LIFE INSURANCE Continued.
PREMIUMS; DIVIDENDS; LOANS; ANNUITIES; ASSESSMENT
Premiums are payable on definite days and unless the policy
provides otherwise, the payments must be ma/ie with absolute
promptness. A grace of thirty days is allowed under some
policies, and one month under others, after the
^ rs ^ y ears> premiums are paid. The insured
should distinguish between thirty days and one
month in this case, as otherwise the policy may be allowed to
lapse by failure to make payment on the proper day.
There are two principal ways of disposing of the profits in
mutual companies arising under life insurance policies, viz:
annual dividends and accumulation of dividends.
An annual dividend policy is one in which the profits are
payable in cash to the insured each year as they accrue. An
accumulation policy is one in which the profits
Dividends are allowed to accumulate for a given term of
years usually for the length of time the policy
has to run. When dividends are deferred for periods of five, ten,
fifteen or twenty years, the option is usually given the insured
to withdraw the accumulation in cash at that time or apply it
to increase whatever form of surrender value is selected. Under
accumulation dividend policies, no part of the profits already
accumulated is paid in the event of withdrawal or death during
the dividend period. Different companies have different designa-
tions for an accumulation policy, a few of which are "tontine,"
"semi-tontine," "deferred dividend" and "distribution" policies,
all of which are based upon the same general principle.
A favorite method of a few companies is to guarantee a cer-
tain dividend on a policy and call it a "guaranteed dividend"
policy. Another plan of theirs is not to pay any dividends on a
policy but to make a definite guarantee of a dividend payable at
maturity of the policy. Such is called a "non-participating"
policy, meaning that it does not participate in the profits of the
company. A guaranteed dividend policy, unless it provides for
additional dividends, is in reality also a non-participating policy.
As several elements go to make up the profits of a company,
such as mortality, interest rates, lapses, expenses, etc., a life
insurance company never makes a guarantee without a loading
of the premiums for all contingencies. "Loading" is a certain
allowance made and added to the premium in order to cover
unexpected losses or expenses before making a guarantee. While
guaranteed dividend and non-participating policies have their
uses, it should be remembered that any results procured under
either would have been received under a dividend paying policy
and also usually a considerable amount of profits from the load-
ing of the premiums which a company very seldom has use
for, but for which every insurance company must make allow-
ance in order to be perfectly sound and safe under all possible
While there is a great variance as to the wording of life in-
surance policies in reference to their restrictions and conditions
there is almost as much difference in reference to the relative
advantages in case of the lapse of a policy before its maturity.
In many companies after a policy has been carried
three years or more it has some value, provided
the policy is surrendered to the company issuing
it within a certain length of time. In some companies a policy
would have a value, had only one annual premium been paid
Some companies provide, in case of lapse, for a paid-up
policy for a smaller amount payable at death no matter when the
380 LIFE INSURANCE.
insured should die thereafter, while other companies have a pro-
vision that the policy shall run on for a certain period of time
for its original amount of insurance, the length of the extended
insurance of course being dependent upon the value of the policy
at the time of its lapse. Some companies also provide cash
values and loans in lieu of paid up or extended insurance. The
policies of many companies provide that within a certain length
of time a lapsed policy holder may be re-instated, provided
he is in good health and pays back premiums with interest to the
date of his re-instatement.
When a few years ago the privilege was given the insured
of surrendering his policy in exchange for one of paid up insur-
ance, it was called a "non-forfeiture" provision. And when
upon failure to pay a premium the insurance is
Non-forfeiture extended by virtue of former payments, this is
called "automatic non-forfeiture." Under a non-
forfeiture policy it is now customary to permit the insured to
resume the payment of premiums at any time before the value
of the policy has become exhausted by lapse, the past due pre-
miums and interest thereon being paid in cash or permitted to
continue as a loan from the company.
The policies of many of the companies are now made in-
contestable after a limited period, and one great company issues
a policy which is incontestable from the date of issue. Such
policies were issued in England before they were
incontestability introduced here, an extra premium being charged.
By this clause the company waives its right to
contest the validity of the policy for any reason whatever, and
yet it is a question whether, in case of fraud, the company would
not have the right to contest.
The policies of many companies provide that after the in-
surance has been carried two, three or five years, according to
the method of each particular company, the company will make
liberal loans on the policies as collateral security, at a reasonable
AN INVESTMENT. 881
rate of interest, usually 5%. Life insurance policies are also fre-
quently used as security for loans from banks or brokers. Debt-
ors are sometimes required by their creditors to
Loans take out insurance for the benefit of the latter,
so that if the debtor should die, the debt will
be provided for.
Life insurance policies may be assigned the same as any other
valuable asset. Unless payable to the insured himself or his es-
tate, the beneficiary must usually join in the assignment, but
the policies of many companies are so written that the insured
may change the beneficiary under the policy at will without her
consent or knowledge. Of course the company must consent
to the assignment.
The modern life insurance policies on limited payment life
and endowment plans are so written, that in case the insured
lives to the date of its maturity he will have a good
investment. It must of course be understood
that strictly investment insurance is written on
an endowment plan. Take for illustration a 20-year endowment
policy of $1,000 which matures for a little over $1,500 in cash
at the end of 20 years, provided its profits will have been allowed
to lie and accumulate. Such a policy will have made about 4%
compound interest and furnished insurance for 20 years without
Stringent laws in- nearly all the states regulate the character
of the investments of the policy holders' money and safe guard
his rights in so many ways that it is practically impossible for
an old line life insurance company to fail. Every company is
forced each year to lay aside a sufficient sum of money which
compounded at a given and very conservative rate of interest
will be sufficient to pay any guarantees contained in its policies.
For instance, in the case of an endowment policy the amount
laid aside each year must be sufficient when compounded either
at 3 of 4% interest according to the rate used to produce one
882 LIFE INSURANCE.
thousand dollars at the end of twenty years. The amount of
assets is so enormous that the companies are able to hire
the best financiers that are obtainable, each a specialist in his
line, to handle and manage their vast interests. These men have
a knowledge of how and where to invest money that the poor
man or the man in moderate circumstances has no means of
knowing. Insurance provides a way whereby the poor man can
invest fifty or a hundred dollars a year to as good an advantage
as the wealthy. It must not be assumed, however, that those
in moderate circumstances are the only ones who invest in life
insurance from either an investment or from an insurance stand-
point, as our best and wealthiest business men are found to be
the heaviest carriers of insurance.
Originally when one failed to pay the premium promptly
on the day it was due he divested himself of all rights and
equities under his policy. Under the level premium plan, it-
must be remembered that the insured pays a higher rate during
the first part of the term than the insurance actually costs in
order to counterbalance any deficit which may arise in case
he should live to an old age. Now if for any rea-
vaiues dC son the policy is allowed to lapse, it is apparent
that the insured has overpaid the cost of insurance.
Out of this condition has grown the doctrine of the surrender
values of life policies. In 1861 a law was enacted in Massa-
chusetts called the "non forfeiture" law, requiring all companies
to give extended insurance as a compensation to the insured in
case of lapse of policies. About this time the New York Life
Insurance Company introduced a policy of whole life insurance
paid up in ten years and inserted the condition that it could be
surrendered after being in force for two years, for paid up whole
life insurance for as many tenths of the original amount as full
years' premiums had been paid. Other companies adopted the
policy of allowing liberal surrender values in the form of in-
surance. The next step was to make the surrender value payable
SURRENDER VALUE. 38H
in cash and this came in 1880. Most policies, after being in force
for a period may now be surrendered for paid up insurance, for
a cash value or for a life or temporary annuity.
As previously stated, many policies now provide that at their
maturity the insured may take an income for life instead of
taking cash or paid up insurance. In England and some parts
of continental Europe, the custom of purchasing annuities has
been in existence for a very long time. In America, however,
the custom has begun to grow only within a corn-
Annuities paratively short time. An annuity is usually pur-
chased by the payment of a lump sum to a life
insurance company. The company issues a contract to pay a
certain amount yearly to the annuitant as long as he or she
may live, the annuity stopping at the annuitant's death. An an-
nuity is also issued with the provision that if the annuitant dies
before receiving the amount of his or her original payment back,
the insured balance would be payable to the annuitant's estate.
A large amount of insurance in this country is supplied by
fraternal or assessment associations upon the plan of assessing
all survivors pro rata in case of the death of a member. The
success of this plan depends upon keeping the association sup-
plied with constant accessions of new members who are young
in years in order that as the policy holders attain greater ma-
turity of years the average death rate may not
^e increased so as to cause an increase in the
frequency of the assessments. For if the death
rate increases the effect is to drive out the young members, pre-
vent young and healthy lives from coming into the association
and leave only the old and decrepit members who are unable by
reason of their advanced years to obtain insurance elsewhere.
Some of these fraternal associations are now accumulating a
reserve, while others have adopted the plan of a graded assess-
ment, increasing as the insured advances in years, in order to
meet the increasing death rate.