW OF INDIANA. In the year 1899 the Indiana legislature passed an act regulating life insurance in that State, which includes the following section relating to compulsory deposit of the re- serves: SEC. 10. As soon as practicable, after the filing of said annual statement of any company organized and doing busi- ness under the provisions of this act, in the office of the Auditor of State, he shall proceed to ascertain the net cash value of each policy in force on the 3ist day of December OF LIFE INSURANCE. 107 immediately preceding, upon the basis of the American Ex- perience Table of Mortality and four per cent, interest, or Actuaries' Combined Experience Table of Mortality and four per cent, interest. For the purpose of making such valua- tions, the Auditor of State may employ a competent actuary to do the same, who shall be paid by the company for which the services are rendered; but nothing herein shall prevent any company from making said valuation herein contem- plated, which may be received by the Auditor of State upon such proof as he may determine. Upon ascertaining in the manner above provided, the net cash value of all policies in force in any company organized or doing business under this act, the Auditor of State shall notify said company of the amount thereof and within ninety days after the date of such notification the officers of such company shall deposit with the Auditor of State for the security and benefit of its policy- holders, an amount -hich, together with the sum already de- posited with said officer, snail be not less than the amount of such ascertained valuation of all policies in force in the securities described in section twenty-two of this act, or in certificates of deposit in any solvent bank or trust company. But no companv organized under this act shall be required to make such deposit until the cash value of the policies in force as ascertained by the Auditor of State exceeds the amount deposited by said company under sections five or six hereof. The following is an assumed example of a Deferred Divi- dend policy, with ordinary life premium rate: AMOUNT OF POLICY, $10,000; ANNUAL PREMIUM, $226.30; AGE AT ISSUE, 30; KIND OF POLICY, ORDINARY LIFE; DIVI- DEND PERIOD, 20 YEARS. Year. Annual Pre- mium. Reserve at 4 per cent. Actuaries. Year. Annual Pre- mium. Reserve at 4 per cent. Actuaries 1st $226.30 $ 93.07 llth $226.30 $1,207.70 2d 226.30 189.14 12th 226.30 1,340 62 3d 226.30 288.28 13th 226.30 1,477.91 4th 226.30 390.60 14th 226.30 1,619.25 5th 226 30 496.29 15th 226.30 1,764.19 6th 226.30 605.40 16th 2,6.30 1,912.50 7th 226.30 718 04 17th 226.30 2,063.61 8th 226 30 834.53 18th 226 30 2,217.47 9th 22(5.30 954 81 19ih 226.30 2,373.88 10th 226.30 1,079.13 20th 226.30 2,532 94 Let it be assumed that a person at age 30 has under considera- tion the investment in such a policy as above described, and that he is quite favorably inclined to close the contract. Be fore doing so, however, he should be quite sure that he under- stands it. What does the insured, under the contract, promise to do ? The contract lived up to on the part of the insured, what does the company promise to do ? The insured promises to pay to the company $226.30, every year, during his natural life, and to 108 THE THREE SYSTEMS live up to all the other requirements of the policy contract as to occupation, residence, habits, etc., etc., and the company agrees to pay $10,000, in cash, soon after his death, to the beneficiary or beneficiaries named in the policy. It is a simple, straight, Ordi- nary Life Policy contract with this addition: During the first twenty years the insured agrees to pay the $226.30 per year, in full. He is to receive no dividends during that period. If he die during the twenty years, the company agrees to pay the face value of the policy, only. If the in- sured live only one single day less than the entire twenty years from date of policy, having paid twenty full annual premiums, in cash, only the face value of the policy will be paid. He must not only pay twenty annual premiums but he must also live twenty entire years, from date of con- tract, and fulfil all the other conditions of the policy contract, before he will be entitled to any dividends whatever. This twenty years is called The Dividend Period. During the Dividend Period, all the dividends that he might have received, and used, in annual reduction of pre- miums, had the policy not been a deferred dividend contract, are accumulating in the surplus fund, and are being com- pounded, annually, at the average rate of interest, from year to year, realized by the company on all its invested funds. These dividend accumulations, from his own policy, are not placed to his individual credit on the books of the company they may be kept in memoranda but they are credited to the general surplus fund of his class. If the policy were an Ordinary one, not a Deferred Divi- dend, and the dividends were to average, say, $75.44 per annum, and were left with the company to be compounded annually at five per cent, interest, at the end of the twenty years they would amount to $2,619.20. This would be the entire amount of his dividends, from all sources, under the assumptions made. How much would the above result be increased if the policy were a Deferred Dividend, and the insured were to persist in living and paying, and complying with all the other conditions of the contract, until the expiration of the twenty- year period? Of course no one can answer this question, not even the companies themselves, except approximately. One company estimated the amount of surplus at the end of the dividend period, on the kind and amount of policy assumed, at $3,256.70. This is $637.50 more than the estimated surplus, if the policy were an annual dividend contract. Another estimated the surplus at $4,6o.7,.oo; or, $2,077.80 more than if it were an annual dividend contract. The first of the above OF LIFE INSURANCE. 109 companies, in its sworn testimony before the Ohio Senate Committee, stated that the surplus, at the end of the tenth year, on a $3,000 policy in that company, issued at age thirty- one, was $269.79; that the dividends paid on the same kind of an annual dividend policy, same amount and age, during first ten years, compounded at six per cent., amounted to only $141.42, showing a difference in favor of the first-named policy of $128.37, o r ninety-one per cent., end of the first ten years. Taking the statement thus sworn to by the company, as the basis of estimates for the entire dividend period, we have the following: The estimated dividends on an annual dividend contract, as stated before, amount to $2,619.20. Add ninety-one per cent, and the result is $5,002.67, the estimated surplus at the end of the dividend period; but this result far exceeds the estimates of any company, on this kind of policy, showing plainly that either our assumptions of the dividends are too high on an annual dividend policy in that company, or that the dividends would not average as large during the entire twenty-year dividend period as they did the first ten years of that period. Now let it be assumed that the policy-holder in our as- sumed example has lived through the twenty-year dividend period. What are the advantages over a similar annual divi- dend policy, at the end of the first twenty years? i. If the policy were an annual dividend in the same com- pany, he would have to apply to the company to ascertain how much cash, or how large a paid-up policy, would be given on surrender of the original policy. This application would have to be made before the twenty-first annual premium became due, or the policy would lapse. It must be attended to promptly. The company has, in the reserve accumulations, $2,532.94, and we have assumed that the accumulated dividends amount to $2,619.20, making, altogether, $5,152.14, in cash, to the credit of the policy in the hands of the company it is an annual dividend policy, remember! How much of this $5,152.14 would the company probably pay the insured, in cash, on the legal surrender of the policy? Probably not more than one-half of it, or thereabouts, say $^,700 possibly, $3,000. If he preferred a, paid up policy to the cash, he would receive what the $3,000 at his present age would purchase at the company's loaded rate! If the policy were a Deferred Dividend, how much cash, or paid-up, would. the company give him upon legal surrender of the original pol- icy? One company guarantees $2,173.90 in cash, but esti- mates it at $5,680. Its estimated equivalent paid-up is $12,- 150! Another company guarantees $2,270.05 in cash, but estimates it at $7,120. Its estimated equivalent paid-up is 110 THE THREE SYSTEMS $16,500! A third guarantees a cash surrender value of $2,- 532.94, but makes no estimates as to what it can probably do better than this. It is well to remark here that the guarantee cash surrender values above, are the entire reserves as kept by the several com- panies, and the estimated cash values are these reserves augmented by the estimated surplus. It should further be remarked that when the cash surrender value is sufficient to purchase a larger paid-up policy than the original one, medical examination is re- quired for the additional insurance. (2.) The cash surrender value or equivalent paid-up, at the end of the Dividend period is not the only option on the part of the insured. There are several others, with reference to which the reader is referred to Chapter V of this book. The following is the history of an early Tontine Policy issued under the original form providing for absolute for- feiture of reserve and surplus in the event of lapse: POLICY No. 44,193; AMOUNT OP POLICY $10,000; KIND o* POLICY, ORDINARY LIFE, TONTINE POLICY; THE TONTINE PERIOD, 15 YEARS; ANNUAL PREMIUM, $324.70; AGE, 41; DATE OF POLICY, JUNE 8th, 1869. During the Tontine period of fifteen years, the insured paid fifteen annual premiums, in cash, of $324-70 each, amounting to $4,870.50. At the end of the Tontine period June 8th, 1884, the insured had the privilege of choosing any one of the following 1 methods of settlement. I. He could surrender the original policy to the Company, and receive, in cash, $5,530.70. After having had $10,000 insur- ance for 15 years for nothing, he could retire with $660, cash, over and above the total sum he had paid ; or, II. He could surrender the original Policy and receive a Paid- up Policy for $10,260 upon which no further payment of pre- miums would ever be required ; or, III. He could convert the surplus, $2,918.10 into an annuity for life, $243.50 per year, and apply it in annual payment of fu- ture premiums, thus continuing the original policy. This life annuity, of $243.50, would alone reduce the annual premium from $324.70 to $81.20, and the future annual cash dividends would very nearly, if not quite, pay the balance. This was the option accepted by the insured ; and, in 1885, the annuity together with the dividend of 1885, more than paid the annual premium, so that the company receipted for the annual premium, and paid the insured $17.20 in cash. OF LIFE INSURANCE. Ill At the end of the Tontine period, the options, in percentage^ were as follows: 1. Cash surrender value of the Policy was 1 14 per cent, of the total premiums paid! 2. Amount of Paid-up Policy was 211 per cent. of the total premiums paid ! 3. The cash surplus was 6O per cent, of the total premiums paid ! Example of a Matured Tontine. Policy, No. 114,285 ; Amount, $10,000 ; Date, May 7, 1875 ; Kind of policy, Ordinary Life ; Annual premium, $350.50; Tontine Period, 1O years. Results: The insured paid the premiums, in full, during the 10-YEAR TONTINE PERIOD, amounting to $3,505. By the provi- sions of the policy-contract, at the end of the ten years he was entitled to the benefit of the following options : 1. HE COULD SURRENDER HIS POLICY AND RECEIVE FROM THE COMPANY, IN CASH, $3,036 ; OR, 2. HE COULD SURRENDER HIS POLICY AND RECEIVE A PAID- UP FOR $6,045, NON-PARTICIPATING ; OR, 3. HE COULD SURRENDER HIS POLICY AND RECEIVE AN AN- NUITY FOR LIFE OF $258.00, PER YEAR ; OR, 4. HE COULD SURRENDER HIS ACCUMULATED SURPLUS, $1,255, CONTINUING HIS POLICY, AND RECEIVE AN ANNUITY FOR LIFE OF $77.00 PER YEAR TO BE USED IN PAYMENT OF FUTURE PREMIUMS. He selected the second of the above options, and reinsured on the Tontine plan, May, 1885. Our readers must not be misled in comparing the above results with those of the 15-year Tontine preceding it. There is no basis for accurate comparison of the two. TERMINABLE ENDOWMENTS ; RESERVE ENDOWMENTS ; A CERTAIN KIND OF LlFE RATE ENDOWMENTS ; FlVE-YEAR DIS- TRIBUTION POLICIES, ETC., ETC., ARE FORMS OF POLICY CONTRACTS IN WHICH THE DEFERRED DIVIDEND ELEMENT PREVAILS TO A GREATER OR LESS EXTENT; BUT TO ILLUSTRATE THEM ALL, BY EXAMPLES, WOULD REQUIRE MORE SPACE THAN A WORK OF THIS CHARACTER PERMITS. The above examples illustrate the workings of the original Tontine contracts. In the following is shown the values endorsed on a modern deferred dividend policy, together with an illustration of the results which would have accrued 112 THE THREE SYSTEMS had such a policy been issued twenty years ago. Now that the companies have had actual experience with these forms they no longer issue estimates, but submit illustrations of present results, with a warning that future results can only be in accordance with future experience. Ordinary Life Policy. Age of insured, 35; amount, $10,- ooo; annual premium, $281.10, payable for life; Accumulation or Dividend Period, twenty years. OF CASH LOANS AND OF PAID-UP OR CONTINUED INSURANCE. AFTER EXPIRA- TION OF Cash Loans. Paid-up Insur- ance. $10,000 INSURANCE CON- TINUED FOR Years. Months. 1 Year 2 2 Years .... $330 $420 *i 4 3 450 850 2 8 4 630 1,120 4 1 5 830 1,410 5 5 6 980 1,670 6 6 7 1,130 1,950 7 6 8 1,290 2,220 8 6 9 1,460 2,490 9 5 10 1,620 2,820 10 2 11 1.79C 3070 10 10 12 1,970 3,330 11 4 13 2,150 3,600 11 10 14 2,330 3,840 12 2 15 2,510 4,200 12 5 16 2,700 4,450 12 8 17 2,890 4,690 12 10 18 3,080 4,920 12 11 19 3,270 5,150 12 11 20 3,470 5,370 13 21 3,660 5,590 12 ii 22 3,860 5,800 12 9 23 4,050 6,000 12 6 24 4,250 6,190 12 4 25 4,450 6,380 12 1 26 4,640 6,560 11 11 27 4,840 6,740 11 8 28 5,030 6,910 11 5 29 5,220 7,070 11 2 30 5,410 7,230 10 10 OF LIFE INSURANCE. 113 Guaranteed benefits at end of twenty years, (a) cash value, $3,270, or (b) paid-up policy for $5,37, or (c) extended insurance for thirteen years. Estimated dividend at end of twenty years, on basis of results achieved on policies matur- ing in 1900, $2,660, which would purchase paid-up insurance of $4,300. 114 THE THREE SYSTEMS CHAPTER XII. THE NATURAL PREMIUM SYSTEM. ITS DISTINGUISHING CHAR- ACTERISTICS. REQUISITES FOR SOUNDNESS AND PERMANEN- CY. A LEVEL PREMIUM SEPARATED INTO ITS ELEMENTS. A NATURAL PREMIUM SEPARATED INTO ITS ELEMENTS. THE Two COMPARED. TABLE A, SHOWING RESERVE AND AMOUNT AT RISK ON A LEVEL PREMIUM POLICY OF $10,000, AGE 40, FOR 27 YEARS. REMARKS ON THE SAME. TABLE B, SHOWING RESERVE AND AMOUNT AT RISK ON A NATURAL PREMIUM POLICY OF $10,000, AGE 40, FOR 21 YEARS. REMARKS ON THE SAME. TABLE C, SHOWING THE NET AND GROSS NATURAL PREMIUMS FOR $1,000, AGES, 20 TO 99. REMARKS ON THE SAME. UNIFORM PERCENTUM LOADING DISCUSSED. II. THE NATURAL PREMIUM SYSTEM. While the natural premium system is thoroughly scien- tific, and therefore perfectly sound, experience has .shown that insurers will not pay a continually increasing premium. For temporary insurance the system meets the pressing needs of a great many men, but when the premiums reach a point where they become burdensome, the insurance is promptly dropped. As a matter of fact, no purely natural premium company is operating in the United States at this time, and only a few ordinary or level-premium companies will issue such a contract, and even they require that at age sixty or sometimes earlier, the insured shall change to a whole-life level-premium contract if he still desire insurance. DISTINGUISHING CHARACTERISTICS: 1. The premium is required to be paid in advance. 2. The contract between the company and the in- sured is callod a policy. 3. The policy always designates a definite sum to be paid by the company to the beneficiary or beneficiaries named therein, and the insurance is for one year only, or in some cases a fractional part thereof two, three or six months renewable from time to time at the option of the insured, without medical examination. OP LIFE INSURANCE. 115 4. The premium is a "progressive premium;" that is, it is larger each successive year than the last preceding one. But the increase in a well managed company is liable to be impeded, somewhat, so that each of the annual pay- ments, during the first five or ten years, in a Mutual Company, may possibly be kept down by dividends to a level, or nearly so, with that of the third, or even the second year. REQUISITES FOR SOUNDNESS AND PERMANENCY. a. The premium must be based on safe assumptions of future mortality, interest and expenses. b. There must be in hand from the first to the end of every policy year, the reserve provided by law. To illustrate, suppose that the insured is 40 years old at the beginning of a policy year ; that the policy is for $1,000, and that the premium is based on the Actuaries' Table of Mortality, and 4 per cent, interest. (See Table No. 16, col. 6}. The net premium at 40 is $9.96, and it is also the required reserve. Bear in mind that this is the reserve at the beginning of the year ; but it gradually diminishes until at the end of the year it is nothing ! At the beginning of the second year he is 41, and the net premium, which is also the legal re- serve , is now $10.20, which is also reduced to zero at the end of the year. At the beginning of the sixth year, at age 45, the reserve is $11.74, and nothing at the end of the year. At ages 50, 55, 60, 65 and 70, the reserves are, respectively, $15.33, $20.83, $29.17, $42.39, and $62.44, at the beginning of each of the several years indicated, but no reserve is required at the terminations of these years. Generally, at the beginning of any policy year, the reserve required by law in The Natural Premium Sys- tem, is the net premium at the then age,; but, at the end of any policy year, no matter how long the policy has been in force, no reserve is required. If any remains, at the end of the year, it shows that the mortality of the company during the year has been less than that indicated by the mortality table upon which its premiums are based, and it is placed to the credit of the sur- plus fund. c. The premiums should be loaded sufficiently see "loading," page 26 to provide for any possible mortality, in the future, in excess of that indi- cated by the mortality table upon which they are based. This surplus fund should be safely invested, and the policy contract should defi- nitely state how it will be invested. To every 116 THE THREE SYSTEMS policy holder -who has been insured a certain number of years, say ten to fifteen, such a pro- portional part of this special mortality fund as his premiums have contributed thereto, to- gether with interest earned thereon, should be available, annually thereafter, in payment of his premiums. Should death occur, or the policy lapse, or become forfeited, prior to the expira- tion of the stipulated period, it should be for- feited to the remaining" members. 130 THE THREE SYSTEMS b The necessary expenses of a society should be provided for by the collection, from each member, annually in advance, or -when an as- sessment is paid, or both, regardless of age, of a uniform fixed amount for each $1,OOO of in- surance named in the certificate. A uniform per centum loading on an increasing net pre- mium is inequitable. c. Good Management. Assessment insurance managers were told repeatedly by competent authorities that the system could not last, that its defects were inherent, and while for a few years losses could be paid and new business obtained on the score of low cost, yet disaster would eventually ensue. How true these pre- dictions were is now a matter of history, and the list cf fail- ures is a long and gloomy one. No complete record of the associations organized on this plan has ever been kept, mainly for the reason that in the earlier years the Insurance Depart- ments did not have supervision over them. The New York Insurance Department's report prints a list of over two hundred associations which had submitted reports at one time or another between 1883 and 1899, many of which con- fine their operations to particular occupations or work in limited localities. From that report, however, it has been possible to compile the following table of failed or retired associations, most of which were active throughout the United States: OF LIFE INSURANCE. 131 xOOOOS OOOOOC iO > Csf 1O* C-O O O Ot^iO O O .iOCOO5O' i ^f ^fxOi rH CO CO i I TCO Tfl C o oi 10 l CO I>TOO r co COodoOG6oOCOOOVODOQO rt g|& '2 bflSi s " > rt o c ^* s*! rt^2 rt'^i? rt^ rt -O* N !& rt-& 6*0 3*0 p*S Oj5 U"o U*o 20 7.77 11.67 15.69 19.93 24.65 30.31 25 8.10 12.27 16.67 21.60 27.48 3495 26 8.18 12.43 16.95 22.05 28.25 36.20 27 8.27 12.59 17.24 22.55 29.10 37.51 28 8.37 12.77 17.55 23.11 30.04 38.96 29 8.47 12.97 17.91 23.74 31.08 40.54 30 8.59 13.19 18.30 24.43 32.21 42.25 31 8.71 13.43 18.74 25.21 33.46 44.10 32 8.85 13.69 19.24 26.07 34.83 46.08 33 9.00 13.99 19.79 27.02 36.32 48.21 34 9.17 14.32 20.41 28.06 37.94 50.47 35 9.35 14.69 21.09 29.22 39.70 52.86 36 9.55 15.10 21.86 30.48 41.59 55.39 37 9.78 15.57 22.71 31.87 43.63 58.02 38 10.03 16.10 23.66 33.39 45.82 60.76 39 10.31 16.68 24.70 35-04 48.15 63.56 40 10.63 17.34 25.85 36.83 50.62 66.41 41 10.99 18.07 27.11 38.76 53.22 69.28 42 11.40 18.89 28.50 40.85 55.95 72.14 43 11.86 19.80 30.02 43.08 58.77 74.99 44 12.37 20.80 31.68 45.47 61.68 77.77 45 12.96 21.92 33.48 48.00 64 63 80.49 46 13.61 22.14 35.43 50.67 67.60 83.12 47 14.34 24.49 37.53 53.47 70.58 85.63 48 15.15 25.96 39.78 56.38 73.53 87.99 49 16.04 27.58 42.19 59.37 76.43 90.17 50 17.03 29.32 44.75 62.41 79.26 92.14 51 18.12 31.20 47.45 65.48 82.01 52 19.31 33.24 50.28 68.56 84.64 53 20.61 35.43 53.23 71.61 87.14 54 22.03 37.77 56.26 74.63 89.41 55 23.58 40.26 59.36 77.58 91.50 56 25.26 42.91 57 27.07 45.69 58 29.03 48.60 59 31.14 51.61 60 33.41 54.70 61 35.82 62 63 38.39 41.08 Explanation. At age 40, what are the chances of living 20 years longer ? By looking 64 65 66 67 43.90 46.83 49.83 52.90 under the heading "Chances in 100 of dying within 20 years/' at the right of age 40, there will be found 25.85. Subtracting this from 100 leaves 74. 15 A little more than 74 chances in a hun dred 68 56.05 to live, and a trifle less than 26 chances to die, in 69 59.15 the next 20 years, and similarly with reference 70 62.40 to any other age or time. TABLE No. 19. 199 AGE. Reserve Accumulations. Actuaries 4 per cent. Face value of policy. Insurance at risk. Col. x. Col. *. Col. 3. 36 End 1st year. $114.81 $10,000 $9,885.19 37 " 2d " 233.38 10,000 9,766.62 38 " 3d " 355.90 10,000 9,644.10 39 " 4th " 482.47 10,000 9,517.53 40 " 5th " 613.38 10,000 9,386.62 41 " 6th " 748.56 10,000 9,251.44 42 " 7th " 888.43 10,000 9,111.57 43 " 8th " 1,032.89 10,000 8,967.11 44 " 9th " 1,181.60 10,000 8,818.40 45 " 10th " 1,334.12 10,000 8,665.88 46 " llth " 1,490.16 10,000 8,509.84 47 " 12th " 1,649.17 10,000 8", 350. 83 48 " 13th " 1,811.06 10,000 8,188.94 49 " 14th " 1,975.65 10,000 8,024.35 50 " 15th " 2,143.00 10,000 7,857.00 51 " 16th " 2,312.84 10,000 7,687.16 52 " 17th " 2,484.97 10,000 7,515.03 53 " 18th " 2,959.22 10,000 7,340.78 54 " 19th " 2,835.41 10,000 7,164.59 55 " 20th " 3,013.47 10,000 6,986.53 56 l< 21st " 3,193.20 10,000 6,806.80 57 " 22d " 3,374.33 10,000 6,625.67 58 " 23d " 3,556.89 10,000 6,443.11 59 " 24th " 3,740.63 10,000 6,259.37 60 " 25th " 8,925.28 10,000 6,074.72 61 " 26th " 4,110.22 10,000 5,889.78 62 " 27th " 4,295.20 10,000 5,704.80 63 " 28th " 4,479.76 10,000 5,520.24 64 " 29th ' 4,663.63 10,000 5,336.37 65 " 30th " 4,846.38 10,000 5,153.62 66 " 31st " 5,027.75 10,000 4,972.25 67 M&l4*J$y*ir 5 - ftnlt i v_v ~'\ :^S'