LIFE INSURANCE.

INDEMNITY AGAINST MISFORTUNE.
HISTORY; METHODS; KINDS OF COMPANIES; KINDS OF POLICIES.

Life insurance is the combination of prudent men against
misfortune. It is an invention of civilization and a practical
application of the principle of co-operation, by which many con-
tribute small sums to indemnify one, or his heirs
Definition against misfortune. Property may never burn,

but every life must terminate, and hence the argu-
ment of prudence and safety applies even more forcibly in favor
of life insurance than that of property. Nothing is more un-
certain than the duration of human life, and yet the problem
of this uncertainty has been reduced to a moral certainty by a
long period of observations and classified statistics which form
the basis of the business of life insurance.

The mathematical doctrine of probability was first, enun-
ciated by Pascal, the great French scholar, in 1654, and has
since been elaborated by other writers. In 1671 De Witt applied
it to the duration of human life. Gradually the death rate under
definite conditions became established from carefully preserved
records. This result is known as the mortuality
Probabilities tables. These tables represent the probability of
death of various classes of persons under varying
conditions, based upon past experience. Nothing is more re-
liable than the laws of average when applied to a large number
of cases, and hence the business of life insurance is not specu-

370



METHODS. 871

lative, but capable of the most exact and conservative manage-
ment.

Life insurance was unknown to the ancients. It originated
in England early in the eighteenth century, but the first regu-
larly organized company began business there in 1765. The
early companies did not require a medical examination as a part
of the application for insurance. The rates of premium were

fixed by guesswork, and a board of directors passed
History upon the applications for insurance. The business

of life insurance has grown to enormous propor-
tions and to a greater extent in the United States than in any
other country. In 1850 there were perhaps a dozen "old line"
life insurance companies in existence in this country. Today
\ve have about eighty companies with a total amount of insurance
in force of over $10,500,000,000, having assets of over $2,100,-
000,000 and a surplus of over $300,000,000.

Two methods of life insurance are employed. The first is
where a fixed and uniform rate of premium is charged, known as
the "level premium" plan, because of the uniformity of the
premium charged throughout a given period. This class of in-
surance is usually carried on by regularly organized companies,
either stock or mutual, and known as "old line" companies.

The level premium plan provides for the payment
TWO Methods to the company of more than the amount necessary

to cover the risk during the early years of the
policy, and the surplus thus accumulated is set aside as a reserve,
or invested in securities, which, with interest will be sufficient
to make up the deficiency in later years. The second method
is known as "assessment" insurance in which each member of
the association is required to make payments into the general
fund for the settlement of death claims, as the needs of the asso-
ciation may require, or at stated intervals.

It is a well established rule that the insurer must have an
insurable interest in the life to be insured for indemity is the



372 LIFE INSURANCE.

fundamental idea in all insurance. Insurance without being
coupled with an interest would be a species of gambling. An
insurable interest, however, does not consist of the ties of rela-
tionship, nor dependence for support upon the life insured. In-
surance may be taken out upon the life of anyone
interest 1 * whose death would cause financial loss to the bene-

ficiary. In England and other European countries
it is not unusual for business men to take out insurance on the
life of their ruler to protect them from the financial loss that
would be entailed by his death. Such insurance is procured with-
out medical examination, or even the knowledge of the insured.
In America this class of insurance is not written, but in every
case it is necessary that the applicant should pass a medical exam-
ination and some companies require an investigation into the
moral character and financial standing of the insured.

Life insurance companies are divided into two classes, viz:
Stock and Mutual. A stock company is one which is owned by
stockholders, the same as other corporations, who control its
management and divide its profits. In some stock companies,
however, the policy-holders are allowed a voice in the manage-
ment, and in this respect they partake of the na-
* ure ^ ^^ual companies. Such companies may
be called "mixed." In a stock company ordinarily
the policy holders have no share in the management of the com-
pany. A mutual company is one which is composed of policy
holders who elect the directors of the company and participate
in the earnings. The two kinds of companies, however, usually
operate on the same general business methods. The mutual
companies are the more numerous.

The method of insuring lives which naturally first suggested
itself was to make the contract of insurance for a single year,
and then renew or extend it from year to year, after the manner
of fire or liability insurance, increasing the rate of premium as
the risk increased. There is the more reason for short term con-



CONTRACT OF INSURANCE. 378

tracts in life insurance since the risk is constantly changing.
The insured is growing older and may at any time develop symp-
Annuai and ^onis ^ c ^ sease - Thus from birth to the age of 10
Long Term years the risk is constantly diminishing and then

very slowly begins to increase until after middle
life, when it increases at a constantly accelerated ratio.
On the other hand, a property risk may remain substantially the
same from year to year.

The contract of insurance is based on the application on the
part of the insured, containing his "warranties, promises, con-
sents and agreements," together with statements of the com-
pany's medical examiner. The application of the
insurance*" assured, together with the payment of the pre-
mium, constitute the consideration upon which
the company's obligation rests. On the part of the company, its
agreement is evidenced by the policy of insurance. A great
variety of covenants and conditions are embodied in such pol-
icies. The nature of these will be considered under the title
"kinds of policies." In other branches of insurance, the com-
panies may cancel the policy at any time by returning a pro-
rata portion of the premium, but this is not so in the case of
life insurance. A contract once entered into and
bifc^ceied * a " s ^ assum ed, is binding upon the company to
the end of the term, unless cancelled by the consent
of the insured. To rule otherwise would be a great injustice
to the insured since it would leave him without insurance per-
haps at a time in life when he could not procure it elsewhere.

Life insurance policies may be divided into four general
classes, viz: Term, Life, Limited Life and Endowment. Any of
these may be purchased by a single payment of
Policies* premium, but the usual method is to pay the pre-

mium by annual or semi-annual installments.
The formalities to be complied with are similar in all policy con-
tracts application, medical examination, etc. A term policy



374 LIFE INSURANCE.

merely provides insurance for a certain number of years, at the
expiration of which it terminates and has no value. This is the

oldest form of policy. A condition is sometimes
Term inserted in a term policy providing that it may

be renewed at an increased rate at the end of the
period without a medical examination. Policies of this char-
acter are called "renewable term" policies.

Life policies provide for the payment of the face of the policy
at the death of the insured, whenever that may occur. A whole

life insurance is thus seen to be a term insurance
Life for the duration of possible life. Ordinary life

policies provide for the payment of premiums
during the life of the insured.

Limited life policies are those in which it is provided that
after a certain number of payments no further payment of

premiums is necessary, and that the policy is fully
Limited Life paid up. The policy may then be held by the

insured as an asset awaiting realization upon his
death. The periods for the payment of premiums under such
policies are usually 10, 15 or 20 years.

An endowment policy is one which provides that its face
value shall be payable to the insured at the end of a fixed period

(10, 15 or 20 years as the case may be) if he sur-
Endowment vives, or to the beneficiary if he dies within the

period. This form of insurance was introduced
later than the other usual forms. It was expected that it would
be the means of inducing many persons to insure, who would not
otherwise do so, in the hope of receiving the face of the policy
during their lifetime. It especially appeals to those who
desire to provide against need in old age. Apparently those who
take endowment insurance are conscious of superior vitality,
since the death rate among endowment policy holders is espe-
cially low.

While different companies have many variations and



POLICIES. 376

designations for their different policy plans, each policy has as
its foundation one of the above forms. Thus a "single premium"
policy is one upon which the premium is paid in one amount
when the policy is issued. Policies of this kind are written
single Premium im ^er both the life and endowment plans. Again,
continuous an installment policy is one of the above forms of

insurance providing that in case of death, instead
of the face of the policy being payable in one sum, it is to be
paid in a certain number of annual installments (usually twenty),
or it may provide that a certain amount shall be paid yearly
as long as the beneficiary lives, and should she die before twenty
years has elapsed the balance of the twenty payments shall be
payable to the beneficiary's estate. In that case it would be
called a "continuous installment" policy.

Another form of insurance properly called an "installment-
annuity" policy, provides that half the face of the policy shall
be payable in twenty annual installments or forty semi-annual

installments, the other half of the policy to be
Not a 5 % Bond paid at the end of twenty years in one sum. Many

companies give this form of insurance a name
which is to some extent misleading, by calling it a 5% bond.
They charge a higher premium per thousand and represent the
face of the policy as being paid in twenty years. The twenty
annual payments are called coupons, or interest payments. While
this form of insurance is an excellent investment in certain
cases, the term 5% bond is misleading in that people are induced
to believe that they have an investment paying 5% interest.

Still another form of installment insurance is called a "sur-
vivorship annuity" policy. This policy provides that a certain
survivorship amount shall be payable yearly to the beneficiary
Annuity as long as he or she lives, all payments stopping

at his or her death. Should the beneficiary die
before the insured, the policy lapses. Some companies provide
that the premiums shall revert to the insured in event of the



876 LIFE INSURANCE.

prior death of the beneficiary. This form of policy is designed
to furnish protection to a wife or other dependent relative after
the death of the insured who is the source of support.

A policy is sometimes issued upon the lives of two people,
payable upon the death of the first. Such are called joint-life
policies. They are sometimes taken by husband and wife, in

favor of their children, or they may be payable
joint Life to the survivor. More frequently they have been

taken out by firms upon the joint lives of the
partners, and payable to the surviving partner, thereby furnish-
ing him with sufficient ready cash to buy out the deceased part-
ners' interest in the business. For this reason it is commonly
known as partnership insurance. To accomplish the same result,
partners sometimes insure the lives of each other, thus making
separate policies instead of joint life. On some accounts this
is preferable to a joint-life policy, since in case of a dissolution
of the firm the joint policy cannot be divided.

There are many firms and corporations whose prosperity is
often dependent on the ability of its president or manager and
the stock-holders would suffer heavy loss in case of his sudden
death. This is especially true where a man of ability, but with-
out large financial means is carrying on an extensive business
on other people's money. Many such concerns carry enormous
lines of insurance upon the life of the man through whom they
have so much at stake.

A very few companies have a scheme which they attach to
policies, providing that instead of the insured paying all of the
premium, the company will loan him a portion of it each year

at interest. The idea held out is that annual divi-
Loa^piTn dends will care for all or a large part of the loan.

This plan cannot be condemned too strongly, as
it results in an unsatisfactory condition. If the insured pays the
interest on these loans whose amount is increasing yearly, as
more premiums fall due then he has a constantly decreasing



PREMIUM LOAN. 87?

amount of insurance at a rapidly increasing rate. But if both the
loan and interest are allowed to accumulate, there is a more
rapidly decreasing amount of insurance at the same rate. In
either event when this kind of a proposition matures there is
likely to be a Very much dissatisfied policy holder.

A few companies issue what is called Industrial Insurance.

This class of insurance is issued on all ages from one to seventy

years, in policies ranging from very small amounts

Inwrara U P t0 $ 200 OT $ 300 ' The am Unt Sold is almost

marvelous. It is, of course, sold principally to
people of very limited means.

Several companies insure women on exactly the same terms
as men, others charge an extra premium or limit them to certain
plans of insurance, while some companies do not insure women
upon any terms.