UC-NRLF II il II ill; 1 'II III III 11 III B 3 IID T7fi Business Insurance Instructor By FORBES LINDSAY Complete in Four Sections General Principles and Fundamental Knowledge Business Insurance for Corporations and Firms Business Insurance for Proprietorship, Farmers Individuals and Various Institutions Methods of Canvassing Business Insurance, Various Supplementary Data and Form Letters FORBES LINDSAY SALES SERVICE 317 CENTRAL AVENUE LOS ANGELES, CALIF. Copyright, 1922, by Forbes Lindsay, SECTION ONE General Principles and Fundamental Knowledge ^)2I i>^>9 Contents SECTION ONE Preliminary Survey — The supreme value of the human asset — Example of its operation as the profit factor in business — Selection of valuable lives to be covered by insurance — Illustration — Pointed ex- pression by an officer of a mercantile agency — Mis- conception as to prospects for Business Insurance^ Relation of Business Insurance to domestic insur- ance — How Business Insurance conserves and develops. What Is "Business Insurance" — A comprehen- sive definition of the term — Two broad divisions of Business Insurance and peculiarities of each — Ad- vantages of specializing in Business Insurance. Preparation for Dealing with Organizations- Qualifications necessary for working among large concerns — Knowledge that should be possessed by agent canvassing corporations — The value of mer- cantile agency reports. Fundamental Knowledge — Character of informa- tion to be gained from books on corporation finance —Good-will described— Depreciation, its nature and methods of providing for it— Uses of Endowment Insurance as a sinking fund — Bonds and Business Insurance — Capital, its nature and functions. Various Forms of Business Enterprises — Differ- ent degrees of risk assumed by persons interested in them — Proprietorship or one-man concern — Liabil- ity of the sole owner — Advantages and disadvan- tages of proprietorship — Partnership or firm, its nature and pecuHar features — Joint-stock company, its distinctive characteristics — Corporation, its char- acter — "Close corporation," the adaptabiHty of Business Insurance to fill its chief need — ConsoHda- tions and reorganizations create prospects for Busi- ness Insurance. Business Insurance as a Credit Stabilizer — Strik- ing statement of Harriman National Bank — Perti- nent statistics from "Bradstreet's Business Mortal- ity" and the magazine, "System" — Inquiry as to Business Insurance in credit forms of Federal Re- serve Banks, American Bankers' Association, and Credit Men's Association. Banking and Trade Credits — The nature of each described — Relation of Business Insurance to cred- its — Concrete example of credit fortified by Business Insurance — Illustration of Business Insurance in connection with a manufacturing concern — Retail credit and the principles governing it — Explanation of the actual effect of Business Insurance upop credit. BUSINESS INSURANCE Preliminary Survey THE typical modern business enterprise is con- ducted along conservative lines and protected agfainst the consequences of adverse contin- gencies. The haphazard practice of taking chances and trusting to luck is a thing of the past. It has been found by experience that insurance in its various forms furnishes the most effectual and economical means of safeguarding from injuri- ous effects of mishaps. So, the up-to-date concern arranges for indemnity in case of fire, embezzle- ment, accident and various other losses. Of course, the fundamental purpose of any kind of insurance is to indemnify for the loss or impair- ment of a valuable asset. Strangely enough, busi- ness concerns carried insurance to cover the less serious and more reparable classes of casualties long before they awoke to an appreciation of life insurance as a source of compensation for what is generally the greatest misfortune that may befall a firm or corporation. The human asset is by far the most valuable pos- session of a going concern. This truth may be rendered more apparent by an illustration. Suppos- ing a corporation having $250,000 of working capital to realize $50,000 clear profit in a year. The normal earning power of money is about 5 per cent, but here we have 20 per cent. The additional 15 per cent earned is clearly attributable to the ability of the men who directed the employment of the concern's working capital. The human element 10 BUSINESS INSURANCE INSTRUCTOR represents the profit factor in every business. So that, when a company puts fire insurance on its building or stock, bonds its cashier and takes other precautions, whilst neglecting to cover the lives of executives upon whom its prosperity depends, it is merely closing the windows and leaving the door wide open to serious loss. And what is true of the largest corporation applies to every business down to the village grocery. It has been said that the human asset is the most valuable possession of a business concern, but that statement needs qualification. The majority of per- sons on a company's payroll do not earn more than their salaries and could easily be replaced. Large profits are produced by the ability of a few, whose places it would be difficult to refill. These are the lives that should be covered by life insurance. The agent must ascertain by inquiry who are the extra- valuable officers or employes. It will not do to guess. Not infrequently the president is in the former class, whilst some comparatively obscure in- dividual is in the latter. For example, the head of a prominent investment house contributes little but capital to the business, whereas an employe, who has no official title, draws a large salary by reason of his experience and exceptional judgment. Again, the foreign buyer for a firm of silk importers makes more money for the business and receives more from it than either of the partners. It is only within late years that life insurance has been employed as a solution to business, or rather to commercial and financial problems, but this exten- sion of this utility has spread rapidly, so that today it is carried by a majority of the large business con- BUSINESS INSURANCE INSTRUCTOR 11 cerns. Extension of education and solicitation to the innumerable small partnerships and one-man enterprises would shortly result in doubling or trebling the annual volume of business insurance. The potentiality of life insurance as a factor in commercial stability may be inferred from a public utterance made a few years ago by an officer of one of our leading mercantile agencies. He declared that "during the past decade corporation and part- nership insurance would have saved more than one million employers from sinking back into the ranks of the employed." This is a staggering statement, but it is supported by a report of another agency to the effect that one-third of all business failures are attributable to deaths for which no provision has been made. Another large proportion of business failures is doubtless occasioned by general financial stringency finding concerns unprovided with reserve resources such as would be furnished by the loan values of life insurance policies. Life insurance is adapted to fill the greatest va- riety of business needs as experienced by corpora- tions, co-partnerships and individuals. Newly organ- ized companies are beginning to look upon it as a well nigh essential element of conservative plans, and many of the largest and most firmly established concerns carry heavy lines of it. The magnitude of the amounts involved and the publicity attached to the cases has led to undue concentration of attention in this direction and caused an impression among many salesmen that the larger concerns compose the sole prospects for Business Insurance. As a matter of fact, the need for this form of protection is great- est among the comparatively small firms and part- 12 BUSINESS INSURANCE INSTRUCTOR nerships. This is a practically unlimited and very promising field which is not worked to any appre- ciable extent. The business purposes served by life insurance are so numerous and diversified as to defy classifica- tion. They range through the greatest variety of protective functions, from the security afforded for a modest loan to the enormous group policy affect- ing thousands of employes. The examples inter- spersed throughout the following pages will illus- trate the most common applications of Business Insurance. Business Insurance, indirectly but quite effec- tually, embraces domestic insurance. The preserva- tion of the business entails the welfare of the em- ployer's home and probably of the homes of those who work for him. The familiar effects of commer- cial failure render the truth of this statement obvi- ous. Indeed, in many instances, a man's death would cause less financial loss to his family than the failure of the corporation or firm with which he is connected. Business Insurance is both a conserving and a de- veloping agency. It conserves by introducing an element of safety and reserve. It develops by afford- ing capital and credit. Business Insurance is recog- nized as an asset and reported by the mercantile agencies as such ; thus it enhances credit, creates confidence and establishes a reputation for con- servatism. Of all forms of commercial insurance, life policies alone create reserve funds. The net cost may be reduced to less than that of any other kind of insurance. The life insurance account of many a business house shows a handsome profit in dollars and cents. WHAT IS BUSINESS INSURANCE? LET us start with a working definition of the term "Business Insurance." It is any form of life insurance which is taken for financial or commercial reasons and the beneficiary of which has an insurable interest based on grounds other than dependency or kinship. Business Insurance differs from domestic or per- sonal insurance only in its purpose. The same policy forms are used in both cases, with the slight modifi- cation necessary when a corporation or firm is at once the beneficiary and the party taking out the insurance upon the life of a person in whom it has a business interest. From the viewpoint of the agent, Business Insur- ance falls into two broad divisions: 1. Policies placed with corporations and large co-partnerships, usually in considerable amounts. 2. Policies written for firms and individual business men, generally in moderate sums. We shall consider the subject under these two classifications, paying the greater degree of attention to the second because of its greater im- portance and because of the fact that a much greater number of agents are interested in it. The former class of insurance necessitates on the part of the agent a general knowledge of business practice and business law, of banking and trade credits and other matters. Corporation insurance frequently involves complicated considerations in the formulation of the proposition. Lacking the requisite training and abilitv, an agent may devote 14 BUSINESS INSURANCE INSTRUCTOR much time and energy to this branch of Business Insurance without adequate results. The second class of Business Insurance presents a much more extensive field, with greater potential yield. The richest opportunity open to the life in- surance salesman today exists in the innumerable partnerships and proprietorships which are to be found on every hand. Prospects of the best kind are available practically without limit, and their need of life insurance protection is pronounced. Mercantile agencies report that more than 90 per cent of all commercial failures are among concerns capitalized at less than $21,000. Specializing in Business Insurance has decided advantages for the agent. The proposition is less difficult to introduce than one of domestic insurance. The former is comparatively novel and the business man is naturally receptive to matters affecting the interests of his company or firm. The general run of Business Insurance policies is larger than the average of personal policies. Settlements with busi- ness concerns are usually more satisfactory than those with individuals, and business policies have the smallest ratio of lapse. If he is alive to the opportunities, the agent who places insurance for a business house can almost always make the trans- action a stepping stone to the procurement of sev- eral individual applications. Still another point, which is well worth consideration. When general business conditions are dull or depressed, the issu- ance of Business Insurance invariably rises. PREPARATION FOR DEALING WITH ORGANIZATIONS M' ANY skilled salesmen, who have been highly successful in selling domestic or personal life insurance, meet with complete failure in the field of Business Insurance. In a large majority of instances this is to be accounted for by lack of general business knowledge. A mediocre life insur- ance agent, possessing such knowledge, has a'better chance of success in this branch of our business than an expert life insurance agent who is deficient in it. This knowledge is of practical value on several accounts. Familiarity with the principles and prac- tices of business is necessary to conceive the needs for life insurance in particular cases and to deter- mine the best manner of its adaptation to those needs. The unqualified agent makes a crude pro- posal to insure the life of the president of a corpora- tion, taking it for granted that his death would entail greater loss upon the company than that of any other officer, which may not be the case. Knowing little or nothing about the character of the organization, the nature of its operations, finances, assets or liabilities, the agent has no idea of the probable consequences to it of the loss of its presi- dent. A knowledge of the conditions might reveal to one familiar with the conduct of business some more vital interest, such as the redemption of bonds or the enhancement of credit, requiring such provi- sion as Business Insurance might aid in creating. Ignorance of general business afifairs can hardly be concealed by the agent dealing with capable busi- 16 BUSINESS INSURANCE INSTRUCTOR ness men, and it must act as an obstacle to the establishment of that confidence which is essential to the success of his endeavor. This disadvantage is not great in soliciting proprietors and co-partners, the conditions of whose business are usually more simple than those of a corporation. In business promotions and reorganizations op- portunity not infrequently occurs for the agent to give valuable advice or suggestions, if he is capable of doing so. Needless to say, this greatly strength- ens his position when he advances a proposition for Business Insurance, We shall take a cursory survey of the field of in- formation with which the salesman of Business Insurance should be equipped, if he aspires to ren- dering expert service and negotiating with large cases. Later on some features of this information will be treated more extensively. It is not the inten- tion to intimate that the agent needs to be an expert in business practice and law, although conspicuous successes in writing Business Insurance have been achieved largely by reason of such qualification. And it is to be understood that comparatively little of this knowledge is required in handling proprietor- ship and small partnership cases. I know of no single volume from which the infor- mation in question can be more readily derived than Gerstenberg's "Principles of Business" (Prentice- Hall, 70 Fifth Avenue, New York). The same con- cern publishes other books which will be valuable to the man specializing in substantial cases of Business Insurance. There are a number of different forms of business enterprises, varying in organization, liabilities, func- BUSINESS INSURANCE INSTRUCTOR 17 tions and other features. The agent should be ac- quainted with the contrasting characteristics of corporations, "close corporations," co-partnerships, limited liability concerns, joint-stock companies and proprietorships. He should be posted on the laws governing their organization, dissolution and opera- tion, especially with regard to the direct bearing of those laws on Business Insurance; also the laws relating to income and inheritance taxes. In work- ing Business Insurance the agent will often be asked for information which he will be able to furnish only if he possesses the knowledge in question. It goes without saying that his knowledge must be thor- ough and reliable, but it need not be exhaustive. What is meant is that, as far as these various mat- ters connect with his business, the agent should be an authority, but it is not advisable for him to study them beyond the point of this relevance. Framing a proposition of Business Insurance sometimes involves calculation of a concern's liabil- ities and assets, which calls for a knowledge of the methods of appraising these, of providing for de- preciation, of the nature of different kinds of bonds and stocks, etc. It is highly important to understand the nature of credits and the bases on which the bank and the supply house extend them, as well as the recognized commercial methods of borrowing money. In this connection some knowledge of collateral security and negotiable instruments is valuable. Ability to read a mercantile agency report intelli- gently is a requisite. Such data should be used fre- quently. In a great majority of instances these reports will afford clues to business other than that 18 BUSINESS INSURANCE INSTRUCTOR immediately in prospect. Quite frequently they point to excellent cases for individual insurance. They are the readiest, and often the only, sources from which to obtain the information necessary to the formulation of an appropriate proposal of Busi- ness Insurance. They have the additional advantage of enabling the agent to display the intimate knowl- edge of the concern's affairs which is almost sure to secure a hearing for him. Elsewhere a specimen mercantile report is given, with comments. FUNDAMENTAL KNOWLEDGE IT IS recommended that the agent who purposes writing Business Insurance for corporations and large firms should read one of the several books on Corporation Finance. These contain typical illustrations of articles of co-partnership, certificates of incorporation, promotion prospectuses, plans of consolidation, voting trust agreements, readjust- ments of capital account, financial statements, bond issues, mortgages, and other matters from which he cannot fail to gain numerous suggestions for the application of Business Insurance. If this is not done as a general preparation, recourse should be had to such a volume for preliminary information in particular cases. For example, the agent hears of a merger and forms the idea of making it the basis for a proposal of Business Insurance. He will do well to read the descriptions of one or two consolida- tions, as given in a work of Corporation Finance, and then seek to learn the details of the case in view. In the same way he may qualify himself to make an intelligent proposition for Business Insurance in connection with a bond issue, a mortgage, or other transaction of a corporation involving increased liabilities. In many instances such knowledge is necessary in order to formulate a logical argument in support of the proposition. The agent who is completely igno- rant of the subject in question is bound to ruin the chances of success. A case in point was recently recounted to the writer by a member of a firm who had been approached by an agent with a proposition 20 BUSINESS INSURANCE INSTRUCTOR for Business Insurance, on the strength of the con- cern having taken in a special partner. There was ground for insurance and it was written, but not by the agent in question. In the first and only inter- view he displayed a complete misunderstanding of the situation. He did not know the status of a spe- cial partner, nor the nature of his connection, and made a proposition which proved that he was igno- rant of the real hazard in the case. The Agent who aspires to writing Business Insur- ance in large amounts must make a specialty of it. He cannot hope for success unless he is willing to take the trouble to qualify for it. Cases of Business Insurance which are written on the presentation of simple and obvious reasons are usually small cases. The large cases almost always involve more than superficial knowledge of business affairs on the part of the agent. Possession of such knowledge often enables him to find, below the sur- face, conditions upon which to base a proposition that would not otherwise occur to him. The pres- entation of Business Insurance in a new aspect excites interest and secures applications where com- monplace proposals have completely failed. We will continue with consideration of matters which should be within the knowledge of an agent aspiring to write Business Insurance in connection with large concerns. Good-will is the patronage enjoyed by a business. It is derived from many different sources. Good-will is rarely a definitely calculable asset. It is some- times inserted in books of account at a specific valu- ation. Upon a business changing hands, good-wiU BUSINESS INSURANCE INSTRUCTOR 21 may be paid for at a high figure, especially when its stability is apparent and the cost of its creation can be shown to have been heavy. When a partner re- tires from a firm, it frequently pays for his good- will ; that is to s.ay, his connection. It may be that a large proportion of a concern's business is due to the reputation or influence of an individual. In the event of his death or disassocia- tion this business, or a considerable portion of it, would be lost. Life insurance will indemnify for such a condition. An endowment policy should be taken to provide for the latter contingency. Depreciation consists of decrease in value of fixed assets. It may be occasioned by wear and tear, shrinkage, expiration of franchises and other causes. The depreciation factor enters into the calculations of all forms of business, but varies greatly. In a law firm, for instance, it would be limited to the wear and tear of the office furniture. In an indus- trial corporation it would extend to buildings, ma- chinery and other equipment. Depreciation may be estimated and written off at a fixed rate annually against profits or dividends. Or, it may be provided for by the establishment of a reserve account or sinking fund. This would bear interest and would be debited with expenditures for replacements and maintenance. The estimates of depreciation in most large busi- nesses are necessarily more or less arbitrary. But in some cases an approximation to precise calcula- tion is possible. For example, auto-delivery trucks of a standard type are estimated as depreciating 10 per cent a year. That is to say, the life of this asset is calculated at 10 years. A ten-year endowment 22 BUSINESS INSURANCE INSTRUCTOR policy would make exact provision for the replace- ment of such equipment. The average sinking fund is 5 per cent yearly. The principal sum contemplated is, therefore, real- ized in 20 years, or such reduction of that period as may be effected by interest accumulation. A twenty-year endowment policy, at an average age, will require a premium payment of less than 5 per cent and the accrued dividends will operate as an offset to the interest on the sinking fund. Of course, the method of providing for depreciation by life insurance has the great advantage that the death of the insured may put the concern in possession of the principal sum at an earlier time and smaller outlay than by the method of creating a reserve account. Moreover, the insurance may cover a valuable life and so effect two important purposes. A proposi- tion, on these lines will often make a strong appeal to a corporation. And it must be borne in mind that every industrial concern requires to maintain a sub- stantial sinking: fund. SINKING FUND FOR REDEMPTION OF BONDS A COMMON method of providing working cap- ital for a new business or for the extension of a going concern is by the issue and sale of bonds. The redemption of these is usually provided for by the creating of a sinking, reserve or redemp- tion fund. This consists of money deposited in bank or conservatively invested in such periodical sums as will amount to sufficient, together with interest, or other securities, to discharge the obligation at maturity. Bonds are issued for varying periods and some- times as a serial; that is to say, an issue certain proportions of which mature in periods of varying lengths. In any case, endowment insurance fur- nishes a substitute for the ordinary sinking fund which will prove attractive to most corporations, if properly presented. It has the advantages which were noted in connection with a similar recourse for anticipating depreciation. There is the additional consideration in the case of insurance taken to pro- vide for the redemption of bonds that, if the policies are specifically taken and held in trust for that pur- pose, they contribute an element of strength to the bonds which is calculated to facilitate the sale of them. Capital, in a commercial sense, means all the prop- erty owned — not borrowed — and used in business. The term "invested capital" more exactly expresses this idea, whilst "working capital" implies the net amount of liquid funds available for the immediate 24 BUSINESS INSURANCE INSTRUCTOR operating expenses of a business. Working capital to tide over three or four months is usually consid- ered sufficient for industrial concerns, but the need may be considerably increased by extraordinary cir- cumstances. During a period of expansion a com- pany will require a substantial increase of ready money or bank credit, because the cost of increased output will keep ahead of increases of ready cash for some time. The manufacture of seasonal prod- ucts demands a supply of working capital much greater at one period of the year than at another. Contract work extending over a long period, with payment deferred until completion, would involve the use of an exceptional amount of working capital. A business with little or no reserve funds is in a more or less precarious situation in times and under conditions which strain its resource of working cap- ital. The death of an important person in its organ- ization at such a juncture might entail the worst effects, unless provision for indemnity had been made through the medium of Business Insurance. VARIOUS FORMS OF BUSINESS ENTERPRISES THE form of the organization determines, among other things, the degree of risk assumed by the persons interested in it. Of course, this has a direct bearing on Business Insurance as indicating specific need for protection. A member of a part- nership, for example, may lose all the money he has invested in it, and everything he possesses besides, unless it be a limited liability concern. As a stock- holder in a corporation, on the other hand, his liabil- ity to loss will be restricted to the amount of his investment, except in the case of a banking business. (The laws of some states, notably California, extend the liability of stockholders in corporations.) The most common forms of business enterprise are sole proprietorships, partnerships, and corpora- tions. Each of these has some variations which afifect, more or less, the liabilities involved. For instance, the joint-stock company is a partnership with transferable shares. The limited partnership is one in which some of the members have a limited liability. The so-called "close corporation" is one the stock of which is held in few hands. Sometimes it is a proprietorship or partnership in corporate form. The Proprietorship is a business owned by one person, w^ho is generally the sole manager. He may be operating on borrowed capital. Needless to say, under such circumstances, insurance should be car- ried for the protection of the backer, primarily, but 26 BUSINESS INSURANCE INSTRUCTOR also in order to conserve the business for the own- er's heirs. The one-man business is the most numerous form and includes many concerns in which large capital is employed. The great majority of proprietors be- come first-class prospects for Business Insurance when its potential services are explained to them. The liability of the sole owner is absolutely un- limited. His private property may be attached by his creditors and, under certain conditions, which the agent should ascertain by reference to the Bank- ruptcy Law and court decisions, he may be com- pelled to realize the cash value of his personal life insurance for the payment of debts. The disadvantage involved in the combination of business and private liability is offset by the conse- quent combination of business and private credit. The individual proprietor can borrow more exten- sively and consequently operate more extensively than he could if his liability were limited. This credit may be considerably enhanced by safeguard- ing with Business Insurance against the conse- quences of death or permanent disability, which would be especially disastrous to an enterprise under one-man management. The Partnership is similar in nature to the Pro- prietorship, being a combination of two or more owners. In law, the members of a firm are regarded as one person, so far as their acts are concerned. For example, all are liable to the fullest extent for a debt contracted by one, within one scope of the busi- ness. Death, insanity, bankruptcy, or the with- drawal of a member automatically dissolves the partnership. Firms are usually perpetuated by a BUSINESS INSURANCE INSTRUCTOR 27 new organization immediately following such an occurrence. Business Insurance is the most certain and effective agency for assuring the continuance of a business under the conditions in question, just as it is the surest means of securing survival of a pro- prietorship after the owner's death. The unlimited liability of partners has a favorable effect on their credit, but this is more than offset by the danger of sudden dissolution and by the unre- stricted power of one member to commit his asso- ciates, even without their knowledge. Insurance will generally act as a counterbalance of these dis- advantages and enhance the bank and trade credit of a firm. The Joint-Stock Company entails upon its mem- bers the same liabilities as those attaching to gen- eral partnerships, but it has advantages which the latter lack. The shares of the joint-stock concern may be transferred without affecting the perma- nency of the organization, so that it may continue indefinitely, like the corporation. The control of the company is vested in a board of directors, and indi- vidual members have not the power to commit the concern. This form of organization partakes of the characteristics of both a co-partnership and a cor- poration. The consideration of Business Insurance for a joint-stock company will be influenced in more than one respect by its dual character. The Corporation is an organization doing business under a charter granted by the government. Its ownership is represented by transferable shares and its management is under the control of a board of directors. Heavily capitalized and extensively operating en- 28 BUSINESS INSURANCE INSTRUCTOR terprises are usually conducted under the corporate form. Great monetary interests are involved and exceptionally valuable men are employed in posi- tions of responsibility. Hence large policies of Busi- ness Insurance are generally issued for the benefit of corporations. Nevertheless, their need of insur- ance protection is relatively less than that of a part- nership or of a one-man business. The Close Corporation is peculiar only in the fact that its stock is held in a few hands. There are usually substantial reasons for this condition. Busi- ness Insurance is especially serviceable to a close corporation as a means of perpetuating the restricted control. Reinforced by a subsidiary agreement, it will provide funds for enabling the survivors to absorb the stock holding of a deceased associate and so prevent its passing to alien and. perhaps, objectionable hands. It may be said in passing that the agent should be able to draw up, in unquestionable form, the subsid- iary agreements which are frequently necessary to insure the full effectiveness of Business Insurance. It is strongly inadvisable to have the legal adviser of the corporation or firm brought into the transac- tion. He is likely to create all manner of compli- cations. To forestall any questions on the part of the prospect as to the soundness of the agreement, and invariably when the least doubt exists in his own mind, the agent had better have the document drawn or approved by a lawyer of repute. Consolidations and Reorganizations frequently present logical occasions for Business Insurance proposals. An amalgamation or a merger of two or more business enterprises almost invariably involves BUSINESS INSURANCE INSTRUCTOR 29 deferred liabilities, for the discharge of which pro- vision may be made through Business Insurance. Reorganization usually entails change of manage- ment and increased responsibilities. Frequently it is accompanied by enlarged capital with correspond- ingly increased liability. A common feature of the transaction is extension of operation, which neces- sarily creates new hazards. In case of consolidation or reorganization it is probable that the reconstructed enterprise will have a new head and perhaps other new officers whose lives the concern may be disposed to cover with Business Insurance. The Bankruptcy Law should be studied in so far as it may affect a canvass of Business Insurance. In particular, ascertain the precise status of business and domestic insurance carried by insolvent debtors. BUSINESS INSURANCE AS A CREDIT STABILIZER CREDIT is the most vital element in business affairs. It permeates the commercial struc- ture and, in one way or another, affects every transaction. In a circular issued by the Harriman National Bank of New York, the following statement occurs : "An important feature of business life insurance is the additional credit responsibility which it con- fers ; it is also an asset of growing value from year to year; and all in all- this type of insurance is so reasonable and so obviously advantageous that it might readily be made a requirement of all commer- cial borrowers." Credit is based on the intention and ability of the debtor to discharge his obligations. How precar- ious is this security, in the absence of the additional safeguard of life insurance, may be inferred from the "Bradstreet's Business Morality" reports for the United States and Canada, which indicate average failure of 1 per'cent annually during the past thirty- eight years. In this connection the term "failure" is applied only to cases involving monetary loss to creditors or individuals, firms or corporations, and does not include reorganizations or clean liquida- tions. Recently the magazine "System" made a careful investigation of the business experience of a typical city, covering the thirty-year period ending with 1917. Some features of the results obtained are quoted : BUSINESS INSURANCE INSTRUCTOR 31 Six of every ten concerns that start in business are sure to expire by reason of some weakness within thirty years. Most of the failures occur in less than eight years. Out of a group of 61 concerns in busi- ness at the beginning of the period, only seven were still in existence. Nearly half of that number failed in the first five years, and one-third in the next sim- ilar period. Out of a total of 4,369 business concerns investigated, 57 per cent failed before the expiration of the thirty-year period. The chief cause of failure was shortage of capital; that is to say, insufficient credit. The late president of the Bradstreet Mercantile Agency declared: "It is practically beyond ques- tion that partnership and corporation insurance strengthens the credit of concerns adopting it. The increased confidence which it establishes is recog- nized in the mercantile community and thus re- flected through our reports." Concrete evidence of the value which is placed on life insurance as a stabilizer of business is found in the credit forms of the U. S. Federal Reserve Banks, the American Bankers' Association, and the Credit Men's Association, each of which embraces inquiries relating to the personal insurance carried by private individuals and the Business Insurance of firms and corporations applying for loans or credit. Add to the foregoing the fact that upwards of one billion of dollars of Business Insurance has been written in the United States during the past few years. By far the greater part of this vast sum was placed with large firms and corporations. Since 1916 a considerable proportion of these issues have been taken by wealthy persons in anticipation of the post- 32 BUSINESS INSURANCE INSTRUCTOR mortem demands of the Federal Estate and States Inheritance taxes. Comparatively little of the Busi- ness Insurance written in great volume yearly is carried by the small concerns, whose need for it is greatest and whose numbers are much in excess of the other classes. This fact indicates an almost lim- itless field of favorable opportunity for the life in- surance agent. BANK AND TRADE CREDITS FOR our purposes, this factor may be considered under two heads — bank credit and trade credit — which differs somewhat from the classifica- tion of the text-books. The former represents the borrowing capacity of a concern which is generally exercised through the medium of a commercial bank, (Another form of financial credit is that which en- ables a corporation to sell its stock or float a bond issue.) Trade credit represents the capacity of a concern to obtain raw material, goods or service upon the tacit or stipulated undertaking to make payment in the future. The stability of a concern's credit is vital to its prosperity. The enhancement of its credit is often of the greatest material consequence. Business Insurance is an effective factor in maintaining or producing these conditions. A few illustrations will make this clear. A is a man of proven integrity and ability, con- ducting a jewelry business. At times he procures small unsecured loans from his bank on short term notes of hand. Several supply houses furnish him with goods on ninety-day settlements. A owns practically nothing but the good-will of his business and the lease of the premises on which it is conducted. His bank and trade credits are based mainly upon his personal character and busi- ness ability. They involve little risk so long as he is able to run his store, but will be followed by almost certain loss in the event of his premature death. 34 BUSINESS INSURANCE INSTRUCTOR Today the business is perfectly solvent, gauged by the book accounts. Tomorrow the proprietor is killed in an automobile accident. Instantly the busi- ness becomes insolvent. The intrinsic value of the stock is the same as yesterday. The bills receivable are as good as ever and the bills payable are no greater than before. But the chief factor in the enterprise — the personality of the proprietor — has been eliminated. The assets, at a forced sale, may realize no more than 30 cents on the dollar of their book value. A commensurate amount of insurance on the life of A, payable to the business, would have enabled it to discharge immediate liabilities and continue until a purchaser might be found or liquidation effected under favorable conditions. Since A's family would be the recipients of any profit balance realized from the disposal of the store, Business Insurance in his case would distinctly embrace domestic insurance. In presenting these considerations to a prospect, the agent should not fail to draw attention to the abstract values in the case. A man of probity will count it worth much to have his reputation for busi- ness foresight and the payment of his debts survive beyond his death. He may have a son whose busi- ness fortunes will be seriously affected, one way or the other, by the manner in which the father's affairs are wound up. B is a manufacturing concern, of which two men are the mainstays — C, by reason of his technical knowledge and executive ability, and D by reason of his weight as an endorser of the company's paper. The company has an extensive line of credit with its bank, to secure which it deposits collateral secur- BUSINESS INSURANCE INSTRUCTOR 35 ity. The product is a seasonal one, and at certain periods of the year the concern employs its bank credit to the limit and, at the same time, goes into debt heavily for raw material. Measured by its business, the credits extended to the company are conservative. If the continuance of existing conditions could be guaranteed, the credit transactions would entail no hazard whatever. However, a large proportion of the security behind the bank and trade credits consists of the peculiarly valuable services of C and D, Suppose that C or D, or both, should die when its marketing season was several months away, it can easily be imagined that the company might expe- rience embarrassment in several forms. Business Insurance would counteract the possibility of such adverse developments or, at least, minimize their consequences. RETAIL CREDITS THE chief sources from which the retail mer- chant secures credit are the wholesale house and the bank. The credit he enjoys is based on his integrity, his ability, his character, his finan- cial standing and his general assets. If his record and reputation in these respects are good, the extender of credit is inspired with confidence in the merchant's promises — and confidence is the main- spring of credit. The banker in considering a loan, or the credit man, in considering a supply of goods, if he be pru- dent and experienced, weighs these factors, not only in their present conditions, but also in their possible future development. The course of his deliberations will extend beyond the immediate circumstances of the case and carry his mind forward to a contempla- tion of the contingency of death. At this point a factor enters into the credit calculations which may not be susceptible of measurement by the personal qualities of the merchant or the current status of his business. The plans and intentions of the most honest man for the discharge of his obligations may be completely nullified by the sudden intervention of the grim reaper. The business which is quite solvent and prosperous may be rendered unstable by the removal of its head, with the consequent loss of valuable services and the impairment of confidence. This is the usual sequel to the death of a partner or sole proprietor. This consideration is justification for the demand on the part of the bank or wholesale house for a BUSINESS INSURANCE INSTRUCTOR 2,7 margin of safety in excess of the merchant's imme- diate resources. It is not sufficient that they can and will meet his liabilities, if all goes well. He should be required to safeguard his creditor against the results of adverse contingencies. The principle involved in this statement is universally recognized in so far as it entails protection against loss by fire. No retail merchant would expect to get credit unless he carried fire insurance. And the average chance of death is about ten times that of fire. How is this provision to be efifected? Surely not by keeping a surplus balance in the bank. The man who could afford to do that would not need credit. Not less impracticable would be the maintenance of reserve security in the form of property. Most merchants need to employ in their business all the capital they can command. The only economically feasible way of creating a safety fund for the pur- pose of counteracting unfavorable developments growing out of the death of the debtor is through the medium of life insurance. Business Insurance is more necessary to the small firm than to the larger one or the corporation. Many concerns are running on the narrowest margin of capital. Any shrinkage of this generally entails em- barrassment, if not disaster. The records of com- mercial agencies show that nearly 30 per cent of failures among firms are solely attributable to deaths for which no provision had been made. The credit of the small firm is often precarious and generally restricted ; its capacity for expansion is limited; its future prosperity frequently depends upon a continuance of uniformly favorable circum- 38 BUSINESS INSURANCE INSTRUCTOR stances. All these conditions may be mitigated or eradicated by Business Insurance. It should be clearly understood that Business Insurance does not create credit; that is based on assets, established business, personal qualities and other considerations. Business Insurance enhances credit; it protects and stabilizes credit. Many agents fail to realize this distinction. Prospects are frequently assured that the mere fact of taking out a policy of life insurance will result in the granting of credit. When a concern has no credit basis, Busi- ness Insurance will rarely improve the situation. But, where ordinary credit is enjoyed. Business Insurance will often secure an extension of it. In some cases, where there are no material assets and the only security consists of personal qualities, Busi- ness Insurance supplies the lacking factor of safety by providing for the contingency of death or perma- nent total disability. BUSINESS INSURANCE INSTRUCTOR 39 SECTION ONE Test Questions 1. A is a corporation employing $300,000 of in- vested capital, owning- a large manufacturing plant and a valuable patent. The annual net earnings of the company are upwards of $60,000. What is its principal asset? 2. Name some of the institutions that recognize Business Insurance as an asset by making in- quiry regarding it in their application for loan blanks. 3. Define Business Insurance. 4. From the agent's point of view, Business Insur- ance falls into two broad divisions. What are they? 5. Which is the larger of the two fields for writing Business Insurance? 6. State some of the advantages for the agent in specializing in Business Insurance. 7. Name the most common forms of business enterprise. 8. There is one especial need of close corporations that is perfectly filled by Business Insurance. What is it? 9. Every concern owning a plant or other material equipment has a deferred liability to provide for. What is it, and how can it best be pro- vided for? 10. Does Business Insurance create credit? 40 BUSINESS INSURANCE INSTRUCTOR SECTION ONE Answers to Test Questions 1. The intelligence, experience and ability that produced 20 per cent profit on invested capital represent by far the most valuable asset of the corporation. The loss of this asset would be much more disastrous than the destruction of the plant. 2. Federal Reserve Banks, American Bankers' As- sociation, the mercantile agencies, National Credit Men's Association and banks in general. 3. Business Insurance is any form of life insurance which is carried for financial or commercial purposes and the beneficiary of which has an insurable interest based on grounds other than dependency or kinship. 4. (1) Policies placed with corporations and large co-partnerships, usually in considerable amounts. (2) Policies written for firms, sole proprietorships and individuals, usually in com- paratively small amounts. 5. Mercantile agencies report that 90 per cent of all commercial failures are among concerns cap- italized at less than $21,000. There are scores of such concerns to every one of the larger class and their need of Business Insurance protection is greater. 6. As a rule, interest is more readily excited in Business Insurance than in personal insurance because a man is always receptive to ideas con- BUSINESS INSURANCE INSTRUCTOR 41 cerning his business, and also because the for- mer is comparatively novel. The average of Business Insurance policies is larger than those of personal insurance. Settlements with busi- ness concerns are usually more satisfactory than those with individuals, and Business In- surance policies have the smallest ratio of lapse. When general business conditions are depressed the issuance of Business Insurance invariably increases. The Business Insurance canvass almost always discloses prospects for individual insurance. 7. Corporations, close corporations, co-partner- ships, and proprietorships. 8. The perpetuation of the limited control which is characteristic of close corporations and which they are always desirous of maintaining. 9. The depreciation of plant and equipment is best provided for by the maintenance of a sinking fund. An endowment policy fully serves the purpose, whilst affording protection against loss by death. 10. It does not, but it enhances and stabilizes credit. A concern lacking the recognized basis of credit cannot supply the deficiency by taking Business Insurance, but one enjoying ordinary commercial credit may increase it by carrying Business Insurance. SECTION TWO Business Insurance for Corporations and Firms Contents SECTION TWO Business Insurance for Corporations — Primarily a plan for the solution of a financial problem — General principles — Opportunities for writing Business In- surance in the less obvious situations — Examples in point — Various secondary purposes of Business In- surance — Creation of a sinking fund, provision for pensioning an officer or employe, enhancement of credit, etc. — Illustrations of unusual applications of Business Insurance. Business Insurance for "Close Corporations" — Example illustrating chief need of close corpora- tions for Business Insurance. Business Insurance for Co-partnerships — The field of numerous small concerns among which the need of Business Insurance is greatest — Proposition usually a simple one such as an agent may handle without special qualification — Why firms fail — Con- trasting effects of carrying and lacking Business Insurance — The influence of Business Insurance on bank and trade credit — Bankers and credit men as sources of prospects — Cash values should be treated as a business asset — Financial responsibility of one man often chief basis of a concern's credit — Typical example of business failure which might have been saved by Business Insurance — Illustration of con- trary results due to carrying Business Insurance — How the agent may increase his production mate- rially. BUSINESS INSURANCE FOR CORPORATIONS UNDER this head may be considered Business Insurance for large firms. For the most part the needs are the same and similar proposi- tions are applicable. The chief differences are those of organization and the peculiar liabilities of corpo- rations, such as bond and stock issues. In soliciting this class of cases the agent will have greater need for knowledge of business than for knowledge of insurance. Consideration of large cases should be governed by the principle that the proposition is primarily a plan for the solution of a financial problem, employing life insurance as the medium for its execution. Experts in this branch of our business owe much of their success to the main- tenance of this view of the matter. In regarding a case, their thought is to fill some specific need, to solve some difficulty. Life insurance is the means to the end in question. The inept agent reverses the mental arrangement. With him the uppermost thought is to sell life insurance. The financial prob- lem furnishes the argument. The difference in these attitudes, apparently slight, is in reality great. The psychological effect of the former method on both salesman and prospect is highly conducive to suc- cess. The interests of the latter are brought into the limelight at the outset. Service is held in the forefront and life insurance in the background. An adept will often make considerable advance in his canvass before life insurance is mentioned. 48 BUSINESS INSURANCE INSTRUCTOR General Principles The primary purpose of any kind of insurance is to provide indemnity for the loss of a valuable asset. This affords the justification and creates the insur- able interest in the case of a corporation carrying life insurance upon any man whose life and activity comprise a substantial factor in the prosperity of the concern. The scope of this principle is not always recognized. Agents commonly make the mistake of regarding it as restricted in its application to offi- cers and employes. Experts in this branch of under- writing take a broader view, with the result of secur- ing business in cases that are less obvious than ordi- narily. For example, an exceptionally able director of five corporations, but not an officer in either, was insured for a large sum in favor of each. A whole- sale drug company carries $50,000 on the life of a manufacturing chemist who is not directly con- nected with the house, but it handles his line of preparations extensively. A mechanical engineer is insured under a large policy by a company which engages his services only in a consultative capacity. He is, however, thoroughly acquainted with the company's operations and their relations to different markets. The discontinuance of his services as an adviser would be a serious handicap to the corpora- tion. A novelty house maintains a $15,000 poHcy on the life of an inventor who is not in its employ but whose ideas it frequently exploits. In each of these cases, as in almost all of a similar character, the insurance was placed as the result of a suggestion by an agent, and probably would not have been thought of by the beneficiary concern. Sometimes the connection is more remote and of BUSINESS INSURANCE INSTRUCTOR 49 a temporary character. Thus heavy insurance was carried for three years on an engineer who designed and supervised an irrigation project by the company that financed the enterprise. The publishers of the late Commodore Peary placed a policy on his life before his last expedition to the North Pole. A moving picture corporation placed a large policy on a foreigner who came to America for the purpose of assisting in a million-dollar production. The life of an American engineer who constructed a railroad in China was covered with a $100,000 policy by the syndicate that financed the enterprise. The insur- able interest in each of these cases was unquestion- able, as well as the prudence of providing for indem- nity for the loss which would have ensued in the event of the death of the insured. The secondary purposes of Business Insurance are several. The principal of these is the creation of a sinking fund, with the object of discharging some deferred liability, such as the redemption of bonds, the renovation of buildings or the replace- ment of equipment. In this connection, too, breadth of vision may disclose unusual opportunities for the application of the principle. For instance, the object of the sinking fund may be to provide for the liabil- ity incident to the retirement of a member of a firm. In such a case, the other members would carry endowment insurance on his life with the intent of absorbing his interest at a certain time. A sec- ondary purpose which will frequently make an ap- peal to a corporation prospect is the provision of a fund to pension a valued officer or employe in the event of superannuation or permanent disability. An endowment policy, with the permanent total dis- 50 BUSINESS INSURANCE INSTRUCTOR ability feature, will effect both objects, whilst filling the primary purpose of indemnifying the company in case of prior death. Still another of these secondary functions is the enhancement of credit. As often as not the creditor originates the idea when life insurance is employed for this purpose. A bank sometimes consents to extend a line of credit on condition of the borrowing concern protecting it with Business Insurance. The same precaution is occasionally taken by a supply house in the case of a customer concern, the busi- ness of which might be severely shaken by the death of one or another of its officers or members. Cases of this kind can generally be most favorably orig- inated by first approaching the bank or wholesalse house. An agent who enjoys the confidence of men responsible for the granting of loans or credits will find it profitable to explain the advantages of this form of protection and ask for the names of specific prospects. When the agent is canvassing a prospect at the suggestion of the banker or credit man it will be possible to make an impressive point by saying something of the following sort : "Suppose you call up Mr. So-and-so and ask him whether your taking Business Insurance would not affect your credit favorably. If he answers in the negative, I will withdraw my proposition." The two chief purposes for which corporations and large firms carry Business Insurance are: 1. To provide indemnity for the loss entailed by death, and 2. To create a sinking fund. The former is necessarily a feature of the arrangement under all conditions. The secondary purposes vary widely in character BUSINESS INSURANCE INSTRUCTOR 51 and in importance. They are rarely of sufficient weight to furnish the main motive for taking Busi- ness Insurance, but they are often the most efifective factors in creating interest in the subject at the out- set; this because they commonly involve novel as- pects of the matter. So an expert salesman some- times uses a secondary purpose of Business Insur- ance as an entering wedge, and after the ground has been paved for a serious negotiation presents his formal proposition, with the death indemnity or sinking fund as the chief consideration and the sec- ondary benefits in their appropriate places. Illustrative Examples It is of the utmost importance that you should understand the principles underlying Business In- surance. Such an understanding will guide you to the various purposes to which it may be applied. We shall, therefore, before proceeding, give you a few more illustrations of unusual situations in which this form of protection effectually fills business needs. It should be understood that such situations are of common occurrence, but generally overlooked by salesmen. If some of the statements should be virtual repetitions of what has already been said, justification may be found in the extreme desirabil- ity of impressing salesmen with the ideas involved. Frequently the stock in a corporation or shares in a co-partnership are largely held by one man, the balance being in the hands of several younger asso- ciates. It will be greatly to the advantage of the latter to make provision for securing control, in the event of the former's death, by carrying Business Insurance on his life. He may be willing to pay a 52 BUSINESS INSURANCE INSTRUCTOR share of the cost, realizing that the protection must tend to conserve his interests in the company or firm. In the case of manufacturing or similar busi- ness, well established and operating on a fixed pol- icy and under tried methods, the heirs of a deceased stockholder or partner are apt to leave his interests intact. In comparatively new businesses, and espe- cially in the case of a financial concern where the deceased has been its mainstay, his heirs are more likely to lack confidence in the ability of the surviv- ing officers and to withdraw money or sell stock, either action probably working for the disadvantage of minority stockholders or junior partners. Such a situation as described above is comparatively com- mon and should be sought for by salesmen. A modification of this situation is the case of the senior member of a firm contemplating retirement at a certain time. Not long since, $350,000 fifteen- year endowment was placed on a prominent whole- sale merchant of Chicago to cover the project in question. Of this sum, $250,000 was designed to enable the other partners to absorb the greater pro- portion of his interest in the business, and $100,000 was taken by him personally to augment his income after retirement. Some years ago a certain manufacturing concern installed a new type of machine at heavy cost. An agent who heard of the circumstance saw in it op- portunity for placing Business Insurance. He ascer- tained that the life of the machine in question is about ten years and that in addition to the replace- ment requirement the company would need exten- sive renovation of its buildings at about the same time. In response to his suggestion the concern BUSINESS INSURANCE INSTRUCTOR 53 took $400,000 of ten-year endowment with a view to creating a sinking fund for the purpose of meeting the prospective expense mentioned, the insurance being placed on four valuable lives. Sometimes the stockholders of a corporation — particularly if it be newly organized — insist on the precaution of Business Insurance, even though the attitude of the officers toward it may be lukewarm. Salesmen planning or negotiating a case of corpora- tion insurance may find it effective to canvass heavy holders of stock. But this must be done tactfully and care taken not to hurt the sensibilities of impor- tant officers. The sale of bond issues is likely to be expedited by Business Insurance, and financial houses under- writing such issues will generally support the prop- osition. Insurance in such cases takes the form of provision for indemnity in the event of the prema- ture death of some man or men essential to the suc- cess of the enterprise, or of endowment for the spe- cific purpose of meeting the bond obligation at maturity. Perhaps both objects are covered by the same transaction. These are but a few of the many comparatively unusual situations in which Business Insurance serves important needs. They are cited with the purpose of giving the agent suggestions and induc- ing him to use his intelligence in the search for conditions among business concerns which will af- ford logical grounds for a proposition of Business Insurance. BUSINESS INSURANCE FOR CLOSE CORPORATIONS CLOSE corporations, that is, those of which the stock is retained in a few hands, are much like co-partnerships in character, and their insur- ance needs are similar. It should be noted, however, that close corporations are frequently induced to take Business Insurance for the express purpose of absorbing- the holding of a deceased stockholder and preventing its falling into undesirable hands. For example, three men own, in equal proportions, 97 per cent of the stock in a prosperous company (the law requires at least five stockholder incorporators) and each takes an active part in the management. Upon the death of one of their number it would be unsatisfactory to the survivors to have his widow drawing a large share of the profits and perhaps having a potent voice in the management without rendering service. Complete alienation of the stock by sale might create an even less desirable situation. To avoid such developments, each of the heavy stockholders gives to the corporation an option on his holding, to be efifective at his death, and Business Insurance is carried on the three lives to facilitate the purchase. It is worth while to absorb this idea, for many close corporations which have never considered the possible consequences of alienation of stock will be induced to take out Business Insurance upon a pres- entation of the matter in this light. It will some- times be found that preventive measures have been BUSINESS INSURANCE INSTRUCTOR 55 taken to the extent of securing the options of pur- chase, but that no provision has been made for assuring the presence of the necessary funds to com- plete the transaction at the critical time when the concern's bank credit is apt to be curtailed. BUSINESS INSURANCE FOR CO-PARTNERSHIPS CASES which come within the category of Part- nership and Proprietorship Business Insurance are usually of a simple character, demanding for their successful conduct little more than the qualities and knowledge required for success in writing domestic insurance. In short, any agent may enter this promising field with assured prospect of adequate return for his labor. Every community contains a number of business enterprises ranging from the corner grocery or drug store to the machine shop or jobbing house. Such establishments are to be found even in rural centers. A concern of this sort rarely possesses any assets beyond its equipment and stock in trade, nor any funds but what are fully engaged in its operations. It is a fair weather craft, almost certain to be wrecked by the first storm that befalls. Its credit is restricted and its prosperity depends upon a con- tinuance of favorable conditions. The death of a partner or other adverse contingency would, in all probability, entail forced liquidation. The average business of the kind is virtually a gamble, with the chances heavily against it. Whilst the necessity of Business Insurance is gen- erally greater among partnerships than among cor- porations, its scope is less extensive in the affairs of the former. The purposes of Partnership Insurance are ordinarily limited to providing indemnity for the loss entailed by death, to the enhancement of credit and to the creation of a sinking fund to meet depre- BUSINESS INSURANCE INSTRUCTOR 57 ciation of plant and equipment or to facilitate exten- sion of operation. Firms frequently fail or retire from business on the death of one of the members. (Of course, a firm is technically and automatically dissolved by the death of a member, but reorganization is a mere formality.) The chief causes of discontinuance are the superior ability or financial worth of the de- ceased, impairment of confidence in the concern and curtailment of its bank and trade credits, or a de- mand by his estate for a cash settlement of his inter- est. Life insurance would greatly lessen the diffi- culty of filling the gap in the organization; it would counteract the effect of the loss by increasing the financial resources of the concern; and it would afford means of discharging the liability to the deceased's estate without impairment of working capital. A leading mercantile agency reports that the great majority of failures among firms are occa- sioned by deaths for the consequences of which no financial provision has been made. The chief cl these consequences are loss of valuable services, de- mand by deceased's estate for cash settlement of his interest, and curtailment of credit. One or more of these crippling conditions almost invariably results from the death of a partner. Every co-partnership has one of these contingen- cies to count upon sooner or later — death, retire- ment or dissolution — and the probable consequences can generally be calculated more or less closely. In either of these events life insurance will mitigate, if it does not fully offset, the bad effects. Three men owned equal shares in a business 58 BUSINESS INSURANCE INSTRUCTOR which they had built up to a highly prosperous con- dition, with seventeen years of strenuously applied ability, when two of them died within a few weeks of each other. As a result, one-third interest in the concern passed to a woman and a similar proportion came under the control of the guardian of two minors. The surviving partner had no means of ridding himself of these encumbrances and was com- pelled to put up with interference in the business by two persons who knew nothing about it. The firm went steadily down hill through several years, and during the deflation period following the war was forced into bankruptcy. By way of contrast, here is an entirely different case. About twenty-five years ago four young men formed a co-partnership, with a combined capital of $30,000. At the outset they took out Business Insur- ance and made an agreement providing for the ac- quisition of a deceased member's interest by the survivors. The concern prospered greatly and from time to time additional insurance was put on to cor- respond with the increased value of the shares. In the course of time one after another of the partners died, until a few years ago the sole survivor was left in clear possession of the entire business, which has a commercial rating in excess of half a million dol- lars. It is reasonable to believe that the former case might have had a similar development, if the part- ners had protected one another's interests with Business Insurance. The possession of Business Insurance enhances bank and trade credit. Mercantile agencies report the life insurance carried by corporations and firms. Credit men of wholesale and manufacturing com- BUSINESS INSURANCE INSTRUCTOR 59 panics take it into account. Life insurance payable to the business frequently enables jobbing and retail houses to obtain goods in excess of the quantity which would be warranted by the sole security of the capital and general assets. This resource is available to many firms whose members have never thought of it. A large proportion of them will be glad to avail themselves of such comparatively easy means of extending credit, when pointed out to them. Credit men of supply houses will generally co-operate wuth the agent in working cases of this sort and will be especially glad to help in placing in- surance on members of firms whose affairs are in somewhat shaky condition. Whilst life insurance is a charge against the busi- ness, it is also an asset of it. The constantly in- creasing cash value of a policy creates a reserve fund that is immediately available in time of need and which has been the direct means of saving hun- dreds of firms from bankruptcy or liquidation. The books of a firm that carries Business Insurance should exhibit these cash values, which are among the very best assets of the business. Among firms it is frequently the case that a large proportion of the credit enjoyed by the concern is due to the financial responsibility of one man. He may be merely a backer or silent partner. Perhaps he is a man of extensive interests, with whom the firm in question is only a side issue and his connec- tion with it limited to endorsing its paper. All such situations present prospects for Business Insurance. Of course, in a case of this sort the active members of the firm would be mainly interested in placing insurance on the silent partner or backer, but the 60 BUSINESS INSURANCE INSTRUCTOR matter involves the stability of his investment to such an extent that he will generally favor the trans- action and be willing to pay a share of its cost. By way of illustrating the principles involved in small partnership insurance, let us consider a typical case : Two young married men form a partnership on the strength of their knowledge of some business and a few thousand dollars of combined savings. All the worldly possessions and future prospects of the partners are tied up in the infant enterprise. The venture prospers and every cent of surplus profit is put back in order to effect gradual extension of the business, which scanty credit makes other- wise impossible. For this purpose they work hard, live frugally and do not even spare enough to pay for domestic life insurance, unless it be in the pre- carious form of fraternal insurance. Their entire dependence and that of their families is upon their little business which has so bright an outlook and which is sure to develop into a highly profitable property — provided all goes well. Presently one of the partners is stricken with in- fluenza and shortly dies. His place is poorly filled by the substitute whom the survivor hires. The loss to the business is soon felt in impaired opera- tion. The increase in the payroll, for the widow is virtually upon it, entails decrease of profits./ The widow of the erstwhile partner becomes dissatisfied with the returns to her and demands a cash settle- ment of her late husband's interest. The business is sold for a mere song in a forced market. The sur- viving partner sinks back into the ranks of the em- ployed, with less money than he had originally BUSINESS INSURANCE INSTRUCTOR 61 saved and seven years of his life gone. The widow's share of the proceeds from the sale of the business is dissipated in a few months, and she — but the rest may be left to the imagination. Now let us consider the alternative and in doing so we shall see how Business Insurance in such cases embraces domestic insurance; in other words, how the conservation of the business preserves the home. We will suppose that these two young men, when they embarked in business together, took the pre- caution of providing against the effects of the pre- mature death of either, and it is reasonable to sup- pose that they would have done so had the matter been brought to their attention. With $5,000 pay- able to the survivor, a very different situation would develop from the death of the partner. The insur- ance indemnity would discharge the claim of the widow against the firm and give her a substantial sum for herself and her children. The surviving partner would become sole owner of the business, with unimpaired capital. Under such circumstances he would be in a favorable situation to hire a sub- stitute or take in a new partner. The business would not be seriously injured and its owner's prospects in life would not be destroyed, as in the case of failure to make provision for adverse contingencies. The foregoing illustration is designed to be of practical use to the agent. Its essential features are found in thousands of histories of failures every year. They are familiar to business men in general, and the force of the arguments based upon them may readily be reinforced by concrete illustrations. The agent will find it effective to ask partners 62 BUSINESS INSURANCE INSTRUCTOR whether, in the event of the premature death of one of them, some such development as has been de- scribed would not transpire. The prospects should be reminded that not only their money and labor, but also the best years of their lives, are the stakes that they have put up in their business gamble. And that their families — wives and little children — are compelled to be shar- ers in the hazard, with likelihood of bearing the worst effects of loss, should it occur. The agent must have inferred that in most cases of this description the appeal of Business Insurance will be stronger than that of domestic insurance. Manj young men starting in business will take the former when they cannot be induced to apply for the latter. Any agent may increase his production considerably by making it a rule to sound every pos- sible prospect on the subject of Business Insurance. Interest will often be aroused after the usual can- vass for personal insurance has fallen flat. BUSINESS INSURANCE INSTRUCTOR 63 SECTION TWO Test Questions 11. What qualifications are necessary for success- fully canvassing Business Insurance among corporations ? 12. What is the primary purpose of Business In- surance? 13. Name the two principal secondary purposes of Business Insurance? 14. Give an illustration of the use of a secondary purpose as an entering w^edge. 15. Ninety per cent of the stock in a close corpora- tion is held by three men in equal proportions. On what grounds would you suggest Business Insurance to them. 16. A corporation is organized to manufacture and market the invention of a man who becomes the general manager and technical expert of the concern. A large tract of land is purchased, an extensive plant erected and $100,000 of twenty-year bonds issued. What form of Busi- ness Insurance would fit the situation? 17. Usually there are but three purposes for which Business Insurance is taken by co-partnerships. Name them. 18. What is the cause of at least one-third of the failures among firms? 19. Name some of the intangible assets of a busi- ness concern. 20. In the case of a small firm Business Insurance is apt to make a stronger appeal than personal insurance. Why ? 64 BUSINESS INSURANCE INSTRUCTOR SECTION TWO Answers to Test Questions 11. Knowledge of business principles and practice. Ability to negotiate with men of aflfairs. The faculty of logical analysis and lucid presenta- tion. Patience and stamina. 12. The primary purpose of Business Insurance is to afiford indemnity for the loss of valuable services occasioned by death. 13. (1) The enhancement and stabilization of credit. (2) The creation of a sinking fund to meet various deferred liabilities of which the most common is depreciation of plant and equipment. 14. The agent creates interest at the outset by explaining the utility of Business Insurance in case of a valued employe becoming totally dis- abled or in case of the concern desiring to make provision for pensioning an officer or employe. The novelty of the suggestion may secure im- mediate consideration when the more common proposal to insure a life would not. After con- tact has been effected, the primary purpose must, of course, be advanced. 15. Business Insurance should be taken in such a case to prevent the stock of a deceased asso- ciate passing into alien hands. A joint agree- ment should be entered into conveying options of purchase contingent on death and stipulat- ing that the insurance should be applied to the purchase. It is advisable to have wives for- mally express their consent to the arrangement. BUSINESS INSURANCE INSTRUCTOR 65 16. The interest of the corporation would be best served by placing $100,000 of Life Insurance on the man who is evidently the main factor in its prosperity. The Twenty-year Endow- ment plan should be adopted in order to secure the additional benefit of a sinking fund to re- deem the bonds. 17. (1) To provide indemnity for the loss occa- sioned by death. (2) To protect and enhance credit. (3) To create a sinking fund in anticipa- tion of depreciation of plant and equipment. 18. According to the head of a mercantile agency, the cause of one-third of all failures among- firms is death, against which no provision has been made, with the usual consequences of weakened organization, curtailed credit and general demand for discharge of liabilities. 19. Good-will, reputation, integrity, technical knowledge and general business ability. 20. The small firm is commonly composed of young men who have staked all they possess upon its success, and confidently rely upon it to provide for themselves and the future of their families. SECTION THREE Business Insurance for Proprietors, Farmers, Individuals and Various Institutions Contents SECTION THREE Business Insurance for the One-man Concern — Each class of cases presents features pecuHar to itself — Conditions that generally obtain in a one- man business — Manner in which Business Insur- ance buttresses the weak spots in the one-man en- terprise — Sole proprietor apt to overestimate per- manency and value of the business — It is precarious dependency for family, unless protected by Business Insurance — Usual consequences of the death of a sole proprietor — Desirable conditions that may be secured by Business Insurance — Examples may be found in every community. Business Insurance for the Farmer — Necessity of observing the distinction between Business Insur- ance and domestic insurance — -Court decision in point — Latter-day farmer is a business man — En- dowment insurance especially adapted to needs of the farmer — Forceful method of presenting Inherit- ance Tax proposition to the farmer — Business In- surance to protect the farmer's periodical borrow- ings — Novel method of presenting proposition to cover a mortgage — Most common cause of failure in canvassing farmers — Illustration of appropriate opening for Business Insurance canvass. Business Insurance for the Individual — Applica- tion of Busainess Insurance to personal affairs of the individual. Shrinkage in estates commonly due to lack of ready cash at time of death — Heavy de- mands on all considerable estates now-a-days — Life insurance most certain and economical means of providing cash at death — Urgent need of Business Insurance to protect speculative ventures — Various examples in point. Business Insurance for Educational, Religious and Social Organizations — Alumi Associations — Various applications of Business Insurance to churches — Illustrative case — Large field of oppor- tunity in connection with insurance of ministers — Detailed description of method of canvass — Sugges- tion for individual to endow charitable institution — Social clubs becoming likely prospects — Examples of Business Insurance in connection with various kinds of clubs — Peculiar features of this class of cases. Group Insurance — Legal definition of Group In- surance — Brief statement of essential principles and practice of Group Insurance — Methods of estimat- ing risks and regulating rates — Variety of plans — What Group Insurance does for the employer — What Group Insurance does for the employe — How to canvass Group Insurance. BUSINESS INSURANCE FOR THE ONE-MAN CONCERN IN DEALING with Business Insurance under diflFerent divisions, a much more important ob- ject is served than mere convenience. Each of the typical classes of cases presents features peculiar to itself. Consequently, the arguments differ v^ith the respective application of life insurance to cor- porations, partnerships, proprietorships and in- dividuals. In addition to these phases of the sub- ject, we must consider Business Insurance as taken by individuals for their personal benefit. Instances in point are the insurance which is taken by a banker to meet the Estates and Inheritance taxes, that which is taken by a physician to cover the dan- ger period in a speculative investment, or by a merchant to safeguard a mortgage on his home. The one-man business is practically always a modest affair. Should it grow to a substantial size, incorporation would become strongly advisable, if not absolutely necessary, on several accounts. The sole owner of a grocery, garage, pharmacy, or other small enterprise, has exceptional need for Business Insurance. He rarely carries it, however, and in the majority of cases will be found to have never heard of it. But the argument for it is so strong and obvious that he cannot fail to be im- pressed by it. He is maintaining his business as a means of live- lihood, but hardly less as a provision for the future support of his family, either by its sale or continu- 12 BUSINESS INSURANCE INSTRUCTOR ance after his death. Business Insurance therefore, involves domestic insurance to an unusual extent in his case. In most instances a business of this sort repre- sents the entire property of the proprietor. All his resources are devoted to strengthening it and the surplus profits derived from it are turned back for the purpose of extending operations. The stock, fixtures and bills receivable, less the debts, constitute the sum total of tangible and mar- ketable assets. These are the material basis for credit with the bank and supply house. Not infrequently, technical ability, business and social record, integrity and reputation, are potent factors in the enhancement of credit. But these are personal qualities which must expire with life. Tliis element of uncertainty impairs their effect as credit factors, /even when they are uncommonly pro- nounced, but, reinforced by Business Insurance, these intangible factors may become the chief asset of the business. Business Insurance, by safeguarding the bank and the supply house against the hazard of loss by death, induces them to extent credit to a greater extent than would be prudent, otherwise, and justi- fies them in making liberal allowances for the per- sonal qualities of the business man. This being so, the sole owner of a business who neglects to carry Business Insurance fails to derive the poten- tial benefits from his abstract assets. The sole proprietor of a successful concern gen- erally overestimates its value and its permanency. Frequently he looks upon it as a s ubstantial and certain provision for his family after his death. And BUSINESS INSURANCE INSTRUCTOR 7Z this attitude commonly tends to engender the idea that his family does not need the protection of life insurance. A one-man concern, that is not stabilized by an adequate amount of Business Insurance, is a very precarious dependence for the family of the pro- prietor after his death. But, even when Business Insurance is carried, it should not be treated as a substitute for domestic insurance. The former is specifically payable to the business and is subject to all legitimate claims against it. Even if there should be a residue after the discharge of all ob- ligations, it ought not to be diverted from the busi- ness, except in case of liquidation. The death of a sole proprietor entails relatively greater loss than the death of a corporation presi- dent or of a member of a firm. In the first case the business is suddenly deprived of all intelligence and direction. Nothing is left but such assets as stock, good-will and lease, the value of which is largely contingent on the continuance of the busi- ness. Naturally, the creditors immediately file their claims and press for settlement. Liquidation is usually the only recourse and if, under a forced sale, the concern pays one hundred cents on the dollar, it is a rare occurrence. Commercial records show that very few one-man concerns survive the death of the proprietor. The exceptions are by no means confined to the mark- edly successful business but, in nearly all instances, are those which carried Business Insurance. This precaution may be depended on to keep the business running or to insure liquidation under the most favorable conditions. 74 BUSINESS INSURANCE INSTRUCTOR The payment, on the death of the sole proprietor, of a sum in excess of the concern's liabilities, wiH enable the executors of the deceased's estate to em- ploy a competent man to manage the business. Credits will be curtailed, doubtless, but not to the extent of hampering operations. Tangible assets will be conserved and opportunity secured for dis- posing of the business on satisfactory terms. So common are the instances where the payment of $5,000 or $10,000 on the death of a proprietor would have conserved values of much greater amount that, for lack of such a resource, shrank to little or nothing, that the agent need never be at a loss for concrete illustrations to give point to his arguments. Every community contains numerous small concerns to which the argument applies — one- man businesses that need the protection of Business Insurance much more than the great corporations and prosperous partnerships that carry liberal amounts of it. BUSINESS INSURANCE FOR THE FARMER LET us bear in mind that any life insurance pay- able to a beneficiary other than a person whose insurable interest is based on dependency or relationship to the insured, comes under the desig- nation of Business Insurance. The necessity for observing this distinction occurs most commonly in cases where individuals insure their lives for the protection of persons or concerns having material interest in the continuance of their lives. Instances in question are policies taken out for the protection of creditors, financial backers, parties to contracts for performance, etc. This distinction, may be emphasized by using the term "for the protection of," with reference to Business Insurance, instead of "for the benefit of" which is usually employed to qualify domestic insurance. The contrasting character of the insurable inter- est in the respective forms of insurance was strik- ingly illustrated in a case that came before the courts last year. A young man died leaving a pol- icy of $3,000 payable to a wealthy aunt. The mother of the deceased contested the claim on the ground that the beneficiary under the policy had no insur- able interest in the life of the insured. Ordinarily the plea might have held, especially as the plaintiff was indigent and actually dependent upon her son, but a decision was rendered in favor of the defen- dant, who produced evidence that the policy had been taken out as security for a loan made by her. In short, the transaction was a case of Business In- surance, pure and simple. 76 BUSINESS INSURANCE INSTRUCTOR A touch of human interest was lent to this inci- dent by the beneficiary's endorsement of the insur- ance company's check to the order of her sister-in- law, with a note to the effect that she should pay the cost of the proceedings as a penalty for her folly in allowing an ignorant or unscrupulous lawyer to draw her into unnecessary litigation. We shall consider various applications of Busi- ness Insurance to the needs of individuals, but at present our attention will be confined to the farmer in this respect. The farmer of today is a business man. He prac- tices business methods and is receptive to business arguments. In recent years the farmer has oper- ated on a larger scale than formerly, with more money invested in his business and a heavier bank balance. At the same time the employment of mechanical energy in agriculture has become more extensive, creating deferred liability in the form of provision for depreciation and replacement. The farmer can be educated to an appreciation of short- term endowment insurance for this purpose. Endowments are especially adapted to the pur- poses of the farmer on account of his several needs for sinking funds. This form of accumulation will supply the means of replenishing equipment, ex- tending operation, purchasing additional land and meeting various deferred obligations. The propo- sition to take a ten-year endowment for the specific purpose of retiring a mortgage will appeal to many farmers, if presented properly. It is in effect paying off the mortgage in ten annual installments, with the guarantee that, in the event of the insured's death within the period, the entire encumbrance will BUSINESS INSURANCE INSTRUCTOR 77 be lifted. Mortgages are sometimes placed at a reduction of one per cent in the interest rate, in consideration of such additional security. Business Insurance to provide for the discharge of inheritance taxes is as necessary to the man farm- ing on a large scale as to the merchant or banker. The writer of a great volume annually uses the fol- lowing method with marked success in working among wealthy farmers : He begins by asking the prospect to show him over the property. This is calculated to put the farmer into a favorable frame of mind. When they come in from the automobile or horse-back ride, the salesman says impressively, "There is a mort- gage on this farm which will have to be redeemed within twelve months of your death." The state- ment cannot fail to excite surprise and curiosity. The agent then goes on to explain that the claims of Federal and State Governments for Estate and Inheritance Taxes are virtually mortgages and actually first liens against the property. He con- tinues by stating that the farmer should take out life insurance to cover this liability and quotes the Single Premium rate for the appropriate amount. To this the farmer is apt to reply that he couldn't raise so much money, when the agent promptly re- joins, "Then how do you expect your wife or executor to raise it?" Having let this point sink in, the agent goes on to say that his company will take care of the matter in consideration of the farmer paying 3 per cent— or whatever the ordinary life premium may represent — of the necessary amount during his life time. 78 BUSINESS INSURANCE INSTRUCTOR The agent who practices this plan closes a great majority of the prospects whom he canvasses. The scheme is cleverly devised to achieve the object in view and if adopted should be followed as described. Each step in the process is calculated to produce a desirable psychological effect — the preliminary in- spection of the property, the mental jolts and, finally, the offer of an easy solution to the difficulty. As a rule, the farmer is a regular periodical bor- rower. He applies to his banker for monetary aid in harvesting his fall crop, giving a short-time note on the general security of his property. During the currency of the loan the farmer is assuming an extra liability for the discharge of which he should make special provision. Some agents do considerable business in writing policies to cover these annual loans. In many instances these policies are assigned to the bank and constantly left on deposit with it. An immediate result is to enhance the farmer's credit and to improve the relations between him- self and his banker. The following account of a novel method of pre- senting a proposition to cover a mortgage is culled from an insurance journal. An agent, learning that a farmer with whom he was acquainted, had bor- rowed several thousand dollars from a farm loan company, went to see him and said : "John, I was in the see Judge Smith yesterday and I just stopped in to tell you that under a supplementary contract by which you agree to pay two and a half per cent additional interest on your mortgage loan, your notes will be cancelled and the mortgage released, in the event you die before you have paid the notes in the regular order of their due date. They are BUSINESS INSURANCE INSTRUCTOR 79 Strung over five years, you know, and you may not be here on the due date of the first semi-annual in- terest payment. If I were you, I would arrange for that supplemental contract right away and play safe for the wife and kiddies." John immediately decided to act on the advice and his application was soon secured. The rural banker may almost always be relied upon to encourage the farmer to protect his inter- ests by Business Insurance. Bank loans are usually well secured, but the collection of a man's debts from his widow is often attended by disagreeable circumstances in a country community. The de- ceased is sure to be an acquaintance, if not a friend, of the banker, and well known to the majority of the bank's customers. When provision has not been made through life insurance for the discharge of debts, it frequently happens that meeting the liability entails hardship upon the family of the de- ceased. In such circumstances, the bank invariably incurs a certain amount of odium. The country banker generally appreciates these conditions and if tactfully approached may be in- duced to extend active assistance to the agent in working Business Insurance among farmers. In fact, many country bankers make a practice of ad- vising their customers to cover loans with life in- surance, and in some instances insist upon their do- ing so. Failure to make a clear-cut Business Insurance canvass accounts for a great deal of lack of suc- cess. The agent should make it understood at the outset that he is proposing Business Insurance. He should explain the difference between that form of 80 BUSINESS INSURANCE INSTRUCTOR protection and domestic insurance. He should then give illustrations of the practical utility of the for- mer to farmers, leading up to the particular pur- poses for which it would serve the prospect. This method prepares the mind of the prospect for the reception of the proposition and enables the agent to slip into the canvass gradually and smoothly through the medium of the impersonal introductory statements. To illustrate an appropriate opening: "Mr. Farmer, I want to make it plain at the outset that I am not considering the life insurance which you carry for the protection of your dependents. You should not regard that as a source for the payment of your debts. Its proper purpose is the maintenance of the home and the education of your children. What I have to propose is entirely apart from your personal insurance. It is Business Insurance which will facilitate your operations and discharge your liabilities. This is the form of insurance that the manufacturer, the merchant and the banker carry in order that their affairs may be wound up with- out loss at death. It is quite as necessary for you as for them, etc." BUSINESS INSURANCE FOR THE INDIVIDUAL THERE are many ways in which life insurance will serve the business needs of an individual more effectively than any other agency. The application of life insurance in these directions is, however, a comparatively recent innovation and the majority of men with pronounced need of it will not appreciate the fact until it is pointed out to them. But, in many instances, the utility of Busi- ness Insurance is so obvious that little difficulty is experienced in writing it. Life insurance is the only medium through which a person can have absolute assurance of a certain sum of money being paid at his death. For this reason it is the surest reliance in making provision for the specific monetary demands which death en- tails upon an estate, as well as the unforeseen re- quirements for ready cash which frequently be- fall executors. Any trust officer can cite instances of heavy shrinkage in estates occasioned by the necessity of selling property in a forced market for the sake of securing the cash demanded by the exigencies and ordinary expenses of administration. A typical case in point was that of a capitalist who died about fifteen years ago. He was one of a numerous class of monied men, who make it a point of pride and principle to "keep their money con- stantly working." They abhor idle money and scorn bank interest, so never have more than a small balance of cash on hand. 82 BUSINESS INSURANCE INSTRUCTOR The man in question died worth $800,000 in valu- able but non-liquid property. The only immediately available resources were $5,000 of life insurance and $730 of cash in the bank. A contest arose over his will which was not decided for three years, and other unexpected demands for money were made on the estate. One piece of valuable property after another was sold at a sacrifice and in the final dis- tribution of the estate the heirs realized less than $400,000. A life insurance policy of $100,000 would have saved this heavy loss. Nowadays, the need for protecting estates with life insurance is much more imperative than for- merly, owing to the Estates and Inheritance taxes. Men of affairs are generally awake to the value of Business Insurance in this connection. These im- posts are inevitable charges against every consider- able estate. They must be met promptly and the only alternative to providing for them by means of life insurance is to carry liquid assets for the pur- pose. When these are in the form of easily con- vertible securities, they tie up a much larger sum of money than an equivalent amount of life insur- ance demands. Furthermore, forced realization of the former in an unfavorable market must be at- tended by considerable shrinkage. The kind of securities — stable stocks and bonds — which a prudent man would provide for the settle- ment of his estate are poor investments viewed from the point of profit. Life insurance, on the other hand, taken at the present time is bound to yield handsome returns. It is paid for with sixty- cent dollars which, in all probability, will gradually overcome their depreciation and regain normal pur- BUSINESS INSURANCE INSTRUCTOR 83 chasing power in twelve or fifteen years. So that, unless the insured should fall far short of realizing his life expectancy,— in which case his insurance account would show a heavy balance of profit,— his insurance will be paid in money of much higher value than that with which he purchased it. Viewed in this light, life insurance bought with a single premium cannot fail to be an excellent investment. Within the present year, the absence of cash caused heavy loss to the seven million dollar estate of a New York business man. Inheritance, income, transfer, and excess profit taxes amounted, in the aggregate, to $600,000. In the process of realizing this sum by sacrifice sale of investments, $610,000 was lost, so that it cost the estate more than two dollars to discharge every dollar of the tax demand. To the agent who is qualified by knowledge of the laws and conditions relating to the Estate and Inheritance taxes, the field for Business Insurance in this connection offers exceptionally favorable opportunities. In its capacity of conserver of estates Business Insurance is the surest and most economical means of covering mortgages, protecting personal creditors and endorsers of paper, and providing for the dis- charge of various obligations which death would immediately bring to maturity. Men who operate extensively in the stock or grain market, men who speculate in oil or minmg ventures, as well as those who have investments, options, and other interests which depend for their value largely upon the personal qualities of them- selves and would shrink more or less upon their 84 BUSINESS INSURANCE INSTRUCTOR death, should carry adequate lines of Business In- surance. A speculator in undeveloped oil lands, who always had several hundred thousand dollars invested in properties and options, was written for $150,000 of life insurance in twenty minutes on the strength of the argument that his sudden death would cause serious shrinkage in the value of his holdings. Apropos of oil promoters, I may mention, in pass- ing, the case of Richmond Levering who had ap- plied for $700,000 of life insurance, and, postponing the examination, was suddenly carried off by influ- enza at the age of 39, Life insurance is frequently the only satisfactory manner in which a man can protect financial back- ers. Unsecured loans in large sums are sometimes made to men of pronounced ability, with confidence that the money will be returned with interest, pro- vided premature death should not prevent. The only way of guarding against this adverse con- tingency is by covering the hazard with life insur- ance. Within the past twelve months a prominent hotel manager took $1,000,000 of insurance to protect his backers in the purchase of several hotels. The only element of doubt in the transaction hinges on the uncertainty of his living to develop the investment. It is safe to say that every capitalist, every man of more than ordinary means, has some specific need for Business Insurance in connection with his personal affairs. He may not realize the fact, but painstaking inquiry about his affairs, on the part of the agent will almost invariably reveal some logical basis for a proposition of life insurance. In such BUSINESS INSURANCE INSTRUCTOR 85 cases, information regarding the prospect is more necessary and valuable than in cases of ordinary domestic insurance. The agent should not make an attempt to present a proposition until he is in possession of a reasonable argument for advanc- ing it. BUSINESS INSURANCE FOR EDUCA- TIONAL, RELIGIOUS, AND SOCIAL INSTITUTIONS DURING the late years it has become common practice to employ life insurance in connec- tion with various semi-public institutions, for the purpose of creating endowments and dis- charging deferred liabilities. The canvass of such cases is widely different from that of commercial organizations and, perhaps, the best results will be obtained from specialization in them by a man possessing peculiar qualifications for the work. Former clergymen, teachers, and lawyers have been more than ordinarily successful in this line of en- deavor. In numerous instances alumni associations have insured their members individually in favor of the Alma Mater, although the first cases of the sort oc- curred only about ten years ago in connection with Williams College, Massachusetts, and Trinity Col- lege, Harford. It goes without saying that the agent engaged on such business should be a college man. It may be added that Y. M. C. A. secretaries in New York City and other centers have been in- sured in favor of branches of the organization. The class of insurance under consideration was first written about thirty years ago in connection with a church, since when a number of kindred cases have been closed, but not nearly as many as would have resulted from systematic canvassing of this field. Occasionally a popular minister has been insured in favor of his church, but generally the in- BUSINESS INSURANCE INSTRUCTOR 87 surance is placed on members of the congregation. The object may be the creation of a reserve fund or the ultimate payment of a debt. About eighteen years ago it became apparent that the fashionable residence center of a large American city was changing. Several wealthy members of its leading church in the section insured themselves heavily for the benefit of the institution and in order that it might have the means of continuing its extensive activities in spite of the diminished support to be expected from its future congregation. As a result of this foresighted provision, the church in question has realized several substantial sums. A congregation may frequently be appealed to successfully by a proposal to supplement a minis- ter's salary with life insurance to be paid for out of the general funds. There is a wide opportunity in this field, if properly pursued. The following paragraph recently appeared in The Christian Register: "Why should not all churches take out life insurance for the minister? No institution ever had a more devoted body of servants than the church. Neglect, sinful in char- acter, is being replaced by regard for the minister's material well-being, but the turn in the road has by no means been passed. Far too many self-deny- ing clergymen are still left to survive or perish as fate and old age may determine. A minister does not ask for distinction, but he does demand, and justifiably, a position of self-respect and an old age guarantee against want." In this connection, some excellent suggestions lately printed in the Radiator are reproduced. Obtain as accurate information as you can about 88 BUSINESS INSURANCE INSTRUCTOR each church. Find out the number of members, the amount contributed yearly for church purposes, the salary paid to the minister, the size of his family, the ages of his dependent children, etc. These fig- ures will guide you in formulating your plan. Then present a clean cut, definite insurance scheme to the vestry, the ofificial board, the parish committee, or whatever the body is called that deals with the business of the church. Show how small will be the burden upon the members and how great will be the benefit to the clergyman and his family if the church makes provision for them in case of death, total disability and old age. Suppose, for instance, that the minister is thirty- five years old, has a wife and two children, and re- ceives a salary of $3,000 a year. Say that 600 mem- bers of the congregation contribute $20 each yearly, on an average, to the expenses of the church. By increasing the contributions by one or two dollars, liberal provision could be made, through life insur- ance, for the contingencies of death, disability and superannuation. If the plan is adopted, a distinct fund should be established for the purpose and the congregation should be pledged to contribution of the amount necessary to its maintenance. It is part of the agent's service to see that these arrangements are made. The objection may be raised that clergy- men frequently change positions. In such a case, the policy may either be turned over to the next church to which the insured is called, with the un- derstanding that the plan for his protection should be continued, or it could be made paid-up and pre- sented to the insured. It can be pointed out that such a scheme not only provides for the future of BUSINESS INSURANCE INSTRUCTOR 89 the minister, but that it also has the effect of in- creasing his efficiency by relieving him of anxiety and worry. If widely adopted it would have a strong tendency to keep men in the service of the church and to attract others to the profession. It may be added that the Christian ministry lost 11,000 men in the last year. Boards of trustees and other interested individ- uals have been insured for the benefit of charitable institutions. A large field for business exists in this connection. The proposition is attractive to many persons. The canvass may effectively follow these lines: "Mr. Doe, it is well known that you are keenly interested in the welfare of the so-and-so boy's home. No doubt you would like to make a donation of $100,000 to it." The answer will prob- ably be something of this sort: "Indeed I would, but I haven't any such sum to give away, unfortunately, and I should not feel justified in making a bequest of so large an amount." To this the agent replies : "Nevertheless, you may endow the home to the ex- tent of $100,000 without deprivation to yourself or your heirs by taking life insurance in that sum for the benefit of the institution and paying about 4 per cent on the principle during your life." It is an easy matter to secure a list of well-to-do supporters of any charitable institution. Recently there has appeared to be a tendency on the part of members of social clubs to insure their lives in favor of the institutions. This is, perhaps, the least promising of the divisions under considera- tion. However, the canvass of a social club has the advantage that it brings the agent in contact with a number of men of means. It would seem probable 90 BUSINESS INSURANCE INSTRUCTOR that group insurance will be resorted to in future among this class of cases. In a large proportion of instances it would serve the purpose effectively and economically. Many clubhouses have been built through loans, facilitated by life insurance. A recent instance is the woman's club of a southern city, fifty members of which each took $1,000 fifteen-year endowment to assist in discharging a $50,000 mortgage that will mature ten years hence. In case it should not be renewed, the cash surrender value of the insurance will go a long way toward furnishing the required sum and, in the meanwhile, deaths may make sub- stantial additions to the redemption fund. In another case of recent date, sixteen founders of an exclusive country club, which started with an encumbrance of $80,000 on its property, sixteen charter members each paid the single premium on $5,000 ten-year endowment, with the club as bene- ficiary. A few years ago, thirty-five members of a social club in the east took out policies of different amounts and various forms, with the purpose of endowing the institution. It is highly probable that many similar transactions might be effected in connection with churches, charitable institutions and social organizations, by tactful canvassing. It may be well to draw attention to some features peculiar to this class of cases. They involve a de- parture from the fundamental principle of life in- surance in as much as the claim is not paid in satis- faction of a loss. Indeed, the death of the insured is generally a distinct gain to the beneficiary. There is rarely a true insurable interest. In fact, the in- BUSINESS INSURANCE INSTRUCTOR 91 siirance is decidedly speculative in character. Nevertheless, since the courts have repeatedly de- nied that such contracts conflict with public policy, and the underwriting- company is always fully aware of the nature of the transaction, there can be no doubt about the validity of the beneficiary's in- terests. GROUP INSURANCE GROUP INSURANCE is primarily a device for providing life insurance, sometimes combined with disability coverage, to all or the great majority of the members of one organization, on exceptionally favorable terms and under conditions mutually beneficial to employer and employes. Whilst Group Insurance serves its principal pur- pose by providing coverage to industrial workers, it is well to recognize the numerous other appropriate directions for its application. It is adaptable to clubs, faculties of universities, corps of school teach- ers, professional and other associations, as well as all kinds of municipal organizations. Several cities have insured all their employes in this manner. The following is the legal definition of Group Insurance obtaining in the United States and to which the practice of Canadian companies conforms : "Group life insurance is that form of life insurance covering not less than fifty employes (of one em- ployer), with or without medical examination, writ- ten under a policy issued to the employer, the pre- mium on which is to be paid by the employer or by the employer and employe jointly, and insuring only all of his employes, or all of any class or classes thereof, determined by conditions pertaining to the employment, for amount of insurance based upon some plan which will preclude individual selection, for the benefit of persons other than the employer, provided, however, that when the premium is to be paid by the employer and employes jointly, and the benefits of the policy are oflfered to all eligible em- BUSINESS INSURANCE INSTRUCTOR 93 ployes, not less than 75 per cent of such employes may be insured." The most distinctive feature of the plan is the omission of the customary medical examination. It will be seen that this condition is inseparable from the underlying principles of the system. It is quite consistent with sound underwriting and entails no extra haard. Viewed actuarially, all life insurance is operated on the group principle, which alone will secure the effect of the law of average. It would be feasible to issue a policy of like amount on each of 500 persons casually passing the home office of the company and to dispense with medical examination. That precaution is necessary to provide against ad- verse selection or the deliberate application of con- sciously impaired lives. Preferred occupation groups, such as members of professional associations, clerical staffs and bank organizations, may be safely depended upon to de- velop a favorable mortality. In most industrial groups, ability to hold the job indicates a physical fitness consistent with the requirements for the ac- ceptance of individual life insurance risks. Many commercial concerns make the passing of a medical examination a condition of employment, and this practice is extending rapidly. Thus far, experience has indicated that the death rate in Group Insurance is superstandard. As an offset to the waiver of individual examina- tions, the group risk is expertly inspected with spe- cial regard to the working and living environment of the employes, the provisions for sanitation and safety, peculiar occupational hazards and other con- ditions which may affect the risk and the charge for 94 BUSINESS INSURANCE INSTRUCTOR it, one way or the other. The effect of these factors is reflected in dividend apportionments. Group Insurance is usually written under a blan- ket contract of yearly renewable term insurance, made with the employer, covering 100 or more of his employes. Preferred groups, such as the office force of a financial house or the traveling salesmen of a wholesale establishment, are sometimes accepted when numbering not fewer than 50 but less than 100. In these cases a modified medical examination is generally required. To each of the members of the group is issued an individual certificate, naming his beneficiary. This is accompanied by a letter from the employer set- ting forth the conditions under which the insurance is provided by him. The blanket policy is usually renewable from year to year indefinitely, subject to readjustment of pre- mium rate at the end of any annual period or, per- haps, every five years. Readjustment results in de- crease of rate as often as otherwise. The general experience is that the average age and relative cost seldom increase, but rather have a tendency to de- crease, derived from the removal of old men and the constant introduction of young ones to the group. In most instances this movement is sufficient to counteract the effect of the individual advance in age among the group members. Group Insurance is susceptible of issue under a number and variety of plans. At present the three following systems are those most widely adopted : 1. A fixed sum, such as $1,000, payable to the beneficiary of each employe. Obviously, this method lacks the advantage of BUSINESS INSURANCE INSTRUCTOR 95 conferring reward for superiority or length of service. 2. The sum of one year's salary or pay, with a minimum of $500 and a maximum of $3,000. This plan is in operation satisfactorily in a num- ber of establishments. 3. A sum regulated by length of service. For example, a basic amount of $1,000, increased by $100 a year to a maximum of $3,000. Employes may be started on equal terms or credit may be given for past services. This system furnishes a strong incentive for con- tinuance in the employment. Either of these plans is capable of modification by the addition of a funeral benefit, say $500, and the payment of the claim in twelve monthly install- ments. It has been conclusively proved that the best re- sults are obtained when the employer pays the entire premium and the policy covers the entire force, ex- cept for a comparative few whose term of service is not sufficiently long to entitle them to participation. In the protection of its own interests, the underwrit- ing company will insist on the employer paying half the premium, at least, and not fewer than 75 per cent of the employes being included in the coverage. If the employes are charged with any portion of the cost the acceptance of the offer becomes optional with them. Those who decline it will be, for the most part, men whose families most need the pro- tection. In the event of such a one's death it will probably be necessary to take up a collection for the relief of his dependents. This will involve an outlay many times as great as the premiums on his insur- 96 BUSINESS INSURANCE INSTRUCTOR ance would be lively to aggregate, not to mention the resultant dissatisfaction among his fellow work- men. In the calculation of charges, Group Insurance follows casualty procedure, inasmuch as the rates are regulated by classification of risks. A definite premium cannot be quoted until after inspection of the risk and consideration of all the data respecting it at the home office. It may be said, however, that the average rates on normally hazardous groups are about 1 per cent on the non-participating plan and 1.15 on the participating. That is to say, these per- centages of the payroll or $10 and $11.50 per $1,000 of insurance, respectively. Preferred risks will fall below these figures and extra-hazardous occupa- tional risks rise above them. Premiums may be paid annually, semi-annually or quarterly, but the usual practice is to make monthly settlements, which admit of closest adjustments. At the inception of the contract the underwriting com- pany is furnished by the assured employer with a census of all the employes embraced in the coverage. Thenceforth the insurance on the group operates automatically. Retiring members are immediately eliminated from the protection of the contract and entering members immediately included under it. The employer makes a monthly report of such changes and the insurance company returns a state- ment of cost, calculated upon the actual group- employe exposure for that period. The principal factors in the production of the extraordinary low rates at which Group Insurance is generally written are : 1. The superstandard mortality, which is a dis- BUSINESS INSURANCE INSTRUCTOR 97 tinct feature of the business when operated exten- sively. 2. The avoidance of wastage by lapse. There is a marked tendency toward expansion in individual groups. The system has been abandoned by very few of the concerns that have adopted it. One underwriting company reports that of 300 groups insured by it but two have been discontinued. 3. The absence of expense for medical examina- tions and the low cost of administration, as com- pared with carrying an equal number of individual risks. 4. The reduced rate of commission paid to the agent, which is, nevertheless, liberal when the wholesale character of the transaction is considered and the fact that renewals are usually effected with- out any action on his part. The foregoing statement embraces all the essen- tial features of Group Insurance. They must be thoroughly understood and completely memorized by the agent, so that he may present them clearly and succinctly to the prospect. WHAT GROUP INSURANCE DOES FOR THE EMPLOYER IN THE present generation there has been an ever-increasing regard on the part of employers for the welfare of their employes. This has been evinced in a variety of ways, with more or less good results. It is safe to say, however, that none of these benefactions has proved so effective as Group Insurance. This may be accounted for by the fact that it reaches into the home and enlists the interest of the wives and other dependents of the workman. The individual certificate, with its assurance of pro- tection, creates good-will rooting in the family circle and lends a value to the job which it could not derive from any other agency. The following in point is a statement by the head of the Brunswick-Balke-Collender Company, who, like many other employers, found Group Insurance effective in securing the desired results, when other welfare measures had failed : "Like most manufacturers, I have been giving a good deal of personal attention for several years to the labor turnover problem. At one time or another I have put into effect plans which I hoped would, in a degree at least, solve this problem. Only one of them, however, seems to have given the results that I had hoped for. "The biggest factor in stabilizing the workman and preventing him from becoming a floater is the home influence. In nine cases out of ten that means the wife. "Visiting nurses were tried, also social gatherings. BUSINESS INSURANCE INSTRUCTOR 99 Both fell flat. One day a man told me how a life insurance salesman sold him through his wife. That gave me an idea. "We took out an insurance policy for every man in our plant, office and shop, payable to any bene- ficiary that the man named. The result from the three years this insurance has been in effect has been a somewhat reduced labor turnover and a noticeably improved spirit among the men. It has accom- plished what the other welfare work did not accom- plish, and the cost has been just about the same as that of the other activities which I tried out one time or another but without success." An employer may be moved by unselfish motives to cover his hands with Group Insurance and find, in course of time, that what he intended for philan- thropy turns out to be a profitable proceeding. Of the numerous benefits that accrue to the concern which carries Group Insurance, the most valuable is reduction in turnover. At a convention of employ- ment managers held at Philadelphia in 1917, it was determined that, taking one business with another, the cost of replacing an employe with a new one is from $40 to $45. Gauged by its effect upon turnover alone. Group Insurance costs nothing in the major- ity of instances, but actually produces a profit in dollars and cents. With concerns whose product is of unique or uncommon character, necessitating training workmen especially for peculiar tasks, re- duction of hiring and firing is of exceptional im- portance. In this connection nothing could be more impres- sive than the public declaration of Mr. E. H. Outer- bridge, vice-president of the Pantasote Leather 100 BUSINESS INSURANCE INSTRUCTOR Company, the first concern to cover a group of employes with Hfe, health and accident insurance. The policy in question has been in force since 1911. "Notwithstanding a liberal scale of wages, short hours, bonus and extensive welfare provisions, we experienced a change in the personnel of our force averaging about 35 per cent annually, due to no speciafic cause that we could discover. ... It was too expensive training 35 per cent of the force to have them leave just as they were becoming use- ful. The constant changes meant loss of production and loss of production meant increased overhead, and heavy overhead often means the difference be- tween a profitable or a losing enterprise. "After our Group Insurance had been in force a couple of years our labor turnover had decreased to about 15 per cent, whilst our production increased, and the proportion of seconds or inferior product showed a distinct reduction." The men who, by reason of advanced age or phys- ical impairment, could not obtain any other kind of insurance, must entertain genuine gratitude toward the employer. In every considerable group will be a sufficient number of such men to compose a sub- stantial nucleus of loyalty that could not be other- wise than extremely valuable to any organization. The purely altruistic satisfaction derived from real- ization of this and other benefits to his people from Group Insurance is not the least of the gains which the employer derives from carrying it. By creating esprit de corps. Group Insurance in- spires workmen with a desire to promote the pros- perity of the establishment to which they are at- tached. Group Insurance enhances the efficiency of BUSINESS INSURANCE INSTRUCTOR 101 labor by relieving it of one of its chief worries. Group Insurance has the effect of attracting the bet- ter class of labor. It has a distinct advertising value, as expressed by the president of the Southern Sierras Power Company of California, thus : "We also find that our companies have received good advertising and favorable comment from people out- side the organization owing to the fact that we are carrying Group Insurance." By providing this form of protection an employer obviates the necessity of expenditures in other direc- tions and especially relieves himself of the frequent and disagreeable requirement of extending chari- table aid to destitute dependents of deceased em- ployees. WHAT GROUP INSURANCE DOES FOR THE EMPLOYE IT IS fairly estimated that 15 per cent of workmen in industrial establishments are uninsurable and at least 10 per cent are at ages which entail heavy premium charges. Let us say that one-fourth of the total number are unable to take life insurance. It is safe to assume that an equal proportion would not do so, even though they could. Therefore, about one-half of the hands in the typical commercial organization are likely to leave their dependents destitute, for very few wage earners own anything at death. The families of these men will gain tem- porarily relief at the humiliating expense of becom- ing beneficiaries of a charitable collection. An effec- tual remedy for this condition is Group Insurance. However, the group coverage is not to be consid- ered as a substitute for individual insurance, and this fact is emphasized by the underwriting com- pany, as well as by the employer. Experience has proved that Group Insurance is highly educative in its effects. As a rule, and invariably when followed by active solicitation, the placing of a blanket policy is followed by the writing of a large volume of indi- vidual insurance among members of the group. Thus thousands of families yearly come under the protection of life insurance, and become sharers in saving investments, for the great majority of whom no post-mortem provision would otherwise be made. The incentive to constant employment and to larger earning is of practical benefit to the workman. Group Insurance not only furnishes this, but also BUSINESS INSURANCE INSTRUCTOR 103 creates a sense of responsibility and a feeling of self- respect. When the project has been properly ex- plained to employees they understand that it is neither a charity nor a substitute for other benefits, but a measure of mutual advantage, entailing obli- gations on both sides. The Western Clock Company, when announcing the introduction of its Group Insurance system, went to the root of the matter with the following statement: "This insurance creates a comfortable feeling on the part of every Westclocker— a feeling that if anything should happen the family would be able to take care of the usual expenses. What has this to do with making clocks? Just this: the man who has the fewest outside worries can do better work for himself and his employer." HOW TO CANVASS GROUP INSURANCE GROUP INSURANCE is a comparatively new idea to the layman. Its principles, though simple, are novel in their application. Its methods differ in many respects from those of ordi- nary life insurance. Consequently the salesman who essays to sell Group Insurance must qualify himself by such a sound and complete knowledge of it as will enable him to impart a clear understanding to the prospect. But, even with this qualification, no considerable success will be possible unless the salesman imbues himself with thorough apprecia- tion of the great and far-reaching value of Group Insurance. He must have the vision to see it as a pervasive beneficence, operating favorably upon the social development of the community at large; cre- ating a bond of enlightened co-operation between employer and employee ; producing contented and intelligent service, based on good-will and mutual advantage ; providing protection to a host of women and children who would otherwise be without it; enhancing the self-respect of wage earners ; and re- ducing labor wastage in industry. The largest cases and the greatest volume of Group Insurance are written by men who have this conception of it — who have efi^ectually "sold themselves" to an appre- ciation of its broadest aspects. This attitude on the part of the salesman is essen- tial, because the first step is efifectively canvass- ing Group Insurance is to convey this idea of its value and results to the prospect. Unless he can be brought to look upon it as an agency for mutual ben- BUSINESS INSURANCE INSTRUCTOR 105 efit and the general betterment of conditions in his estabhshment, there will be little liklihood of ob- taining his application. The chief cause of failure is the unbalanced presentation,— that in which the agent over-emphasizes one or the other side of the proposition. To appeal solely to the selfish instincts of the employer is no less faulty than to advance the project as pure philanthropy. You must present both the commercial and the altruistic side of the question. It is advisable to ascertain beforehand by inquiry which of these con- siderations is more apt to influence your prospect. In the majority of instances, the practical aspect of the matter will have the greater weight, but the man who utterly disregards the sentimental element can rarely be written. In other words, the employer who is not moved to any extent by the desire to ben- efit his employees, regardless of profit to himself, is not apt to incur the expense of covering them with Group Insurance. You may gain useful clues to the probable attitude of a prospect toward the proposal by ascertaining his practice in the matter of wages, sanitation, safety and general welfare work. In- spection of the establishment in view, as an ordinary visitor, is a commendable preliminary to formulat- ing a proposition for Group Insurance. Do not, under any circumstances, allow yourself to be drawn into a discussion of cost and methods of operation until your prospect has become con- vinced of the value of Group Insurance. In other words, create desire before going into details. This is an important feature of the canvass. As a rule the chief executive or managing head of the organization should be approached with the 106 BUSINESS INSURANCE INSTRUCTOR proposition, although occasions will arise when the overture may be made more effectively to some other official, or when an influential director may better be seen at the outset. If you have taken trouble — as you should invariably, to enquire into conditions of the establishment, you will be in a position to determine as to the most likely action in this respect. Make sure that the person to whom you present the proposition gains a sufficient understanding to explain it correctly to his asso- ciates. A brief and well-composed typewritten statement of the salient features of the proposition is to be recommended, but it should not be intro- duced until after the completion of your initial can- vass. If the matter is to be brought before a board of directors or a committee of officials, request per- mission to be present for the purpose of making a complete statement of the plan or of affording in- formation and explanations. Having "sold" the idea to the employer, be pre- pared to "sell" it to his employees, in case it is de- sired that you should do so. Even though you are not asked to address the men on the subject, nor to discuss it with their leaders and foremen, it is advisable that you should suggest the manner of its introduction to employees. The ultimate success of the enterprise will depend in large measure upon the idea of it which is entertained by the hands. At the outset many of them will be suspicious of ulter- ior motives on the part of the employer. It must be impressed upon them that the insurance will in no degree curtail any present or prospective benefits from the concern ; that there is no element of charity involved in the matter ; that the employer is moved BUSINESS INSURANCE INSTRUCTOR 107 by considerations of mutual advantage; and that the group coverage should be viewed in the same light as the employer's provisions for safety, sanitation and comfort. The employer should be warned against any ink- ling of the Group Insurance project reaching the men before a determination to put it into effect has been arrived at. Premature discussion is bound to lead to misconceptions and ill-founded prejudices. And, if the final decision is adverse to the proposi- tion, widespread dissatisfaction is inevitable. Even men opposed to the sugestion in a nebulous form will generally experience a strong desire for Group Insurance immediately it is withdrawn from their reach. The influence of labor union leaders will almost invariably be exerted against Group Insur- ance, because they have learned from experience that in establishments where it is carried there is difficulty in inducing strikes. Carry a specimen of the contract between the Company and the assured concern, a copy of the "in- dividual certificate," and accompanying letter from the employer. These are merely suggestive, of course, and will differ more or less in every actual case. The chief difficulty will frequently be found in convincing the prospect that Group Insurance will produce the effects which you claim for it and that the practical results will be commensurate with the expense. In this effort you will find a list of prominent concerns carrying Group Insurance and the testimony to its value the most effective means available. Most prospects will be apprehensive of additional clerical labor and troublesome details in connection 108 BUSINESS INSURANCE INSTRUCTOR with carrying Group Insurance. Familiarize your- self with your company's method of collecting pre- miums, paying claims, adjusting charges to changes in prsonnel, apportioning bonuses and regulating rates. This knowledge will enable you to show that very little trouble and no extra clerical force is re- quired on the part of the assured. You cannot make better than a rough estimate of cost, since the actual premium for the risk must be determined by the home office, after consideration of all the foctors in the case. In typical instances, however, it will be safe to ofifer a tentative quotation of 1.15 per cent, in clerical groups and 1.25 in indus- trial groups, with reduction by dividends. The cor- responding non-participating rates would be .90 and 1.05. Do not fail to enquire whether the contem- plated group will embrace an unusual proportion of persons over 45 years of age, and any over 60 years. Insurance rates do not advance in mathematical cor- respondence to increase of age. To illustrate: If an Ordinary Life premium is 2.40 per cent, of the sum insured, at age 30, it will be 3.93 per cent, at age 45, and 7 HZ per cent, at age 60. Naturally the average rate on an ordinary-sized group will be markedly increased by the presence of a few aged lives. And, as high salaries are usually accompani- ments of advanced ages, a schedule based on pay- roll will generally entail greater cost than one based on a flat sum, although the aggregate amount at risk be the same. Unless you are qualified to write Group Insurance by a thorough knowledge of the subject, do not at- tempt it, or restrict your efforts to creating an inter- est and, that having been accomplished, call in a BUSINESS INSURANCE INSTRUCTOR 109 capable agent to close the case. Don't deprive your- self of half the gains by an endeavor to secure the whole. The immediate profit to an agent from closing a group case is comparatively small, owing to the fact that the insurance is written on the Yearly Renew- able Term plan. But the by-product commonly yields rich returns, when the salesman is alive to his opportunity. In many instances, the group contract has led to Business Insurance applications for sub- stantial sums by officers of the assured company and numerous policies on the lives of employees. In this manner an agent last year placed $800,000 of ordi- nary insurance as a sequel to a group transaction. The negotiation of a group contract will usually be more or less protracted and it is sometimes prac- ticable to work side issues, meanwhile. But, this activity should seldom include the officers who are considering the proposition. The discussions with them should be restricted to the main question until it has been disposed of one way or the other. BUSINESS INSURANCE INSTRUCTOR 111 SECTION THREE Test Questions 21. State briefly the argument for Business In- surance in the case of a typical one-man con- cern. 22. Name some of the principal purposes of the farmer which will be served by Business In- surance. 23. In the canvass of the farmer it is especially necessary to have a clear understanding on a certain point. What is that point? 24. Name a few purposes for which the business or professional man takes Business Insurance to protect his private interests. 25. Why is life insurance the best means of pro- viding for the purposes contemplated in the preceding question? 26. Name a few important purposes that may be served by Business Insurance in connection with a church. 27. A is retiring from business at age 52, with $500,(X)0 clear. He is commencing to build a $50,000 residence and is backing a new busi- ness enterprise to the extent of $80,000. Does he need Business Insurance and, if so, why? 28. B is a farmer with a $12,000 mortgage on his land, ten years to run. He has $2,600 lately in- 112 BUSINESS INSURANCE INSTRUCTOR vested in mechanical equipment. He borrows from $2,000 to $3,000 from his bank on short term note, as occasion may require. What are his Business Insurance needs? 29. A church has members of modest means and a poorly paid minister with a family. What form of canvass would you base on the facts? 30. May group insurance be applied to the mem- bers of a church or social club? BUSINESS INSURANXE INSTRUCTOR 113 SECTION THREE Answers to Test Questions 21. The one-man concern is usually one-man man- aged. When the directing experience and abil- ity are removed, there is nothing left to the business but the material assets, which would realize but a small proportion of their value, under forced liquidation. 22. Enhancement of bank credit and general pro- vision for the discharge of debts. Specific means of paying off mortgages. Creation of sinking fund to meet depreciation of plant, and facilitate extension of operations. 23. That you are not, as he is apt to imagine, trying to write him for more personal insurance. That Business Insurance is quite distinct from per- sonal insurance and has entirely different func- tions. 24. To provide for Estate and Inheritance taxes and other post-mortem claims. To discharge a mortgage and other specific indebtedness. To protect speculative ventures and similar tem- porary hazards. 25. Life Insurance is the only medium through which a person can have absolute assurance of a certain sum of money being paid at his death. The only feasible alternative is to carry stable stocks and bonds. This will call for much larger immediate outlay than would life insur- ance. The amount that would be realized on 114 BUSINESS INSURANCE INSTRUCTOR the sale of securities cannot be definitely predi- cated. 26. The creation of an endowment or the liquida- tion of a mortgage. The protection of the minister's family and provision for his old age. 27. Obviously, A has extensive need of Business Insurance. First, he should provide enough to meet Estate and Inheritance taxes. His finan- cial stake in the new business venture should be covered, to avoid shrinkage of his estate in case of loss. It might be well to make specific pro- vision of ready cash to complete the residence in case of his early death, but this is of minor importance. Ordinary life would be the appro- priate form to recommend. 28. B should carry $15,000 ten-year endowment to discharge the mortgage and replace equipment ; and, in addition, $3,000 ordinary life to cover his periodical loans. 29. Clearly some provision should be made for the minister's family in case of his premature death and for himself in the event of permanent dis- ability or superannuation. The feasible plan would be to induce all the members to pledge individual contributions semi-annually or quar- terly to a "minister's fund." Reliance upon the general expense fund is rarely satisfactory. The per capita assignment or contribution for the purpose would probably amount to no more than one or two dollars. 30. It may, and there is an extensive opportunity for business in this direction. The organiza- tions which might be interested in group insur- ance are numerous and varied in character. SECTION FOUR Methods of Canvassing Business Insurance, Various Supplementary Data and Form Letters Contents SECTION FOUR Methods of Canvassing Business Insurance — Chief requisite of success in selling Business In- surance — Features of the Business Insurance can- vass — Injury effected by incompetent agents — Methods of creating interest in the subject — Prep- aration the most important part of the salesman's work — Employment of mercantile agency reports urged — Agent must originate the proposition — Large class of prospects that is quite commonly overlooked — Individual cases likely to grow out of the canvass. Preparation for the Canvass — The character of information that should be obtained — Difficulties that are usually met with — Presenting the proposi- tion to a committee or board of directors — The dif- ference in age objection disposed of — How to cal- culate the worth of an individual's services — Busi- ness Insurance a legitimate charge against operating expenses — Fallacy of the "can't afford it" argument — Preparation for the second interview of vital im- portance — Lists of prominent concerns carrying Business Insurance and expressions of bankers good canvassing material. Appropriate Policy Forms — Term insurance, its use and its several disadvantages — Method of turn- ing applications for term insurance to advantage — Joint versus separate policies — Various objections to joint insurance — Ordinary life or endowment in- surance usually the most appropriate for corpora- tion purposes — Great latitude in form of insurance permissable in case of small concern — Income insur- ance may best serve needs of firm — Limited instal- ment policy will fit certain situation — Precaution to be observed when insurance is likely to be assigned. Tabloid Arguments for Business Insurance. Expressions of Bankers regarding Business In- surance. Skeleton Proposition to cover the Life of an Em- ploye. Illustration of Endowment Policy employed as Sinking Fund. Specimen Mercantile Agency Report, with com- ments and appropriate proposition. Federal Taxes in Relation to Business Insurance — Proceeds of life insurance policies, when taxable — Premiums, when deductible from gross income — Partnerships classed as individuals — Corporations may not deduct premiums — Creditor Business In- surance — Partnership health insurance — Charitable institutions as beneficiaries — Pensions and Disabil- ity compensation — Group insurance — Income insur- ance — Insurance as surplus and invested capital. Estate and Inheritance Taxes — Character and ap- plication of the respective imposts — Assigned poli- cies — State inheritance taxes — Insurance payable to the estate — Valuation of insurance. Business Insurance Form Letters — Two series of form letters for corporations and firms respectively — Directions for producing and mailing form let- ters — Six specimen letters addressed to president of corporation — Six specimen letters addressed to partners in a firm. METHODS OF CANVASSING BUSINESS INSURANCE THE chief requisite for success in selling Busi- ness Insurance is understanding of the prin- ciples pertaining to it, and that, in turn, necessitates more or less knowledge of common business practices. The appeal to emotions and the excitement of imagination, which are powerful factors in writing personal insurance, play minor parts in the canvass of Business Insurance. Sentiment is not entirely absent, however, from even the largest cases, as when a corporation takes an Endowment policy to provide for an officer or employe after his term of service. And, of course, sentiment is almost al- ways a strong motive in the consideration of Group Insurance. In dealing with small concerns, whose business and domestic interests are closely con- nected, the usual suggestions of family protection may properly be advanced in the closing effort. But care should be taken not to mix them up with the presentation of the primary purpose. Success depends largely upon conveying to the prospect a clear conception of the difference between Business Insurance and personal insurance. Negligence or weakness in this respect account for a large pro- portion of failures. In every large cit}^ the field of Business Insur ance has been seriously impaired by agents incom- petent to discuss the subject. This makes the ap- proach more difficult than it would be ordinarily. Many prospects will claim to "know all about Busi- BUSINESS INSURANCE INSTRUCTOR 121 ness Insurance" and to have decided that there is nothing in it for them. The very statement is proof positive that it has never been adequately presented to them. It is no uncommon occurrence for an intel- ligent man to say, "Business Insurance is all right for a corporation, but we are a firm and it doesn't ap- ply to us," or the excuse may be stated conversely, in either case betraying complete ignorance of the character and functions of Business Insurance. This adverse attitude is most effectively overcome by special preparation for the particular case. If the salesman can suggest a specific application of Busi- ness Insurance to the affairs of the prospect's con- cern, an interview is likely to be granted. Lacking particular information, he should suggest one or an- other of the general uses of Business Insurance, on the chance of exciting interest. In such circum- stances, it is not advisable to go farther before mak- ing preparation. If the canvass is pursued, the agent's ignorance of conditions in the prospect's business is almost sure to lead to some inappropri- ate suggestion, with the probable result of closing the opportunity. It will be better to postpone the interview with some such statement as this : "There is no doubt but that Business Insurance would be a valuable aid in the solution of some of your in- ternal problems, but just how it might be most ef- fectively applied I cannot pretend to say, at present. If you will kindly give me some information, I will call again after preparing a specific proposition." Needless to say, the salesman must be ready to ask pertinent questions. What these should be in the cases of various prospects will have been gath- ered from thoughtful reading of the foregoing text. 122 BUSINESS INSURANCE INSTRUCTOR It will not, however, be necessary to seek exhaus- tive information from the prospect. This may be obtained from the mercantile agency report which should invariably be secured before proceeding with the case. The preparation for a Business Insurance can- vass is the most important part of the salesman's work. Creation of interest in the proposition and ultimate success of the negotiation depend upon the formulation of a logical plan which may be supported by convincing argument. The Business Insurance canvass is mainly a cold-blooded appeal to the intelligence. The argument is governed by consideration for the prospect's material interests. The monetary equation runs right through the prop- osition. It is a question of practical service and more or less calculable profit. Hazy or indefinite statements are fatal to success. The prospect, like the man from Missouri, "must be shown." And, in order to convince him that his interests will be promoted by acceptance of the proposition, the agent must have such a clear understanding of his plan and such a strong conviction of its soundness as can only be obtained from thoughtful and ex- haustive consideration. It is safe to say that the chances of success would be much greater in a case where six hours has been devoted to preparation and but one to presentation than in a case where one hour had been given to preparing and six hours consumed in the canvass. It must be taken for granted that the salesman possesses the knowledge and intelligence neces- sary to perceive the application of life insurance to certain business problems. Given that ability, the BUSINESS INSURANCE INSTRUCTOR 123 most essential and important element in preparation is information regarding the case in hand. This is the reason for urging invariable employment of mercantile reports. The data should be analyzed and digested thoroughly. (The writer has found it useful to memorize all the salient features.) Notes or memoranda should then be made as a basis for the proposal. (See Specimen Mercantile Agency Report, page 86.) Careful Preparation Necessary If, at the outset, you make some statement about the affairs of the concern which will indicate inside knowledge, you are likely to secure a hearing. The chief source of such knowledge is the mercantile report, which should be supplemented by inquiry among the concern's competitors and customers. You cannot work Business Insurance intelligently and successfully in connection with corporations and substantial firms without employing mercan- tile reports freely. Many agents do not use them at all and few get them except in cases that have developed hopefully. When you consider canvass- ing a concern for Business Insurance a report should be obtained as a first step. It ought to be the basis of your proposition. If a report should be the means of your writing one moderate case that you would not otherwise have closed, it would pay for all the reports that you would use in five years. But, the expense will be vastly more than counter- balanced by occasional information leading to the writing of individual insurance. The percentage of Business Insurance cases 124 BUSINESS INSURANCE INSTRUCTOR closed, even by experts, is much lower than that of domestic insurance.' This fact leads some agents to begrudge time and trouble in the preparation of Business Insurance canvasses. No greater mis- take could be made. Indeed, it is responsible for a large proportion of the failures in this field of en- deavor. The more thorough and painstaking the preparation, the greater the chance of success. It is practically certain that sixteen well-prepared ef- forts will yield a greater number of applications than sixty haphazard approaches. Moreover, the by-product of the former method is bound to be considerable. Diligent enquiry about a particular prospect will almost invariably disclose leads in various directions for business and personal insur- ance. Don't approach a concern in the expectation of having it furnish the information on which to make a proposition. You must frame the suggestion yourself, on ascertained facts, before making the approach. Nearly every business concern can be benefitted one way or another by carrying Business Insurance. The affairs of almost every business concern involve some problem which may be solved in whole or in part by carrying life insurance. How- ever, the concern will rarely perceive the need or ■ the utility of Business Insurance until it is pointed out. In seeking prospects for Business Insurance, agents are apt to be unduly influenced by material assets and to overlook concerns that own little more than office furniture. If we recognize the principle that brains, experience and other personal qualities are usually the most valuable possessions of BUSINESS INSURANCE INSTRUCTOR 125 business, it is obvious that excellent prospects for Business Insurance may be found in the numerous class that includes law firms, consulting engineers, service corporations, brokerage houses, advertising and various other kinds of agencies, etc. Such concerns are commonly crippled by the death of a talented member. They rarely carry Business Insurance, but that is doubtless because they are seldom canvassed for it. A firm of efficiency engineers affords an exception to the general rule of negligence in this respect. Five years ago the concern adopted the practice of putting 2 per cent of all net fees into a fund— the "kitty" they call it — to provide for life insur- ance and several other needs. About twelve months ago one of their number died. The insurance claim enabled the firm to pay his widow $15,000 in full settlement and to add $5,000 to the "kitty." The total cost of these benefits was somewhat less than $1,000. A peculiar feature of this case, which strik- ingly illustrates the necessity of the agent originat- ing the idea of Business Insurance, is that, whilst the firm had frequently recommended Business In- surance to clients in the course of many years of practice, it had never been thought of in connec- tion with themselves, until an agent broached the proposition. Even though preparation will assuredly increase the proportion of successes, many cases will fall flat after much work has been done on them. This is an inevitable feature of writing big business, but commercial insurance canvasses generally com- pensate for thought and labor. In the majority of cases, a wide-awake agent will contrive to secure 126 BUSINESS INSURANCE INSTRUCTOR some individual applications, whether or not he places Business Insurance. Some knowledge of the physical aspects of your prospect's business will be of advantage. For exam- ple, it is advisable to inspect a manufacturing plant, as a casual visitor, before making your approach. Even though you should not gain any information bearing upon your proposition, you will get closer to your prospect by displaying some familiarity with his operations. The canvass of large business concerns will bring you in contact with men who appreciate lucid and terse statements. Your proposition must be re- hearsed until it is perfectly clear in your mind and you are capable of stating it briefly and pointedly. Sometimes a typewritten statement will strengthen the presentation of the proposition. Don't spare pains in the preparation for Business Insurance canvasses of large cases. Success de- pends upon the formulation of an appropriate prop- osition and the presentation of it in a convincing manner. PREPARATION FOR THE CANVASS BEFORE approaching prospects for Business Insurance it is important to ascertain upon what specific person or persons the effort is to be directed. A common mistake, which often creates later difficulties, is to wait until after the negotiation has been opened for this information. In case of a corporation, find out which of the officers had best be approached— it will not neces- sarily be the president— and whether any director exercises more than ordinary influence over the board. In case of a firm, it is desirable to know the division of the shares and which of the partners manages the concern's financial affairs. In case of a close corporation, you must know how the stock is distributed. The information in question is easily obtainable through a mercantile report and personal inquiry. The object of it is to enable the salesman to open the canvass under the most favorable conditions. Many a promising case has fallen through because the wrong person was approached in the first in- stance. The agent who specializes in Business Insurance for large concerns must have an infinite fund of patience and the fortitude to bear severe disappoint- ment. It will sometimes happen that, after he has made careful preparation for a case and worked hard on it during several weeks, his proposition is rejected when success seemed to be in sight. In such cases, however, if the agent's work has been 128 BUSINESS INSURANCE INSTRUCTOR well done, he will generally have laid the founda- tion for some individual insurance. Business Insurance deals of magnitude are usu- ally long drawn out and interrupted by postpone- ments, obstructions and delays. The opposition of one person is overcome only to be succeeded by the objections of another. A difficulty is hardly dis- posed of when a fresh and unexpected one takes its place. Determination and cheerful patience are nec- essary to carry through a negotiation under such circumstances. The agent may be able to fill in breaks with canvasses for personal insurance, but he should keep it distinctly apart from the main issue. As a rule, it is advisable to postpone the working of individual cases until the Business In- surance proposition has been disposed of. It is hardly necessary to state that the agent should take the earliest opportunity to let the pros- pect know that considerable time and thought have been spent on the preparation of the case. The statement should be supported by a show of per- tinent knowledge and a proposition of practical application. Hints as to the Canvass In most instances it will be necessary to explain your proposition to more than one person. It will generally be advantageous to interview them sep- arately. Discussions with several persons at the same time are difficult and usually unsatisfactory. If your proposal is to be submitted to a committee or board of directors, it is of vital importance that the official who will present it has a thorough under- standing, as well as a favorable appreciation, of it. BUSINESS INSURANCE INSTRUCTOR 129 In addition to posting him, the salesman should put him in possession of a typewritten summary of the proposition, with the main arguments for its accept- ance, and all necessary figures. Opinions of experts differ as to the advisability of the salesman appear- ing on such an occasion. The writer is decidedly of the belief that the agent should make presentation of his proposition in person, if possible. At a sub- sequent meeting of the board to decide the question it will generally be advisable for the agent to refrain from appearing, but to remain close at hand in order to furnish any information that may be required. If this course is followed, each member of the board or committee should be supplied with the typewritten statement of the proposition immediately after the salesman's presentation of it. The statement should be supplemented by a list of prominent local con- cerns that carry Business Insurance. Reference by the directors or committeemen to some of these con- cerns will doubtless result in endorsement of Busi- ness Insurance, but that advantage is apt to be somewhat discounted by recommendation of other companies or agents. Despite that possibility, the salesman is advised to adopt the suggested practice. It commonly happens, in the case of two or three partners with considerable difference in age, that the youngest considers himself at a disadvantage because the cost of insuring the elder member is much greater. This fallacy is founded on a miscon- ception of the situation. The transaction is a joint one for mutual benefit and at mutual expense. The firm, not the individuals, pays the premiums, and the firm, not the individuals, enjoys the benefits. In case of the insurance being cashed in, the positions 130 BUSINESS INSURANCE INSTRUCTOR would be reversed and the policy on the elder man would contribute the greater surrender value. If the duties of one partner necessitated the employ- ment of an exceptionally high-salaried secretary or the use of an exceptionally costly desk, the other would view the matter as one of common interest and find no fault with it. He should take the same attitude toward the fact that the greater chance of his associate's death imposes a heavier premium payment on the concern than in his case. In short, Business Insurance is a firm charge and a firm asset. In a canvass or in the presentation of a proposi- tion it is frequently desirable to make a calculation of the worth of an individual's services. There are two ways of arriving at the result. The concern's estimate of the proportion of its annual profits attributable to the individual's services may be taken as a basis, or the remuneration which he re- ceives. For example, using the latter basis, let us assume that a man 35 years of age is receiving a salary of $10,000 a year. Using the Annuity Table at 6 per cent, we find that the present worth of his future services is about $128,000. In the event of his death there will be a definite monetary loss, approximately calculable, just as there would be in case of a building being destroyed by fire. Occasionally the agent will come across members of firms who look upon Business Insurance as a personal affair and consider that it should be paid for out of profits. This is a thoroughly illogical attitude. Business Insurance, like fire or liability insurance, is a legitimate expense. Its benefits are indirectly extended to everyone who has any deal- ings with the concern. Its premium outlay should BUSINESS INSURANCE INSTRUCTOR 131 be absorbed in the cost of production or operation and ultimately paid for by the consumer. When a concern declares that it cannot afford to divert the money required for Business Insurance premiums from its working capital because the lat- ter is earning extraordinary profits, the prospect is furnishing the agent with a strong argument in favor of his proposition. The extraordinary profits are dependent on extraordinary ability which, in its turn, is dependent upon continuation of life. The risk of loss and the wisdom of providing for indem- nity are equally obvious. No matter how carefully you may prepare your proposition, it will rarely be flawless or complete. But the first interview should enable you to gain the information necessary to make it so and otherwise put you in a position to strengthen your canvass. Preparation should be made for the second inter- view by readjusting the proposition, if necessary, and by reviewing the whole situation in the light of the first interview. Many agents fail to realize the importance of the second interview, and fall down at this stage of the negotiation. In a majority of instances, perhaps, this is the critical stage of the transaction. The interest which has been excited by the preliminaries is either strengthened or it dies out. Usually the prospect approaches the second interview in the expectation of hearing something impressive and, if he is disappointed, consideration of the matter is abandoned there and then. In many cases, careful preparation for the second interview is of greater importance than preparation for the approach, A list of prominent concerns carrying Business 132 BUSINESS INSURANCE INSTRUCTOR Insurance might have been added to the "Instruc- tor," but they are so numerous that the names of only the best known would fill many pages. It is very desirable, however, that the salesman should carry such a list, which should be made up mainly of cases in his city. Expressions of bankers, finan- ciers and merchants also make efifective canvassing material and a few are appended. Additional data of this sort is easily obtainable from various sources. Indeed, the insurance journals frequently print the strongest testimony to the value of Business Insur- ance, gathered from such sources. It is, however, becoming constantly less necessary to use such ma- terial in canvassing the larger concerns, among which the value of Business Insurance is now widely appreciated. The same cannot be said of the numerous small firms and one-man concerns which have not yet been extensively canvassed for Busi- ness Insurance. In such cases the agent will find illustrations drawn from the immediate business community to be the most efifective in influence, and especially those drawn from the prospect's line of business. APPROPRIATE POLICY FORMS HAVE dealt at length on the purposes of Busi- ness Insurance, with typical examples, because the most important qualification of the agent for success in this branch of our business is understand- ing of the principles involved and consequent ability to detect fields for their practical application. In short, the discovery of a real need for Business Insurance and the formulation of a logical proposi- tion, in accordance with the conditions of the case, constitute the chief part of the salesman's work in this connection. We will now proceed to consideration of various forms of insurance which may be fitly recommended in certain circumstances. Term Insurance The principle of avoiding unnecessary withdrawal from working capital will occasionally justify the taking of Term Insurance, but only when it is prac- tically certain that the need of the protection will not extend beyond six or seven years. After that period the net cost begins to be increasingly less under an ordinary life policy. Term insurance may be employed properly as extra or additional cover- age when it is desired to provide protection against some special hazard or liability which will exist for no more than a few years. When this form is used to serve the main purposes of Business Insurance, it usually proves to be disappointing in the long run. The entire absence of surrender values from term insurance is another objectionable condition. The 134 BUSINESS INSURANCE INSTRUCTOR assured may not appreciate this as fully as an assignee might. In case of a policy being assigned to a bank or other creditor, an extended insurance option might add substantially to its value as pro- tection against loss. An instance in point is that of a shoe jobbing house of Chicago which, several years ago, assigned a policy in connection with a loan and failed without discharging the obligation. The creditor maintained the insurance on the exten- sion provided by the contract and in a few years' time collected his debt in full, through the death of the man covered by the policy. By drawing the attention of a banker to this weak point in term in- surance, an agent secured an application for $25,000 on the ordinary life plan when the borrower desired to take term insurance. It is rarely possible to fix a limit to the time dur- ing which insurance protection will be required. In an active business new liabilities and fresh risks are constantly developing. Many concerns that start with a term policy, believing that they will not require to carry it till the end of the first period, find that their interests compel a renewal at a higher rate, and then wish that they had taken a permanent form at the outset. In nearly every case, term in- surance should be avoided on account of the insured, the company, and the agent. In several instances where concerns insisted on taking term policies, the writer contrived to improve the situation by a device which may be best ex- plained by citing actual cases. A hotel company decided to place a $20,000 twenty-year term policy on its manager. At my suggestion he arranged with the company to make BUSINESS INSURANCE INSTRUCTOR 135 it a twenty payment life contract. He undertook to pay the premiums in consideration of the company allowing him the term rate in cash. He clearly understood that his death within the period would entail considerable loss to his estate on account of his premium outlay on the policy. However, he lived to enjoy what was in all probability the most profitably matured policy in the history of life insurance. In a second instance, five officers of a corporation were insured under ten-year term pol- icies. I induced one of them to take a ten-year endowment, under a similar arrangement. On an- other occasion, one of three partners availed him- self of the plan. The scheme involves a fair gamble, of a kind likely to attract an unmarried man or one of ample means. Joint Versus Separate Policies An erroneous and injurious idea prevails among life insurance agents that joint policies are the ap- propriate forms for Business Insurance. Joint pol- icies should be written only when the concern is unable to pay for the amount of insurance required under separate policies. The chief objection to joint policies is that, no matter how many or how few lives may be involved, the contract expires with the death of one of the insured and the payment of one claim. It frequently happens that the survivors have great need for con- tinued protection. At best, they can secure it only by obtaining new insurance, necessarily at higher rates. But it may be that one or more of the orig- inal lives has become impaired and ineligible for insurance. Cases of very serious injury have been 136 BUSINESS INSURANCE INSTRUCTOR wrought upon business concerns by agents placing joint insurance where separate poHcies might quite as readily have been written. Another disadvantage of joint insurance is that the rejection of one risk nullifies the application, and the agent generally finds it impossible to revive the negotiation on the basis of separate policies. But when these have been applied for in the first in- stance, it is less difficult to place them with the insurable members of the group. Joint insurance is seldom taken by corporations, unless of the "close" character. In case of the re- tirement of a member or the dissolution of a firm which is covered by a joint policy, adjustment of the insurance interests is more difficult and less sat- isfactory than in a case where separate policies are carried. Under the former circumstances most com- panies will reissue the insurance on separate forms, but the individual policies will be for much smaller amounts than that of the original contract. In every respect, save that of larger premium out- lay, separate policies are preferable to joint forms for Business Insurance. The additional cost is, however, more than offset by the increased protec- tion and the proportionately larger cash and loan values. If the agent will take the trouble to work out a few comparative illustrations, he cannot fail to reach the conviction that there is only one con- dition which will justify him in recommending joint policies of Business Insurance — that is, when the concern cannot afford to pay the premiums for an adequate amount of insurance under separate policies. By far the majority of needs for Business Insur- BUSINESS INSURANCE INSTRUCTOR 137 ance will be served by ordinary life and endowment policies. When provision for indemnity in the event of death is the sole desideratum, the former is the appropriate form. When the chief purpose is to create a sinking fund, the latter form must neces- sarily be taken. Departures from these rules will be justified by certain conditions, of which notice will be taken hereafter, and by the entertainment of a secondary purpose by the applicant. The actuating motive with large corporations is generally to cover a valuable life. Occasionally the insurance taken in such a case is endowment, with a view to furnishing a retiring bonus or pension for the person in question. Corporations carry endow- ment insurance as a means of redeeming bonds, pro- viding a fund for taking care of the depreciation of the plant and equipment, as well as to facilitate the discharge of specific deferred liabilities. Under all conditions the death indemnity is more or less of a consideration, otherwise the proposition would not compare favorably with a purely financial funding arrangement. Variety of Forms May Be Used in Small Cases The need of large co-partnerships for Business Insurance are similar in great measure to those of corporations. With small firms there is rarely necessity nor ability to create a substantial sinking fund. The chief need is usually to provide an ofifset to the consequence of death. This can be most economically eflfected through ordinary life insur- ance, but considerable latitude as to form is justifi- able in writing such concerns. The small concern of limited means and restricted 138 BUSINESS INSURANCE INSTRUCTOR opportunities for investment may wisely consider various secondary purposes. The amount of insur- ance taken will be moderate, and any excess of premium over that of ordinary life could hardly represent a sum that would make any appreciable difference in the working capital. Young men often have a predilection for Endowment or Limited Pay- ment insurance. Either form may wisely be taken by partners in a modest business. It is more than probable that the substantial loan values will serve business purposes on more than one critical occa- sion during the course of the policies. In the case of a small firm, any Business Insur- ance that may be taken will embrace domestic pro- tection to a considerable degree, because the part- ners will generally be depending upon the business for the ultimate support of th-eir families. Under such circumstances, any of the ordinary forms of contract may be written appropriately. Even in- come insurance is not an exception to this state- ment. Let us suppose that two partners desire to provide for the discharge of the interest of the widow of either in case of death. The object can be served as well by monthly income policies as by any other form. It is advisable, however, that the method of settlement should be covered by a definite agreement, in which the wives should join. There is a class of cases to which limited install- ment insurance usually applies. It not infrequently happens that a man retires from a business under an agreement that his interest shall be acquired by a partner, employe, or several such persons, in con- sideration of paying to him a certain sum for a stipulated number of years. The sale is generally BUSINESS INSURANCE INSTRUCTOR 139 made on the terms in question because the pur- chasers lack means of paying in a lump sum. Under the circumstances, if the latter should die before completing the payments, it is improbable that their estates would be able to continue the payments. In order to safeguard the equities of purchasers in such arrangements, insurance should be taken on their lives, payable to the retiring member in the required annual amounts. Obviously, only in the event of the insured's death in the first policy year would the entire insurance be needed for the primary purpose, so that a specific secondary purpose might be served by it. If necessary, such insurance could be written on the reducing plan, so that it would exactly cover the liability at all times and expire when the last payment of purchase price should be made. When there is any likelihood of the insurance be- ing assigned, it should be issued in broken amounts. Failure to take this precaution sometimes entails serious inconvenience. A policy may be tied up as security for a comparatively small loan, when half the amount of insurance would have served the pur- pose and the balance, in another policy, could have been similarly employed elsewhere. Many cases will arise in which Business Insur- ance should be accompanied by a subsidiary agree- ment as to the disposition of the proceeds of claims. The agent should be prepared to suggest the terms of such agreements and to draft them in the rough. The final document should invariably be drawn by a lawyer. In a matter of such importance it is dan- gerous for the agent to trust to his own knowledge, no matter how extensive. On the other hand, his 140 BUSINESS INSURANCE INSTRUCTOR knowledge of insurance contracts and procedure may be of great service to the legal adviser. What has been said regarding small firms applies with greater force to one-man concerns and private individuals. In such cases secondary purposes will almost invariably be contemplated. For example, the sole proprietor, who is taking insurance to pro- tect a supply house, will be wise to consider the ultimate service of the policy in protecting his fam- ily or providing for his old age. There are numer- ous less obvious calculations that might prompt the agent to deviate, in such cases, from the rule to recommend ordinary life insurance as a provision for death indemnity. In their private capacity, individuals frequently find need for Business Insurance. It may be taken to secure creditors, to discharge mortgages, to cover speculative ventures, and to liquidate various liabil- ities. The agent's advice as to forms should con- form to the best interests of the applicant. The former may suggest secondary purposes when the prospect appears to overlook them. For instance, a physician desires to cover a mortgage on his home and is disposed to take an ordinary life policy for the purpose. His attention should be drawn to the value of an endowment as serving the double pur- pose of protecting the mortgage and, after it is paid off, of creating a fund for his support in later years. TABLOID ARGUMENTS FOR BUSINESS INSURANCE 1. It secures indemnity for the most valuable business asset — personal ability, brains, experience, technical knowledge, and the rest. 2. It provides means of discharging the claims of a deceased partner's estate against the firm of which he was a member. 3. It protects creditors, endorsers of paper, and financial backers. 4. It stabilizes business by enhancing bank and trade credits. 5. It is a certain and economical method of cre- ating a sinking fund. 6. It is a definite provision for depreciation of plant and replacement of equipment. 7. It affords ready cash, through policy loans and matured values, for expansion of operations, meeting unexpected demands and other needs. 8. It is adapted to meet various liabilities, espe- cially matured bonds. 9. It facilitates the floating of stocks and bonds. 10. It is an effective medium for conserving the control in close corporations. 11. It facilitates the retirement of members of firms. 12. It enables minority holders in close corpora- tions and partnerships to acquire larger interests. 13. It is the best provision the individual can 142 BUSINESS INSURANCE INSTRUCTOR make, as a rule, for the discharge of mortgages, estate and inheritance taxes. 14. It is almost indispensable to the perpetuation or profitable liquidation of one-man concerns. 15. It has frequently relieved concerns from financial embarrassment, and even bankruptcy, through the resource of its loan values. 16. It is a strengthening factor in new organiza- tions, consolidations and reorganizations. 17. It is a convenient and economical provision for pensioning valued employes, in the event of per- manent disability or superannuation. 18. It enables individuals to make charitable be- quests which would otherwise be beyond their means. 19. It facilitates the operations of the farmer and relieves his personal insurance of the charge of debts. 20. It can be usefully employed by every business concern in the solution of one or another of its internal problems. These are mere suggestions that might be ex- tended almost without limit. They should suffice to afford clues to many prospects. The agent is ad- vised to read one of the tabloids and then to ask himself: "What concerns with which I am ac- quainted would find Business Insurance especially useful in this connection?" Or, already having a particular prospect in view, let the agent run over the tabloids with the object of determining which of them suggest points for strengthening his presen- tation. EXPRESSIONS OF BANKERS REGARDING BUSINESS INSURANCE BANKS are becoming more and more impressed with the importance of providing against ad- verse business contingencies, and in making loans to corporations, partnerships and other busi- ness enterprises they now find it desirable to make specific inquiry as to whether the lives of the prin- cipal members of the borrowing concern have been insured. The importance of this can be judged by the fact that the Federal Reserve System has caused an inquiry regarding life insurance to be inserted in its regular statement form."— J. M. Henderson, Jr., President Sacramento-San Joaquin Bank, Sacra- mento, Calif. "Few features of a business statement give us more satisfaction than one showing a line of life msurance for the protection of the business, and it always adds to the credit of the customers seeking accommodation."— H. P. Hilliard, President Central National Bank, St. Louis, Mo. "It is a good safeguard in case of death and at other times a concern might be saved from suffering by this resource. In our opinion, insurance of this kind (Business Insurance) benefits the credit and financial standing of those adopting it." — Walker Hill, President Mechanics-American Bank, St. Louis, Mo. "Financial institutions in extending credit to cus- tomers make it a point to see that all material prop- erty is covered by fire insurance, and I fail to see why insurance on the lives of the main factors in a 144 BUSINESS INSURANCE INSTRUCTOR firm or corporation would not be as valuable to the bank or mercTiant extending credit. I am heartily in favor of this form of protection." — W. L. Peel, President American National Bank, Atlanta, Ga. "Business Insurance should commend itself to the management of every corporation the success of which is dependent upon the lives of certain indi- viduals; and this we know is true in many cases. Such insurance improves the credit by insuring stability, indemnifying the concern in case of loss of valued members of its management. As the cash values of such policies increase year by year, they form a sinking fund for the benefit of the concern, and become an additional resource in the event of financial depression." — F. L. Lipman, Vice-Presi- dent Wells-Fargo National Bank, San Francisco, Calif. "Individual, partnership or corporation Business Insurance tends largely to strengthen the credit of a business. It guards against the sudden removal of one of the important factors in the business, and means ready money to meet any demands caused by such a contingency. It is always a valuable asset on a business statement." — W. J. Blalock, President Fulton National Bank, Atlanta, Ga. "From the standpoint of a firm or corporation we believe that Business Insurance would in many cases prove valuable, offsetting to the extent of the amount of it carried any depletion of capital that might occur through the death of a member of a firm and affording a direct money benefit to corpo- rations in the event of the death of officers or stock- holders who by their endorsements or otherwise had strengthened the credit of the company." — James B. BUSINESS INSURANCE INSTRUCTOR 145 Forgan, President First National Bank, Chicago, 111. "I am of the opinion that prudent men engaged in every line of business, whether as individuals, firms or corporations, should carry as business protection a sufficient amount of life insurance not only to cover any indebtedness that may now exist or which death may bring about by reason of incompleted business ventures, but also such as will add to the estate as much as possible." — W. L. English, Presi- dent Fourth National Bank, Atlanta, Ga. "In the case of a company that depends to a large extent upon the management and ability of one, or even two, persons, we believe that it adds decidedly to the credit of the concern to carry life insurance for the benefit of their company or firm ; further than this, we believe that if a bank were loaning to any considerable extent to a company that depended largely upon the ability of one or two individuals, it should insist upon having a proper amount of insur- ance taken out." — Allan Forbes, President State Street Trust Co., Boston, Mass. "I have always felt that insurance designed to protect business from the losses resulting when im- portant persons in the business are removed is essentially sound and of the greatest importance." — ■ W. H. Booth, Vice-President Security Trust and Savings Bank, Los Angeles, Calif, "We regard with great favor the steadily growing practice of placing a substantial amount of insurance upon the life of the active and aggressive partners in a firm or officers in a corporation. In fact, the more important a man is to his concern the more satisfac- tion a creditor derives from learning that coincident with the irreparable loss caused by his death there 146 BUSINESS INSURANCE INSTRUCTOR will be a payment of a large sum in cash into the treasury of the concern." — W. A. Law, Vice-Presi- dent First National Bank, Philadelphia, Pa. "The carrying of Business Insurance is an element of strength for the credit of a firm or corporation which will not be overlooked by the banker when called upon to finance the concern, I would urge all corporations and firms to carry this form of life insurance." — J. A. McCord, Vice-President Third National Bank, Atlanta, Ga. *T am a strong advocate of partnership and cor- poration life insurance. I believe that business con- cerns should take the precaution of insuring the lives of those on whom they are particularly de- pendent for management. In a number of instances where this plan has been adopted, during the past few years, it has materially increased the credit and standing of the concerns affected." — J. M. Elliott, President First National Bank, Los Angeles, Calif. "When a man comes to us to borrow money we want to know how much life insurance he carries." — A. Barton Hepburn, President Chase National Bank, New York City. "We regard life insurance as a necessary addition to the intangible assets of any business." — R. H. Hemphill, Manager Federal Reserve Bank, Atlanta, Ga. "We consider business life insurance as the most desirable as collateral when credit is being sought." — H. W. Bowman, President Springfield National Bank, Springfield, Mass. "Paper presented by a company that carries Busi- ness Insurance is just that much more acceptable than the paper of one that does not." — C. M. Sawyer, BUSINESS INSURANCE INSTRUCTOR 147 Governor Federal Reserve Bank, Kansas City, Mo. "We know that life insurance is an excellent safe- guard ; we are constantly recommending it to our borrowers." — J. Adam Brown, President New Neth- erland Bank, New York City. "Harriman National Bank makes it a practice not only to make inquiry regarding life insurance, but also urges it both for personal and business pur- poses." — J. W. Harriman, President Harriman Na- tional Bank, New York City. "Frankly, if the average business man asking credit would consider his life insurance with the same regard that he does his fire insurance, less business troubles would occur." — G. C. Van Tuyl, Jr., President Metropolitan Trust Co., New York City. "Business Insurance strengthens the credit of the concerns that carry it. The increased confidence that it creates is recognized in the mercantile com- munity and thus reflected through our reports." — C. F. Clark, late President Bradstreet's Mercantile Agency. SKELETON PROPOSITION TO COVER THE LIFE OF AN EMPLOYE FORM of Policy. Endowment, 20, 25, 30 or 35 years, regulated to mature at about age 65. Plan. Monthly income to provide pension at the end of the policy period. Commuted value to be paid to the employer concern in case of insured's death w^ithin the policy period. In case a satisfac- tory amount of monthly income should not yield the desired amount of indemnity for death, an ordi- nary life policy may be added to make up the deficiency. Provision for Disablement. The policy should embrace the permanent total disability feature, to cover the hazard of loss of services, plus a probable expenditure for the aid of the employe. This form of proposition will appeal to many cor- porations. It is quite likely that in a considerable proportion of instances where ordinary life is taken upon the life of an employe, the alternative coverage described would be adopted, if suggested by the agent. ENDOWMENT POLICY EMPLOYED AS SINKING FUND "HEN the proposition is to use endowment insurance as a substitute for the ordinary- sinking- fund, it -will generally be advisable to employ a comparative illustration. The following is a suggested method of setting forth the data : It is assumed that the primary object is the re- demption of $100,000 of bonds, maturing- in twenty years and that it is also desirable to cover a valuable life with insurance. A twenty-year endowment pol- icy of $100,000 is placed on a man aged 35, although the insurance may be distributed over several lives, in which event the comparative statement must be worked out for each case. Column 1. Gross premium. Column 2. Probable dividend. Column 3. Total net deposits. Column 4. Profit in case of death. Column 5. Sinking fund, beginning with $28,800 and improved at 5 per cent annually. Column 6. Difference between insurance and sink- ing fund accounts in case of death. At the end of the period, the two accounts will necessarily balance. SPECIMEN MERCANTILE AGENCY REPORT LEE & PRATT, Building Contractors and Con- sulting Engineers. The firm is composed of Edgar E. Lee (mar- ried, aged 45), Thomas S. Pratt (married, aged 42), and Perrin I. Hudson (married, aged 36). The last named has little more than a nominal interest, but draws a salary of $20,000 a year as manager of the business, the success of which is said to be largely- due to his ability. This partnership was formed by the senior mem- bers in 1906. Hudson's connection with it is of five years' duration. It began in a modest way, but has become very prosperous, especially in recent years. The concern has constructed a number of large buildings in this city and now has in hand the fol- lowing, besides many comparatively small con- tracts: Adamson Building, $1,700,000; Elks' Club, $800,000; Normal School, $1,600,000; Buell Opera House, $1,350,000; Shepard Building, $675,000. Some of these contracts are made on the cost plus fixed fee, others on the lump sum basis. Edgar Lee furnished the following typewritten, but unsigned, statement of the firm's affairs as of Decem.ber 31, 1921 : ASSETS (cents omitted) Cash in banks $ 7,214 Cash in hand 3,647 Accounts receivable (construction work in progress) 182,533 Portions of fees earned on uncompleted buildings 18,500 BUSINESS INSURANCE INSTRUCTOR 151 Book accounts 8,161 Real estate 137,460 Equipment 85,000 Office furniture and fixtures .... 4,200 Inventories, material on hand . . . 8,720 Total $455,435 LIABILITIES Bills payable to banks $113,700 Accounts payable, not yet due . . . 101,412 Mortgages, not yet due 64,000 Taxes, not yet due 1,740 Bills payable to others 7,576 Total $288,428 Net worth 167,007 Fees to mature within 12 months, less estimated expenses 250,000 Total $417,007 Personal assets of E. E. Lee and T. S. Pratt, con- sisting of real estate, stocks, bonds and various per- sonal property, are said to amount to upwards of $200,000. The concern operates extensively in real estate, buying and selling with good results, as a rule. Their holdings are usually mortgaged to the limit, probably to facilitate extensive operations. At pres- ent they have a number of lots in scattered sections of the city, mostly well located. At times the firm makes large advances to clients in order to assist in financing building operations. They have a considerable sum owing to them on a 152 BUSINESS INSURANCE INSTRUCTOR large building which they erected some time ago on Rhodes Avenue and have filed a lien on the prop- erty. It is possible that they may come out of this transaction without serious loss, but it ties up a con- siderable amount, meanwhile. Lee & Pratt are both shrewd men, energetic, of good business ability, and they bear a good general reputation. They are reported to take care of their current obligations promptly. They have the use of a liberal line of accommodations in financial quar- ters and are regarded good for their reasonable requirements. The foregoing is almost a literal reproduction of a genuine mercantile agency report. The most sig- nificant features, from our point of view, have been italicized. Now, let us jot down memoranda, just as we would if we were considering the data with the purpose of formulating a proposition for Business Insurance. Memoranda Partners (Hudson need not be considered in this connection) both married. In absence of agreement to contrary, widow of either might make demand upon survivor for cash settlement of former hus- band's interest. Hudson's ability evidently very valuable asset. Firm's greatest prosperity coincident with his con- nection. On basis of his salary, his present worth to concern about $250,000. (See method of calcula- tion, page 68.) Hudson should be good prospect for personal in- surance. Others are to be sounded in this respect, after disposition of Business Insurance proposition. Speculative ventures in real estate and incidental BUSINESS INSURANCE INSTRUCTOR 153 mortgages are to be noted. Firm takes risks in lending to clients and recent unfavorable experience must make them appreciative of fact. Concern always has large contract operations on hand, necessitating extensive financing and ready resources. Usual risks of lump sum contracts not to be overlooked. Cash in banks and in hand is negligible quantity and other assets show only questionable resources in case of emergency. On the other hand, liabilities to banks are probably represented by short-time notes. Review of financial statement indicates really dan- gerous condition. Sudden death of either of the three partners would doubtless embarrass the firm seriously. In all probability credits would be cur- tailed and claims pressed. In almost total absence of quick or liquid assets, concern would have to abandon profitable contracts and, perhaps, wind up its business. This is the big point to impress on them. As a minor consideration, sinking fund should be established to provide for depreciation of equipment and discharge of mortgages. Not improbable that Lee & Pratt are depending to some extent on personal resources to supply cash in case of emergency, but it is poor policy and some- times disastrous to domestic interests to make one's estate bear risks of one's business. Proposition That Lee & Pratt should each take $100,000 of ordinary life insurance, payable to the other, under a special agreement as to its disposition. 154 BUSINESS INSURANCE INSTRUCTOR That the firm should place $200,000 ordinary life insurance on the life of its manager, Hudson. That $25,000 of ten-year endowment should be carried as a sinking fund to meet deferred liabilities. As a matter of fact, the firm was written a few months ago for $100,000 of ordinary life on each of the senior members and $150,000 of the same form on Hudson. The endowment is now under consid- eration and Hudson has applied for a $250 monthly income policy in favor of his wife. Without the mercantile agency report on which the agent formulated his proposition, it is practically certain that he would not have secured anything like the above amount of insurance and, perhaps, would have failed to close the case. FEDERAL TAXES IN RELATION TO BUSINESS INSURANCE PROCEEDS of Life Insurance Policies. Under the provisions of the Revenue Act of 1918, the proceeds of life insurance policies, when pay- able to corporations, were included in the corpora- tion's gross income and were subject to an income tax of 12 per cent in 1918 and 10 per cent in sub- sequent years. In addition to the income tax, such proceeds of life insurance policies were subject, in certain cases, to the excess profits tax. A radical change was effected by the Revenue Act of 1921. Section 233 of that instrument provides: (a) "that in case of a corporation subject to the tax imposed by Section 230, the term 'gross income' means the gross income as described in Sections 213 and 217," Section 213 refers to individuals and pro- vides that the following items shall be excluded from gross income : (a) the proceeds of life insur- ance paid upon the death of the insured to individual beneficiaries or to the estate of the insured; (b) the amount received by the insured as a return of pre- mium or premiums paid by him under life insurance, endowment or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract. Therefore, so far as Federal income taxes are con- cerned, the proceeds of life insurance policies, when they now become payable to corporations, are placed upon the same basis as when payable to individuals, and are not included in gross income. Without a doubt, this amendment in the law will 156 BUSINESS INSURANCE INSTRUCTOR result in Business Insurance being taken by many corporations that have been restrained by the for- mer impost on the proceeds. This worked extreme hardship in some instances. A case is on record of a corporation collecting a claim of $30,000 under a life insurance policy and by reason of that addition to its gross income being placed in a higher class for excess profits taxation. This occasioned an addition to the tax charge of $35,000, so that the company actually lost $5,000 by receiving the proceeds of the insurance policy. The exemption described above applies to firms and one-man concerns. Premiums — When Deductible. When a business concern pays premiums on a policy on the life of an officer, employe or individual financially interested in the concern's business, for the purpose of protect- ing itself from loss in the event of the death of any such person, the premiums are not deductible from gross income. But if the concern is not a bene- ficiary under the policy, except as it may derive advantage from the increased efficiency of the em- ploye, and pays the premiums purely as reasonable additional compensation of such employe, they are allowable deductions. The proceeds of such policies paid upon the death of the insured may be excluded from gross income if the beneficiary is an individual, but must be included in the gross income if the beneficiary is a corporation. (In this connection see following paragraph.) Partnerships Classed as Individuals. On the rec- ommendation of the Tax Advisory Board, the ex- emption allowed to individuals was extended to include the proceeds of life insurance when paid to BUSINESS INSURANCE INSTRUCTOR 157 partnerships, on the theory that in the ordinary case where the Hfe of a member of a firm is insured his death dissolves the partnership and the survivors receive the proceeds of the insurance pohcy as individuals. Corporations May Not Deduct Premiums. Cor- porations are not included in the exemption referred to in the preceding paragraph, and may not deduct premiums paid on Business Insurance from gross income. If a corporation pays the premium on an individ- ual life insurance policy carried on the life of one of its officers or employes v^ho is permitted to desig- nate the beneficiary and in which the corporation is not in any way a beneficiary (see following para- graph, Group Insurance), premiums so paid will, in the absence of satisfactory evidence to the contrary, be presumed to constitute taxable income to such officer or employe. (Treasury Ruling 1128.) Creditor Business Insurance. If a creditor takes out a life insurance policy on an individual to cover loans to the individual or indebtedness otherwise incurred, the creditor may, while the indebtedness is existent, deduct from gross income as a necessary expense the amount of the premiums paid during the year for which the return is made. On the same principle, it has been ruled that when a firm or indi- vidual carries life insurance specifically for the pro- tection of a creditor and the creditor is named as beneficiary under the policy contract, the premiums may be treated as a legitimate business expense and be exempted from taxation as gross income. 158 BUSINESS INSURANCE INSTRUCTOR Partnership Health Insurance, Premiums paid by a firm for accident and health insurance covering the individual partners are not deductible from the gross income of the concern. Premiums paid by an employer firm on life, acci- dent or health policies in favor of its employees as additional compensation for such employees are in- come to the employees. (See paragraph, "Corpora- tions may not deduct premiums.") Charitable Institutions as Beneficiaries. Premiums paid on life insurance are allowable deductions from gross income when the beneficiary is a charitable institution exempt from taxation, provided the bene- ficiary named cannot be changed at the will of the insured and the sum of the annual premuims, plus other allowable charitable contributions, does not exceed 15 per cent of the taxpayer's net income. Pensions and Disability Compensation. Amounts paid for pensions to retired employes or to their de- pendents, or on account of injuries sustained by employes, and lump sum amounts paid as compensa- tion for injuries, are allowable deductions as neces- sary expenses. Such deductions are limited to the amount not compensated for by insurance or other- wise. (Regulation 45, Article 108.) Group Insurance. Premiums paid by an employer on policies of group insurance covering the lives of employees, under which financial benefits can accrue only to the beneficiaries designated by the em- ployees, do not constitute taxable income to the employees whose lives are insured. BUSINESS INSURANCE INSTRUCTOR 159 Income Insurance. Amounts received by an indi- vidual beneficiary or by the estate of the insured under an instalhnent contract of life insurance are exempt from taxation. This applies to the install- ment payments and to any dividends received under the contract. Insurance as Surplus and Invested Capital. Only the cash surrender value of policies derivable from premiums paid in prior years which have not been deducted as an expense can be included in surplus. The cash surrender value of a life insurance policy which constitutes surplus as of the beginning of the taxable year for invested capital purposes retains its character as surplus even though the policy consti- tuting the admissible asset upon the basis of which the surplus was determined is terminated and paid. In case a corporation beneficiary has deducted from gross income only a portion of the premiums paid in prior years on insurance policies on the lives of its officers or employees, it may include in its invested capital for the taxable year the same pro- portion of the cash surrender values of the policies on January 1, 1917, that the premiums paid and not deducted from gross income bear to the total pre- miums paid to that date. The computation of this portion relates only to premiums applicable to the years prior to January 1, 1917, and cannot be made with respect to any premiums paid subsequently, for the reason that under the Revenue Acts of 1917 and 1918 premiums paid by a beneficiary corporation on the lives of its officers or employes are not allow- able deductions from gross income. If all premiums paid prior to 1917 have been de- 160 BUSINESS INSURANCE INSTRUCTOR ducted from gross income, only the increase in the cash surrender values of the policies from January 1, 1917, to the beginning of the taxable year may be included in invested capital. (Article 846.) ESTATE AND INHERITANCE TAXES BUSINESS INSURANCE is commonly taken to provide for the taxes upon estates. These are entirely separate and distinct from the income tax. The Federal impost is termed an Estate Tax. It is collected from the net estate before distribution and is a first lien against it. The Federal estate tax is not deductible in computing the income of estates for the purpose of taxes. The Revenue Act of 1918 provides that in the value of the "gross estate of the decedent there must be included "The amount receivable by the executor as insurance under policies taken out by the dece- dent upon his own life; and to the extent of the excess over $40,000 of the amount receivable by all other beneficiaries as insurance under policies taken out by the decedent upon his own life." The taxable insurance is (a) all insurance payable to the estate; (b) insurance payable to individual beneficiaries to the extent that it, together with other taxable insurance payable to the estate, ex- ceeds $40,000. Insurance is deemed to have been taken out by the decedent in all cases where he paid the premiums, directly or indirectly. Where the premiums were paid by some other person, firm or corporation, not out of money belonging to or ad- vanced by decedent, the insurance should not be included in the estate. Assigned Policies. Where the decedent has as- signed a policy and thereafter retained no interest in it and paid no part of the premiums, the insurance 162 BUSINESS INSURANCE INSTRUCTOR will not be considered in calculating the amount entitled to exemption. State Inheritance Taxes. The Federal estate tax is distinct from the inheritance tax imposed by almost every State. The former is imposed on the entire net estate and not upon the distributive shares. State inheritance taxes are not deductible from the gross estate in computing the net estate subject to Federal tax. Insurance Payable to the Estate. All proceeds of insurance received by the executor are to be in- cluded in the gross estate. This applies to policies payable to decedent's estate or to his executor or administrator, and all insurance which is in fact receivable by the estate, or which must be used to pay charges against the estate or to cover costs of administration ; it includes insurance to provide funds to pay the estate tax, inheritance tax, or other legal charges upon the estate. (Regulation 37, Article 33.) Valuation of Insurance. The amount of any policy to be returned is the amount of the proceeds actually received by the executor or beneficiary. Where the proceeds are payable as an annuity for life or a term of years, the present worth of the annuity at the time of death must be included in the gross estate. Where the insurance contract grants an option to receive a lump sum in lieu of the annuity, this sum, if accepted, will represent the value of the insurance for purposes of taxation. Where there is more than one option, and none of them is convertible, the value of the insurance will be calculated in accord- ance with the option which is exercised. BUSINESS INSURANCE INSTRUCTOR 163 The agent who purposes speciaHzing in Business Insurance for the purpose of meeting the estate and inheritance taxes must post himself fully on the sub- ject. The taxes of States vary considerably in amount and in the regulations governing them. All the necessary information may be acquired from the Inheritance Tax Service of Prentice-Hall, New York City. BUSINESS INSURANCE FORM LETTERS TWO sets of form letters follow. One is de- signed for use in connection with corporations, the other in connection with co-partnerships. The form letter which has the appearance and character of a circular is of little value. Each of the Business Insurance letters should be typed separately and signed by hand. In order to increase the impression of individual communica- tions, they are so phrased that the name of the cor- poration or firm addressed may be inserted without change in the general wording. This method involves considerable time and trou- ble, but experience has shown that one hundred let- ters prepared in this manner will produce better results than one thousand produced by the multi- graph or other duplicating process. The series of letters is framed on the principle that governs homeopathy. The small doses, deliv- ered at short intervals, are readily swallowed and easily digested. Cumulative effect, with all its well- known advantages, is secured. It is recommended that the letters be mailed so that one will be received on each Monday and Wednesday of three consecu- tive weeks. A return card and return unstamped envelope should be enclosed with each letter. Not more than 5 per cent of replies should be looked for. The greater proportion of results will accrue from the canvass, for which the letters are an excellent intro- BUSINESS INSURANCE INSTRUCTOR 165 duction. The follow-up should be commenced three days after the second letter has been received. Good men following one hundred letters of this kind, judiciously addressed, can hardly fail to secure ten live prospects and interest a number of others. It may be added that it is advisable, for several rea- sons, to select the names from a list of concerns in the same line of business. Immediately that it is determined to institute a canvass, a mercantile report should be obtained and studied, preparatory to the first interview. Corporation Letters Mr. J. W. Simpson, President Ribstone Engine Works. Dear Sir: Doubtless the Ribstone Engine Works carries fire, liability and other forms of insurance. Has it covered its most valuable asset — the combination of brains, experience and ability upon which its pros- persity depends? Life insurance is the business buttress that main- tains stability in time of stress. Yours truly, Mr. J. W. Simpson, President Ribstone Engine Works, Dear Sir: Every corporation may find in Business Insurance a solution to one or another of its internal problems. It is a source of relief in all manner of adverse contingencies. Life insurance is the anchor to windward that has saved many a corporation from wreck. Yours truly, 166 BUSINESS INSURANCE INSTRUCTOR Mr. J. W. Simpson, President Ribstone Engine Works. Dear Sir: Business Insurance, taken with the primary pur- pose of providing indemnity for the loss of a valu- able life, is not idle in the meanwhile. Its constantly enlarging loan credit creates an emergency reserve that is immediately available in time of need. Business Insurance is a reliable support when other resources fail. Yours truly, Mr. J. W. Simpson, President Ribstone Engine Works. Dear Sir: The Ribstone Engine Works might find Business Insurance an economical and profitable medium for creating a sinking fund to discharge deferred liabil- ities, repair plant and replace equipment. Business Insurance furnishes cash without pub- licity and at a moderate rate of interest. Yours truly, Mr. J. W. Simpson, President Ribstone Engine Works. Dear Sir: The conserving quality of Business Insurance is not limited to its function of indemnifying for loss of life. The mercantile and banking credit of a con- cern is enhanced by it. Many a company has been enabled to survive financial stress by loans against life insurance. Business Insurance is the ultimate safeguard of creditors. Yours truly, BUSINESS INSURANCE INSTRUCTOR 167 Mr. J. W. Simpson, President Ribstone Engine Works. Dear Sir : I have addressed to you several letters, briefly calling attention to a few of the numerous advan- tages of Business Insurance. If the Ribstone Engine Works does not carry this form of protection, it can only be because Business Insurance has never been adequately presented to your company. I shall seek an early opportunity to discuss the subject with you, confident of my ability to indicate directions in which Business Insurance may be made to serve the interests of the Ribstone Engine Works. Yours truly, Firm Letters Messrs. Johns & Pettie, Lumber Dealers. Dear Sirs : If you could take into your business an associate who, whilst asking no voice in the management, would stand ready to guarantee you indemnity for the death of a member of your firm, who would stand ready to lend money in time of need, who would hold a constantly growing reserve fund to your credit, you would promptly accept the offer. Business Insurance is the silent partner that will do all this and more. Yours truly, 168 . BUSINESS INSURANCE INSTRUCTOR Messrs. Johns & Pettie, Lumber Dealers. Dear Sirs : It is safe to assume that Johns & Pettie carry fire, liabiHty, burglary and other forms of insurance, but has it provided for the most severe loss that could befall the firm — the premature death of one of its members? Business Insurance w^ill enable you to meet the claims of a deceased partner's estate without draw- ing on working capital. It will act as a shock ab- sorber in minimizing the loss of his services and as an aid in repairing your organization. Yours truly, Messrs. Johns & Pettie, Lumber Dealers. Dear Sirs : An officer of one of our leading mercantile agen- cies declared that "During the past decade Business Insurance would have saved more than one million employers from sinking back into the ranks of the employed." The head of another mercantile agency has said : "Over 80 per cent of failures among firms are due to deaths for which no provision has been made." Business Insurance involves domestic insurance. Upon the prosperity of the business depends, more or less, the preservation of the homes of employers, employees, and creditors. Yours truly, BUSINESS INSURANCE INSTRUCTOR 169 Messrs. Johns & Pettie, Lumber Dealers. Dear Sirs : Business Insurance enhances credit and estab- Hshes a reputation for conservative methods. Mer- cantile agencies include Business Insurance in their reports, and banks take account of it in their deaHngs. The treasurer and credit man of one of our largest vt^holesale houses has said : "In this day of commer- cial operations on narrow margins, any serious re- verse, and especially death, is apt to result in failure or liquidation. Life insurance will soon be required of all concerns asking for extensive credit." Yours truly, Messrs. Johns & Pettie, Lumber Dealers. Dear Sirs : Business Insurance will not only protect the most valuable asset of Johns & Pettie— the man material upon which its prosperity depends — but will also create a tangible reserve and a fund immediately available in emergency. During the last financial panic more than $75,000,- 000 was borrowed by business houses on the col- lateral security of their life insurance policies, saving many from serious embarrassment, if not actual bankruptcy. Yours truly, 170 BUSINESS INSURANCE INSTRUCTOR Messrs. Johns & Pettie, Lumber Dealers. Dear Sirs : I have addressed to you several letters, briefly- calling attention to a few of the numerous advan- tages of Business Insurance. If Johns & Pettie do not carry this form of protection, it can only be because Business Insurance has never been ade- quately presented to your firm. I shall seek an early opportunity to discuss the subject with you, confident of my ability to indicate directions in which Business Insurance may be made to serve the interests of your concern. Yours truly, BUSINESS INSURANCE INSTRUCTOR 171 SECTION FOUR Test Questions 31. What are the chief qualifications for selHng Business Insurance? 32. Wherein does the value of the mercantile agency report consist? 33. Is it feasible for an agent to write Business Insurance without special qualifications? 34. Briefly state the arguments against the use of term policies for Business Insurance purposes? 35. What are the principal uses of Business Insur- ance on the endowment form to corporations, firms and individuals, respectively? 36. Two young married men run a garage and sup- ply store in which each has $12,000 invested. The business nets from $8,000 to $10,000 a year. Each of the partners carries $3,000 of personal insurance, and both recently purchased homes which are to be paid for at the rate of $50 a month for ten years. What form of Business Insurance would you recommend to them and on what grounds? 37. D is a corporation which desires to protect itself against the loss that would be entailed by the death of its general manager, and proposes to place ordinary life insurance upon him. Would you suggest any modification of the plan? 38. A proposition is briefly stated in connection with the mercantile report on Lee & Pratt. 172 BUSINESS INSURANCE INSTRUCTOR Enumerate the principal purposes that will be served by the suggested insurance. 39. The Revenue Act of 1921 effects an important change in the taxation of life insurance carried by corporations. What is it? 40. A firm takes out Business Insurance for the specific protection of a creditor. May the for- mer deduct the amount of premiums from gross income in making tax return? BUSINESS INSURANCE INSTRUCTOR 173 SECTION FOUR Answers to Test Questions 31. Knowledge of common business practices and methods of financing, together with an under- standing of Business Insurance. Without such knowledge and understanding, an agent will be unable to apply Business Insurance to the solu- tion of various business problems. ^2. The mercantile agency report furnishes data concerning the affairs of a business concern that can rarely be obtained from any other source. It affords a reliable basis for the formulation of a proposition of Business Insurance. It fre- quently discloses good prospects for individual or personal insurance. ^^- It is quite practicable for an agent without spe- cial qualifications to write Business Insurance extensively among the numerous class of con- cerns operating in a small way. with meager capital. These cases seldom involve other con- siderations than the consequences of death and the enhancement of credit. The canvass is sim- ple and the prospects easy to approach. 34. After six or seven years the net cost under term insurance will be greater than under ordinary life. The absence of surrender values seriously diminishes the value of a term policy as security. 35. Corporations employ endowment insurance to create sinking funds for the retirement of bonds and the discharge of various deferred liabilities; It is also effective as a provision for future pen- 174 BUSINESS INSURANCE INSTRUCTOR sions. Firms may find endowment insurance valuable as a means of facilitating retirement and meeting future obligations. To the indi- vidual this form is to be recommended chiefly for the purpose of paying off a mortgage. 36. The primary object of the partners should be to provide for indemnity in case of the death of either, and $10,000 on each life would be a rea- sonable amount. The settlement of the claim should be arranged so as to serve the needs of domestic protection. This may be done by writing the policies on the ordinary life contin- uous income plan, $60 a month, which will take care of any unpaid installments on the home and supplement the income derivable from the $3,000 of personal insurance. 37. In such circumstances the more extensive util- ity of endowment insurance should always be explained. It will enable the company to pro- vide for retirement of its manager on pension. The contract may be written so as to pay a lump sum to the employer concern in case of its becoming a death claim, and monthly install- ments to the contingent beneficiary (the man- ager) in case of his outliving the stipulated term. Permanent total disability should be provided for in whatever form of insurance is taken. 38. The two policies of $100,000 will furnish ready cash to meet the immediate demands upon the firm in case of a partner's death. These are liable to be made by his estate, by creditors and BUSINESS INSURANCE INSTRUCTOR 175 banks. The money will also offset possible curtailment of credit. Meanwhile the insur- ance will increase the security of banks and other creditors, thereby enhancing the concern's credit. It will aid a surviving partner in the purchase of the deceased's interest. At some future time the loan values may be a valuable resource. The insurance on Hudson will indemnify for the loss of his services and make it much easier than otherwise to replace them. The policy might ultimately be useful in retiring Hudson. The endowment would provide for discharge of mortgages and replacement of equipment, as well as other purposes. Its heavy loan values would create a valuable quick asset. There are several other benefits that might accrue to the firm from carrying this insurance. The student is advised to search for them. 39. The Revenue Act of 1921 exempts the proceeds of life insurance carried by corporations from inclusion in gross income, a change which is certain to result in Business Insurance being taken more extensively by concerns that were adversely affected in this respect by the former Income Tax Law. 40. The premiums outlaid in such a case are deemed to be a legitimate business expense and may be deducted from gross income, so long as the indebtedness exists and the policy remains pay- able to the creditors. In like manner, a creditor carrying insurance on the life of a debtor may deduct the premiums from gross income. THIS BOOK IS DUE ON THE LAST DATE STAMPED BELOW AN INITIAL FINE^OF 25 CENTS W.LL BE ASSESSED FOR FAILURE TO R^URN THIS BOOK ON THE DATE DUE. ^HE P^INAUTY WILL INCREASE TO SO CENTS ON THE FOURTH dIy and to $1.00 ON THE SEVENTH DAY OVERDUE. JiM 26 1934 m LD 21-100m-7,'33 ^21T)UU -J iT-r-V-e-^ UNIVERSITY OF CAUFORNIA UBRARY