Paid-up and Extension Benefits Under the Limited- Payment Plan

Paid-up and Extension Benefits Under the Limited-
Payment Plan. As was explained in the previous chapter
various contingencies may arise which may cause the insured
to view a policy differently from the way he did when he pur-
chased it and which may induce him either to surrender it
or to discontinue the payment of premiums. This attitude
may be caused by any one of several events, such as loss of
earning capacity, death of one's dependents, or impairment
of health to such an extent as to make death certain during
the period for which extended insurance is granted. Under
such circumstances the insured may realize the guaranteed
values of his contract as they stand at the time. Either he
may surrender the policy for its cash value or effect a loan
against that value, and this cash or loan value we have seen
is considerably larger under the limited-payment than under
the continuous-payment plan. Or the insured may exercise
the option of taking paid-up or extended insurance, and these
benefits, since the larger cash value is used as a single
premium to purchase paid-up or extended insurance at the
then attained age, will be greater than under the ordinary
life policy.

Related posts:
Advantages of the Limited-Payment Plan

Advantages of the Limited-Payment Plan

Having re-
ferred to the shortcomings of limited-payment policies when
viewed in the light of special circumstances, we may next
note the conditions under which this method of paying pre-
miums may prove desirable. Certainly, the willingness to
pay a larger annual premium must be justified by advantages
which will compensate for the sacrifice. Two important ad-
vantages present themselves and may be stated briefly as
follows :

1. Premium payments may ~be limited to the produc-
tive period of life. Instead of continuing for an indefinite
period, the premium-paying years may be so limited in num-
ber as to correspond to the income-producing years. Not
only is there satisfaction for many people in knowing the
maximum amount which they can be asked to pay on a pol-
icy, but for the great majority of men between the ages of
25 and 40, engaged in the average walks of life, the next
thirty, twenty, or fifteen years, depending upon the age under
consideration, represent the really productive period of their
working lives. As regards the great majority, these years,
and not the years of old age, can through a little extra effort
and economy be made the years of surplus. It is therefore
argued that the average man should take advantage of that
period in his working life when money comes in most freely,
to pay a somewhat higher premium, in order to free himself
in old age from any payment whatever. Using the rates
cited above, a person insuring at age 25 is given the option
by the company of making his whole-life policy paid-up bj
the time he becomes forty-five years old by paying an extra
annual sum of $7.75 per thousand dollars of insurance for
twenty years. As previously stated, less than one in ten of
our population succeeds in accumulating a reasonable com-
petence by the time age 50 is reached, and through reverses in
business or investments a great majority of this limited
number lose the same before death. Now why not use the
productive years, the supporters of the limited-payment plan
argue, to protect one's insurance against such a contingency?
As the management of one company admirably states in re-
ferring to a twenty-payment life policy : *

The period, of twenty years is not so short as to make the dis-
count of future payments too heavy, nor so long as to extend
these payments far into the future, thereby defeating the wise
purpose of avoiding them late in life. . . . After twenty years
the insured has completed his side of the agreement and reaps
the reward of prudence and persistency. His estate, the value
of the policy, is an accomplished fact bought, paid for and
standing to his credit. Nothing can take it from him, nothing
can reopen the account it is beyond peradventure. At his
death the company instantly discharges its side of the contract
by the simple transfer of the property. . . . Here then, is a
present plan for future security. The ordinarily vigorous and
most productive years of life pay toll for the fullness of years
sometimes attained without fullness of pocket. Thus the bur-
den is put where it can more easily be carried, and the relief
in later life always abundantly justifies the earlier foresight.

2. Combines saving with insurance. The limited-
payment life policy affords the advantage of combin-
ing saving with insurance, assuming that the policyholder
desires to accomplish this purpose, to an even greater degree
than was noted in connection with whole-life insurance by
continuous payments.

Related posts:
Disadvantage of Continuous Premium Payments

Disadvantage of Continuous Premium Payments

Disadvantage of Continuous Premium Payments. The
chief objection usually advanced against ordinary life insur-
ance is the continued payment of the premium throughout life.
This objection, however, is more apparent than real, and may
at the option of the insured be obviated to some extent by
allowing the annual dividends to accumulate with the com-
pany with the view of either shortening the premium-paying
period or hastening the maturity of the contract. Under the
first option the contract becomes a paid-up policy for the full
amount after a period of years thus requiring no further
premium payments the insurance, however, being still pay-
able at death only. Under the second option the dividend
accumulations on the policy cause it to mature as an endow-
ment at an earlier age, thus enabling the insured to realize the
proceeds before death occurs.

The cash surrender and other options allowed under an
ordinary life policy may also, under certain circumstances,
make desirable a discontinuance of premium payments.
Changing circumstances may cause the insured to desire the
taking of any one of three important options customarily al-
lowed by the companies. If the policy has served its pro-
tective purpose and the insured is satisfied that the change
in his circumstances is such as no longer to require insur-
ance protection and does not wish the full face value of
the policy for legacies or bequests, he may surrender the
policy to the company for its cash value. Or, instead of tak-
ing the cash value, the insured may choose the option of stop-
ping premium payments and taking a paid-up policy, payable
upon death to his estate or designated beneficiary. The
amount of paid-up insurance which the companies grant after
the policy has been in force a specified number of years is
indicated in column three of the preceding table, and repre-
sents the amount of insurance that can be purchased at the
then attained age with a net single premium equal to the sur-
render value. The amounts, it will be observed, are very con-
siderable in the later years, the face value of the paid-up insur-
ance granted on the $10,000 policy, after the same has been
in force twenty-five years, being $6,380.

Lastly, it may happen that the policyholder contracts some
fatal disease or meets with some accident which incapacitates
him for the earning of future premiums. Under such cir-
cumstances the necessity for insurance is greater than ever,
and the policyholder is allowed to avail himself of the option
of " extended insurance," which means that he can without
further premium payments enjoy the full benefit of his orig-
inal policy for a designated number of years and days. This
option may also be chosen, even though the ability to pay
premiums continues, when the insured is satisfied that his
physical condition is such as to prove fatal before the expira-
tion of the term during which extended insurance is granted.
The duration of the term of extended insurance as allowed by
the companies will again depend upon the cash value of the
policy, which is used as a single premium to purchase insur-
ance at the then attained age. The respective amounts on the
$10,000 policy, used for purposes of illustration, are shown
in the fourth and fifth columns of the preceding table. Thus,
it will be observed, for example, that after this policy has
been in force nineteen years it may be extended for its full
face value, without further premium payments, for a term of
fifteen years and two hundred and sixty-one days.

Related posts:
Combines Saving with Insurance

Combines Saving with Insurance

Combines Saving with Insurance. Besides its moderate
cost and the permanent character of the protection offered,
the ordinary life policy furnishes the further advantage of
combining saving with insurance. In term insurance, as
already explained, nearly all of the premium represents pay-
ment for the current protection, and the companies follow the
practice of not refunding anything upon withdrawal. More-
over, under term insurance nothing is paid to the insured in
case of survival at the expiration of the term, and it is this
fact that constitutes one of the chief objections to this type of
insurance, it being most difficult, as previously stated, to
make the average holder of such a policy, after he has paid
ten or twenty premiums, appreciate the fact that he has al-
ready received full value in the form of protection for the
premiums paid, and that he is therefore not entitled to receive
any refund.

As contrasted with this shortcoming, the ordinary life pol-
icy presents an entirely different situation. In the early
years of such a policy the annual level premium is much in
excess of the amount required to pay the current cost of the
insurance protection, the balance being retained by the com-
pany as a reserve (called the legal reserve) and improved at
compound interest at an agreed rate for the purpose of
making good the deficiency in the later years of life when the
annual level premium is no longer sufficient to pay for the
actual cost of the insurance. The overcharges in the early
premiums are instrumental in inculcating thrift on the part
of the insured and in the great majority of instances, repre-
sent a saving an accumulation of small amounts promptly
invested by the company which would otherwise not have
been earned or, if earned, would have been lost or needlessly
wasted. The fund thus accumulated out of the overcharges
in the early premiums does not belong to the company, but is
held in trust by it for the policyholder. It represents the
" cash value " of the policy, and may either be withdrawn by
the insured, in whole or to a certain designated percentage,
if 7 he decides to lapse the policy, or be made the basis of a
loan, usually at 5 or 6 per cent., to be used in time of illness,
financial emergency, or business opportunity. The loan privi-
lege also is often valuable in that it enables the insured to
keep his policy alive for its full amount under temporary cir-
cumstances when the payment of the premium would other-
wise not be possible. The extent to which such cash or loan
values accumulate may be illustrated by the table on page 75,
which furnishes the figures for the first twenty-five years of
a $10,000 ordinary life policy issued by a company which
grants such values at the beginning of the third year and to
the full extent of the legal reserve.

Usually cash or loan values are not granted by the com-
panies until at least three annual premiums have been paid.
Usually, also, the companies do not refund the entire legal
reserve during the first ten, fifteen, or twenty years, but retain
a fixed percentage thereof as a surrender charge. In the
above illustration it will be observed that the cash value of
the $10,000 policy has accumulated to $4,254.90 during the
first twenty-five years, and this accumulation continues until
it reaches the face value of the policy by age 96, the last
year in the American Experience table.

Related posts:
Furnishes Permanent Protection

Furnishes Permanent Protection

Furnishes Permanent Protection. Several advantages
may be noted as essentially associated with this plan of
insurance. In the first place it gives the insured permanent
protection at moderate cost, and this is highly important for
the average man of moderate salary or daily wage who re-
quires considerable family protection and whose limited in-
come does not enable him both to pay premiums and to ac-
cumulate a savings-bank fund. Term insurance is essentially
designed to afford protection against a temporary family or
business hazard, and can be recommended safely only when
it is definitely known that the hazard under consideration is
temporary in character. But such contracts, as we have noted,
contain elements of danger which are inseparable from tem-
porary insurance. The chief danger connected with such
insurance is that the insured may have miscalculated the
duration of the hazard confronting him and his future need
for protection, or may neglect to carry out his original pur-
pose to convert his temporary insurance into or replace it
with policies which afford protection for the whole of life.
Under ordinary life insurance all danger as to miscalculations
relative to the uncertain future need of insurance or the fail-
ure to carry out original purposes is obviated. Such insur-
ance is certain in its results in that it provides protection that
is permanent, payable in the event of death, whether that
occur early or late, and purchasable at a definite and moder-
ate premium which remains uniform throughout life.

Furnishes Permanent Protection at the Smallest Initial
Outlay. As has been aptly stated " the ordinary life policy
is of all policies the one which gives the maximum of perma-
nent protection at a minimum annual charge." This may be
illustrated by comparing the gross premium charged by com-
panies for ordinary life policies with those required under the
limited payment and endowment plans. For instance, the
annual premium charged by a certain company per $1,000
of ordinary life insurance is $19 at age 25, $21.80 at age 30,
and $25.45 at age 35. On a twenty-payment life policy at
the same ages the annual premiums charged by this company
are $26.75, $29.70, and $33.28; while on an endowment pol-
icy, maturing in twenty years, the premiums are respectively
$44.82, $45.63, and $46.70. It is therefore seen that the or-
dinary life policy furnishes permanent protection at the small-
est initial outlay, although, as will be shown later, the limited-
payment and endowment policies will, if the insured continues
to live, ultimately yield certain advantages which probably
induced the insured to prefer these forms and which will
compensate for the higher premium. In case of early death,
however, the insured would realize the same amount under
each of the aforementioned policies, yet the outlay on the
part of the insured would have been considerably greater
under the limited-payment and endowment plans than under
the ordinary life policy.

Owing to its moderate annual cost, an ordinary life policy
tends to bring adequate protection within the reach of nearly
all. It is particularly well adapted to those whose income is
small and who find desirable a considerable amount of perma-
nent protection. To the rich man, on the other hand, the
policy affords ample protection and enables him to use any
surplus money to better advantage probably than if allowed
to accumulate with an insurance company. The policy is also
well adapted to persons who, although having passed middle
life, may still desire the largest amount of permanent pro-
tection at the lowest cost. Even at ages 45 and 50 the an-
nual premiums charged by the aforementioned company are,
respectively, only $36.50 and $45.10; while for a twenty-pay-
ment life policy at the same ages the premiums are $43.46
and $51.26, and for an endowment policy, maturing in twenty
years, $51.45 and $56.55.

Related posts:
Renewable and Convertible Features in Term Policies

Renewable and Convertible Features in Term Policies

Exclusive of the term covered, term policies are of two
main kinds: (1) those which grant insurance only for the
specified term and are renewable only upon a satisfactory
medical examination: and (2) the renewable-term policy, the
conditions of which give the holder the option, at the expira-
tion of the first-term period or at the end of any subsequent
term period, to renew the policy without a medical examina-
tion and irrespective of the insured's health at the time of
renewal. The renewal of the policy, in other words, can be
effected by the insured by paying the premium for the age
then attained. Usually, however, the companies limit the
age (generally 55 or 60 years) at which such renewal term
policies may be issued, and in some instances the number of re-
newals permitted is limited. Where the term policy contains
no renewal privilege the insured may be placed at the disad-
vantage at the end of the term, of being without insurance
and of not being in a position, because of poor physical con-
dition, to secure a renewal of the contract or to obtain any
other form of life-insurance protection. In many instances,
also, the particular contingency which the term policy was
designed to cover, may still exist at the expiration of the
term, thus making highly desirable the privilege of renewing
the contract for one or more terms at the will of the insured
and without the possibility of denial on the part of the com-
pany.

Nearly all term policies also contain the so-called con-
vertible feature, i.e. the privilege on the part of the insured
of converting the policy into another type of contract upon a
proper adjustment being made in the premium charge. Some
companies extend this conversion right throughout the term
period, but the great majority grant the right only for a lim-
ited number of years, such as the first four, five, or seven
years of the term. Conversion is usually allowed into whole-
life, limited-payment, or endowment insurance. The ex-
change is usually allowed on any anniversary of the policy
during the period when conversion is permitted, and may be
effected in one of two ways. The new policy may bear the
date of the surrender of the original policy and the premium
thereon be that required for such new policy at the attained
age of the insured. Or, the new policy may be considered as
bearing the date of the original policy, in which case the
insured is usually required to pay to the company the difference
between the premiums which would have been paid on the new
policy if it had been issued at the same time as the original
policy, and the premiums paid thereunder for the same
amount of insurance, with interest on euch difference at a
certain stipulated annual rate. 1

The advantages of the conversion privilege become apparent
if we consider the disadvantages usually attaching to term in-
surance. At the time of taking out the policy the insured
may not have definitely selected the type of policy best adapted
for his needs. Following the issuance of the term policy his
circumstances may soon become such as to enable him to
take out adequate permanent insurance. Or he may desire to
utilize insurance as a means of accumulating an estate rather
than to use it entirely for protection against death. As soon,
therefore, as he concludes that term insurance does not meet
his present and future needs he may carry out his conclusions
by exchanging his term contract for one on the whole-life or
endowment plan in either of the two ways already suggested.
Moreover, another great value of the conversion privilege also
becomes apparent (where the policy does not contain a re-
newable privilege) when it is remembered that a consid-
erable percentage of the insured lives become physically im-
paired to such an extent during even the first five or seven
years following the issuance of the contract, as to make im-
possible the securing of any other plan of life insurance in a
reliable company. Under such circumstances a non-renewable
term policy may, because of its expiration before death, fail

Related posts:
Disadvantages of Term Insurance

Disadvantages of Term Insurance

Disadvantages of Term Insurance. While the foregoing
illustrations serve to indicate the useful purposes that may
often be derived from term insurance, it is important to note
that this type of contract presents various dangers that are
frequently overlooked and that should always be borne in mind
by the person contemplating the taking out of such a policy.
Although the absolute cost of term contracts is very low in
the younger years the sole purpose of such policies is to furnish
temporary protection.

The entire premium represents payment for this protection and
nothing is paid to the insured in case of survival at the
expiration of the policy. It is a common assertion that the chief
objection to this form of insurance is that the insured is apt
to feel dissatisfied at the expiration of the contract, and that
it is most difficult to make the average holder of such a policy,
after he has paid ten or twenty premiums, appreciate the fact that
he has already received full value in the form of protection for the
premiums paid and is therefore not entitled to any refund.

While the insured may feel that he will be in a financial
position later to make the carrying of insurance unnecessary,
or to replace his term insurance with policies at a greater
cost but which afford permanent protection, there is nearly
always the danger that he may have miscalculated the future
or may neglect to carry out his original ideas. Hence, if the
ordinary term policy is not supplemented with other forms
of insurance, such as whole-life or very long term insurance,
there may come a day when the policyholder, upon the ex-
piration of the term contract, will be without insurance at
the very time when he may need it most. Assuming that he
will be able to obtain other insurance at the time by passing the
required medical examination, his advanced age will have
greatly increased the premium, and possibly at that time, his
early expectation of a larger income not having been realized,
such increased cost may prove exceedingly burdensome. More-
over, other types of policies generally commend themselves in
preference to term contracts in that they inculcate in the
policyholder to a much greater extent a compulsory spirit of
thrift and cause the great majority to have to their credit a
large sum, accumulated from small payments promptly in-
vested, which otherwise they would not have accumulated or
would have lost or wasted. Term insurance, as already stated,
represents cost for protection only, and the smallness of the
premium should prove an attraction only where large pro-
tection is absolutely needed and where the available fund for
premium payments makes a more permanent form of pro-
tection impossible.

Related posts:
Advantages of Term Insurance

Advantages of Term Insurance

Term policies are especially designed to afford protection against contingencies
which either require only the taking out of temporary insurance
or call for the largest amount of insurance protection for the time
being at the lowest possible cost. The advantages of this type of contract may be enumerated briefly as follows :

1. Term contracts are often desired by those who need a
large amount of family protection at a time when the income
is so small as to make impossible the payment of the premium
for an equal amount of protection under other types of
policies. This is especially the case where family responsibilities
have been assumed by young professional or business
men who are just starting their careers and who, appreciating
the necessity of adequately protecting their families against
the contingency of early death, feel that they need heavy
insurance protection at small cost pending permanent establishment
in their profession or business. Persons so situated
may feel inclined to subordinate the investment feature in
life insurance to its protective function. "Wanting all the
protection possible during early years, they may feel that they
can more advantageously use all available savings in their
profession or business. Or, looking forward to a larger income
later in life, they may reason that they can then advantageously
replace or supplement this type of contract with
policies of other kinds which have permanent protection as
their primary purpose.

The extent to which large protection is granted by term
policies for a small outlay at a time when such increased protection
is absolutely needed at small cost, may be exemplified
by the following rates charged by a certain company selected
for purposes of illustration. The annual premium charged
by this company for a $1,000 whole-life policy at age 25 (the
policy in this instance being paid whenever death may occur)
is $19, at age 35, $25.45, and at age 45, $36.50. But the
risk of death during a limited term of years is less than that
under a whole-life policy where the risk converges into certainty.
Because of this fact term policies for five, ten, fifteen,
or twenty years offer the advantage of a much lower annual
premium. Thus in the case of the company referred to a five-year
term policy for $1,000 at age 25 requires a gross premium
payment of $11.09, and the premiums charged for successive
renewals of this five-year contract are : at age 30, $11.65, at age
35, $12.50, and at age 60, $42.21. In the case of a ten-year
term policy at age 25 this company charges $11.34, while the
renewal premiums at ages 35, 45, 55, and 60 are, respectively,
$13.10, $18.27, $34.54, and $51.20. The same principle applies
to term policies for fifteen, twenty, or any other number
of years. If such policies are renewable at the option of the
insured without medical examination, the policyholder may
feel that by a number of renewals he may enjoy a large protection
for a considerable number of years at a low cost, and
discontinue such renewals when the protection is no longer
needed, or when the renewal rate becomes too burdensome. It
should be noted in this respect that, whereas the rate for a
ten-year term policy at age 25 is only $11.34, as contrasted
with $19 for the whole-life policy at the same age, the latter
rate remains the same throughout life, while the successive
renewal rates for the term policy increase with advancing age
until they become practically prohibitive, the rate charged
by this insurance company being $34.54 at age 55, and $51.20
at age 60.

2. Term insurance may also enable young men to acknowledge
their debt to parents or relatives of modest
means who have given them their education or who have
started them in business. Under such circumstances every
young man owes this debt to parents and should, as soon as
he is able to pay the premium, acknowledge it by carrying
insurance for their benefit so that their investment in him
will be protected against the contingency of an untimely
death. In the same way a term contract may enable one to
provide adequately during the early years of one's professional
or business career for a dependent mother, sister, or
other relative. Where the age of the parent is advanced the
term of the contract may be so arranged as to afford protection
during the probable lifetime of the beneficiary. But
where the beneficiary is comparatively young, the purpose of
the term contract may be regarded as furnishing a large protection
at small cost, the insured looking forward to a large
income in later years which will then enable him the more
readily to make the protection permanent by other types of
contracts. Again, the insured may desire additional protection
while his children are young and his own estate is small
so that in case of early death there will be an adequate fund
for educational and maintenance purposes until the children
become self-supporting.

3. Such contracts are also well adapted in many instances
to furnish protection against some temporary business hazard.
Many such contingencies may arise, but only a few need be
mentioned to illustrate the usefulness of term insurance in
this connection. A business firm may wish to protect itself
for a definite number of years against the loss through early
death of the highly valued services of an employee or of an
official who is regarded as essential to the continued success of
the business enterprise. Or the firm may have engaged the
services of an expert in an undertaking which it will require
a certain number of years to complete, and as the work progresses
may be obliged to make a considerable outlay of capital
which might be lost or seriously impaired by the death of
said expert before the completion of the work. Under such
circumstances the firm might find a term policy, especially
in view of its low cost, highly attractive as a means of protecting
itself against loss during the period required for the
completion of the work. The sum secured under the policy
in case of death would, indemnify the firm for any loss incurred
by way of impairment of the capital, or by delay in
completing the work, assuming that another expert might be
found to continue the project. In many business undertakings
it may be found desirable to protect the business during
the first five or ten years usually the crucial and experimental
stage when its promoters are confronted with the task,
frequently involving great risk, of establishing it on a firm
foundation as regards clientele and credit. These are a few
instances to illustrate how a firm or corporation may cover
any temporary extra hazard, when the low cost of insurance
is of chief importance.

In the same way an individual may, in many instances, use
term insurance advantageously to enhance his opportunities
or to make his financial position more secure. A young man
may, for example, complete his college course or may start in
business on borrowed capital which has been secured by protecting
the lender against the possible loss occasioned by early
death which would prevent repayment of the sum borrowed.
Sometimes a person may have definite assurance of a certain
sum of money in the future, such as an inheritance, pension,
or death benefit, but is obliged during the interval to borrow
money or to obtain insurance protection against death before
the stipulated time arrives. In such cases term insurance
may be used to great advantage. The lender will be doubly
protected, since the loan will be paid out of the inheritance in
case of survival and out of the insurance proceeds in case of
death. On the other hand, the need for insurance protection
may expire when the policyholder is assured protection under
the terms of the pension or insurance fund established by the
firm or institution with which he is connected, the term policy
in the interval of waiting having served its purpose as temporary
protection. Again, money may have been borrowed on
a mortgage on real estate, the mortgage running for a definite
number of years and the mortgagor expecting to pay off
the mortgage out of income during that period. While the
mortgagee may feel entirely competent to accomplish the payment
of the mortgage out of savings from his income, it is
highly important to remember, as already stated, that it takes
time to save, and that a resolution to save should be hedged
with an insurance policy so that if the saving period is cut
short by an untimely death the proceeds of the policy may
liquidate the balance of the indebtedness. A $5,000 mortgage,
which it is expected to pay in ten years, can, therefore,
be advantageously hedged with a $5,000 ten-year term policy.
In case of survival and the payment of the mortgage, the
policy may no longer be needed and may therefore not be renewed.
In case of early death the unpaid portion of the
mortgage can be paid out of the insurance proceeds, the balance
of the insurance money, if any, being payable to the
insured's designated beneficiary. In fact, any plan for the
accumulation of a fund through saving, no matter what the
method adopted, should, as already stated, be protected by an
insurance policy.

Related posts:
Term insurance

Term insurance

A term policy in life insurance may be defined as a contract
which furnishes life-insurance protection for a limited number
of years, the face value of the policy being payable only if
death occurs during the stipulated term, and nothing being
paid in case of survival. Sometimes such policies are issued
for business purposes for a period as short as one year, and at
various times such policies have also been issued upon the
"yearly renewable term plan," according to which the insured
could exercise the option of renewing the policy for
successive one-year periods, each year's premium being regarded
as the cost of that year's protection, and the premium
thus increasing as the policyholder's age advanced. While
this plan, also commonly known as "natural-premium insurance,"
is theoretically sound, it has proved impracticable in
actual practice, because it is apparent that under this plan
the premium would ultimately become prohibitive.

Owing chiefly to the aforementioned fact, the issuance of
very short term policies is limited at present to cases involving
business and financial transactions. In nearly all instances
term policies are written by American companies for
periods of five, ten, fifteen, or twenty years, although other
periods are sometimes used. Such policies may insure for
the agreed term of years only, or may be renewable for successive
term periods at the will of the insured and without
medical examination. Various restrictions are also imposed
by many companies in the issuance of term contracts, such as
limiting the size of the policy to a certain amount or the
length of the term so as not to carry the insurance period
beyond a certain stipulated age. Term insurance may, therefore,
be regarded as temporary insurance, and, in principle,
more nearly compares with a property insurance policy than
any of the other life contracts in use. If a building, valued
at $10,000, is insured for that amount under a five-year term
policy, the company will pay this insurance in case of the
destruction of the building during the term; but if at the
end of the specified five-year period the owner neglects to
reinsure the building by renewing the policy and a fire
thereafter ensues, the company is absolved from all liability
in view of the expiration of the contract. Similarly, if a
person insures his life for $10,000 under a five-year term
policy, either keeping the policy in force by paying a single
premium in advance or by paying, as is nearly always the
case, annual premiums from year to year, the company will
pay $10,000 in case of the insured's death at any time before
the expiration of the five years, nothing, however, being paid
in case death occurs after the expiration of the contract
period, the term life policy, like the fire policy, having expired
at that time.

Related posts:
Combination of Various Types of Policies

Combination of Various Types of Policies

A large
number of the special contracts referred to in the preceding
classification represent in the aggregate only a limited percentage
of the total insurance written. Probably three-fourths of the
total life insurance in America, it has been
estimated, consists of three forms of policies, viz, whole-life
policies on the continuous premium plan, twenty-payment
whole-life policies, and twenty-year endowment insurance.

The remaining one-fourth of the outstanding insurance represents
a vast variety of policies, some differing from others
only in minor particulars. In this respect it should be noted
that many of the foregoing policy features easily lend themselves
to the effecting of an almost endless number of combinations.
Thus there may be issued a limited-payment whole-life
continuous-installment policy, or a limited-payment endowment
policy with the proceeds payable in ten or more
installments. As already indicated, all the various methods
of paying the premium, or of distributing the principal of
the contract, may be applied to any of the ordinary types of
policies written.
The Several Types of Policies Equivalent in Net Cost.
While policies differ greatly in form, it is important to note
that the net premium (the premium before any addition is
made for expenses or contingencies) for all, as will be shown
later, is computed on the basis of the same assumptions.
Thus a company in computing the net premiums for all its
types of policies may use the same mortality table, usually
the American Experience table, and the same assumed rate
of interest, usually 3 or 3y 2 per cent. If this is done, it follows
that all the policies issued by a given company are
equivalent to each other from the standpoint of dollars and
cents.

Some Policies Better Adapted than Others to Meet the
Special Needs of the Insured. Although the policies issued
by a given company are usually equivalent to one another in
net cost, it is highly important to remember that one form of
policy may be much better suited to the needs of the policy-holder
than another. Much has been written lately concerning
the " fitting of the policy to the client," by which is meant that
the various kinds' of policies have certain advantages or disadvantages,
depending upon the circumstances surrounding the
applicant and the particular purpose that he wishes to realize
by the taking out of life insurance. It is therefore highly important
for the salesman, after ascertaining the prospective applicant's
financial ability to pay premiums and the object
which it is desired to accomplish through insurance, to recommend
impartially that contract which will best serve his client.
The matter may be illustrated by the following example : A
merchant may display a large variety of suits of clothes all
valued at the same price. But, despite their common value,
these suits may differ in color, style, and material. One suit
may be totally unfit for the use of a prospective buyer, although
inherently worth just as much as another suit which may be
selected by him as meeting his requirements. In life insurance,
likewise, the many policies on the market may from a
mathematical standpoint be of equal value. But in selecting
a contract the prospective buyer should be careful to see, and
in such selection it is the professional duty of the agent to
render impartial advice, that the character of the policy is
such as to give him what the family or business circumstances
surrounding his life require.

Related posts:
Classification of Annuities

Classification of Annuities

The ordinary annuity con-
tract is an agreement whereby the company promises, in return
for a cash payment made in advance, to pay the annuitant
while living an agreed amount annually, semi-annually, or
quarterly, such payments to cease whenever death occurs.
The purchase of an annuity therefore represents the purchase
of a fixed income, and the general purpose of the contract is
seen to be the reverse of that accomplished under life insurance.

As was the case with life-insurance policies, annuities may
be of various kinds. The annuity may be one for the
whole of life (a life annuity) or merely for a stipulated term
(a term annuity). Sometimes it is provided that a stated
minimum number of annuity payments shall be made under
any circumstances, as, for example, that at least ten annual
payments are guaranteed although the annuitant may have
died before the expiration of that time. So-called " deferred
annuities " may also be granted for the purpose of enabling
the purchaser to provide an income for himself at some future
time, and the purchase price of such an annuity may take the
form of a single premium at the time of purchase, a level
premium during the entire time between the date of purchase
and the commencement of the annuity, or the payment of a
limited number of premiums under the limited premium payment
plan. Under the ordinary annuity, the first annuity is
usually payable three, six, or twelve months following the
date of purchase, whereas under the deferred annuity the payments
do not begin until the purchaser reaches a certain age,
such as twenty or thirty years following the age at purchase.
Should death occur during this twenty- or thirty-year period,
no refund of the premiums or purchase price is ordinarily
made; although it is entirely feasible under the deferred annuity
plan to provide that in case of death before the annuity
payments begin, the premiums which may have been paid shall
be refunded to the heirs of the purchaser. It should also be
stated that two persons, such as husband and wife, or two
sisters, may purchase an annuity payable to them jointly while
both live and also continuing during the lifetime of the survivor.
As has been well stated : " By this means an income
is provided so long as the survivor of the two can possibly
require it. The same principle may, of course, be extended
to three or more lives, but the circumstances are rare when
such annuities are desirable, while for two lives it is a common
form of contract."

Related posts:
Special Types of Contracts

Special Types of Contracts

A very large variety of special contracts,
differing materially from those already mentioned,
might be described; but special attention will be
directed to the following three main classes:

1. Return-premium policies. Such policies differ
from the usual forms of life insurance in that they promise
upon death to pay not only the face of the policy, but in addition
thereto a sum equal to all or to a portion of the premiums
paid. The premiums returned may comprise the entire
amount paid during the existence of the contract, but usually
such return is limited to the premiums paid during a limited
p'eriod, such as ten, fifteen, or twenty years. A promise of
this kind should cause no surprise since the policy merely
represents increasing life insurance under a level premium
plan. In other words, the face value of the policy increases
as the number of premium payments increases, but this increasing
amount of insurance must be paid for by an extra
charge, i.e. the premium on a policy allowing a return of all
or a portion of the premiums, is higher than the premium for
the same kind of policy when not containing a return premium
privilege. It may be added that pure-endowment contracts
sometimes provide for the return of premiums paid in
the event of death before the expiration of the pure-endowment
period.

2. Policies which involve more than one life. In
addition to the various types of continuous-installment policies,
which it will be remembered involve the lives of the insured
and one or more beneficiaries, there are three other
types of policies under this heading that deserve special mention.
One type goes under the name of " ordinary joint-life
insurance." Joint-life policies may be taken out on two or
more lives, and sometimes prove advantageous to several business
partners who may wish to utilize the same for the protection
of their partnership against the withdrawal of capital or
other financial embarrassment occasioned by the death of any
one of them. The policy promises the payment of the principal
in the event of the first death amongst the two or more
persons covered by the contract. This joint-life principle may
be applied to any of the ordinary forms of life insurance, such
as whole-life policies, limited-payment policies, term insurance,
endowment insurance, etc.

" Last-survivor " and " contingent " or " survivorship " insurance
should also be referred to briefly, although policies
of this kind are used to only a limited extent. The last-survivor
policy differs from the ordinary joint-life policy in
that the principal is payable in the event of the last death
instead of the first death. Contingent or survivorship policies,
on the other hand, "insure one life against another"
and provide for the payment of the face value in the event
of the death of a certain person, but only on the condition
that some other person designated in the policy is still alive.
In his discussion of these two forms of policies, Mr. Henry
Moir indicates their purpose in the following words :

Last-survivor policies are seldom, required, although sometimes
when two persons have an income which will be continued to
the survivor, and they desire to borrow money on
their joint interest, a policy of tbis nature may enable them
to effect their purpose on reasonable terms. . . . Contingent or
survivorship policies will be understood more readily if the
circumstances under which they are generally issued be explained.
It is common in the will of a wealthy man to provide
that tbe entire income from his property be paid to his widow,
and tbat the property be divided on her death amongst certain
heirs or legatees who may then be living. In such circumstances
it is evident that tbe share of the property would be
lost by any heir or legatee who might die during the lifetime
of the widow. The cheapest form of protecting tbis share from
absolute loss is the survivorship assurance, providing the sum
assured at bis death in event of its occurring in the lifetime
of tbe widow. Assurance companies occasionally grant loans
secured by contingent interests in estates to be divided at some
future time, called reversions, and any such loans should be
protected by a survivorship policy. 2

3. Policies containing total disability features.
Since a separate chapter is devoted to a discussion of total
disability benefits 3 in life insurance, it will suffice to indicate
here merely the nature of the special benefits offered. Without
special provision a life-insurance policy may not fully
protect where the holder becomes totally disabled and is not
in a position to keep his insurance alive by further premium
payments. Moreover, even granting that the policy can be
maintained, no part of the face value can be realized under the
contract until death actually occurs, although such payments
may be sadly needed at the time. Considerations like these
have induced a very large number of American companies to
assist the policyholder in various ways in the event of total
disability. Such assistance has usually taken one or more of
the following forms in the event of total disability : ( 1 ) the
premiums will cease and the policy will be considered fully
paid during the time of disability; (2) the policyholder may
select either this option or may choose to have the value of his
policy converted into an annuity, the first payment to begin at
once; and (3) the policy either matures for a stated sum or
becomes payable in ten or twenty annual installments, such
payment stopping whenever the disability ceases.

Related posts:
Two other types of insurance policies

Two other types of insurance policies

Two other types of insurance policies should be mentioned under our
classification of policies according to the method of paying
the proceeds, viz, so-called " reversionary annuities " and
" gold " or " debenture bonds' The first type of contract,
said to be the first form of installment insurance written, pro-
vides a life annuity to the beneficiary in case of the insured's
death before the beneficiary's death. If, however, the bene-
ficiary should die first, the insurance contract is regarded as
having expired and all premium payments are considered fully
earned. The debenture gold bond plan, like the installment
feature, may be applied to any of the ordinary types of policies
written. According to this plan, considered in connection
with a whole-life policy, the company retains the entire pro-
ceeds of the policy upon the death of the insured and issues a
bond to the beneficiary bearing an agreed annual, or semi-
annual rate of interest. At the expiration of the interest-pay-
ing period such as ten, fifteen, or twenty years, the bond is
redeemed. Usually the interest rate promised is high as com-
pared with the rate of interest which life-insurance companies
use in the computation of their rates. This high rate of in-
terest on the bond is entirely feasible owing to the fact that
the company will have safeguarded itself in advance by charg-
ing a higher premium during the lifetime of the insured.
Thus, according to the rate book of a certain company, the
annual gross rate for a 5-per cent, twenty-year gold bond on
the ordinary life plan is given as -$25. 74, while the annual level
premium for an ordinary life policy at the same age is given
.0.14. In both cases the mathematical computation was
based on the same assumed rate of interest, and the larger pre-
mium in the case of the bond is simply charged to assure the
accumulation of a sum of money sufficiently large to enable the
company to guarantee the promised rate of interest on the
bond. It is thus apparent that any rate of interest, no mat-
ter how high, may safely be promised if the difference be-
tween that rate and the assumed rate for computation pur-
poses is collected in the form of higher premiums.

Related posts:
Classification of policies. Part3

Classification of policies. Part3

Policies Classified According to the Method by Which
the Proceeds Are Paid. Reference is had under this heading to the
various types of so-called installment policies.
Instead of paying the face of the policy in one lump sum in
the event of death or maturity, the proceeds are paid in regular
installments, either annually, semi-annually, or monthly,
over a prescribed period of time, such as ten, fifteen, or twenty
years. This installment feature may be applied to the payment of
the proceeds of any of the usual types of policies.

Thus it may be arranged that under a $10,000 whole-life
policy the principal of $10,000 shall not be paid in full upon
death, but the company's liability shall be limited to the pay-
ment of $1,000 upon the happening of death and $1,000 each
year thereafter until the tenth or last installment has been
paid. In case the company's liability should be limited to
the payment of the $10,000 in the form of fifteen or twenty
installments, each installment would be, respectively, $666.66
and $500. Should the beneficiary die before all the install-
ments have been paid, provision is usually made that the
unpaid installments may be continued for the original amount
to the deceased beneficiary's estate or to a newly designated
beneficiary, or may be commuted and paid in one lump sum.

If the total installments aggregate the face value of the
policy, the cost of the contract will naturally be smaller than
if the face value of the policy be payable in full upon maturity of
the contract. It is apparent that by paying the
$10,000 in ten installments the company retains the use of
a large part of the policy's proceeds for a considerable period,
viz, $9,000 for one year, $8,000 for one year, $7,000 for one
year, etc. Mathematically, the company can arrange to give
the interest earnings (at an assumed rate) on these balances
to the insured during his lifetime in the form of a reduced
premium. Many companies, however, follow the plan of
charging the same premium that would be required on the
same kind of policy when providing for the payment of the
proceeds in one lump sum, and then make allowance for interest
earnings on the proceeds retained under the installment
plan by increasing the size of the installments.

While the ordinary installment policy, as just described,
affords the advantage of giving the beneficiary a definite income
for a prescribed number of years and thus prevents the
possible loss or dissipation of the proceeds of the policy as
might be the case if the entire sum were paid at once, it
should be remembered that these installments are limited in
number, and that upon the payment of the last installment
the beneficiary may still be in need of an income. This
shortcoming of the ordinary installment policy may be avoided
by arranging for the continuance of such payments throughout
the lifetime of the beneficiary. Such an arrangement
may be effected under the so-called " continuous-installment
policy." Here the company agrees to pay a definite number
of installments, irrespective of the death or survival of the
beneficiary, and to this extent the continuous-installment policy
includes the ordinary installment feature. But after the
entire face of the policy has been paid in installments the
qompany gives the further very important guarantee that it
will keep on paying these installments if the beneficiary be
still living and will continue to do so during the lifetime of
said beneficiary.

The continuous-installment feature lends itself to a large
variety of applications, and almost any set of circumstances
requiring a guaranteed income can be met by the contracts
of certain companies. The continuous income may be so
arranged as to be paid annually, semi-annually, or monthly,
as desired. Instead of guaranteeing an income throughout
the lifetime of merely one beneficiary, several beneficiaries
may be protected. Thus one beneficiary may be assured an income
throughout life, and following his or her death, another
designated beneficiary may become the recipient of the stipulated
income either during the whole of life or for a specified
number of years. Similarly, the continuous-installment plan
may be combined with the endowment principle. Thus if the
holder of an endowment policy should outlive the endowment
period an annual income may be promised to him throughout
life. Further arrangement may be made whereby, following
his death, an annual income may be paid to his wife or other
beneficiary or beneficiaries as long as they may live. Or, the
policy may be made to contain a guarantee to the holder of,
say, twenty definite annual payments with a further promise
that such installments will continue, following the payment
of the twentieth installment, during either the lifetime of the
insured or of the insured and another beneficiary.

Related posts:
Classification of policies. Part2

Classification of policies. Part2

Policies Classified According to the Inclusion or Exclusion
of a Pure-Endowment Feature. A pure endowment is
a contract which promises to pay to the holder thereof a stated
sum of money if he be living at the end of a specified period,
nothing being paid in case of prior death. Term insurance,
on the contrary, consists of a promise to pay a stated sum in
case of death during the given period, nothing being paid in
case of survival. The two promises are, therefore, exactly
opposite in their nature. They may, however, be combined in
the same contract, in which case the policy goes under the
name of "endowment insurance." Thus a $1,000 twenty-year
endowment policy may be regarded as a combination of
twenty-year term insurance for $1,000 and a twenty-year pure
endowment for an equal amount. In other words the policy
assures the holder that he will receive $1,000 whenever death
may occur during the twenty-year term ; likewise that he will
receive $1,000 in case he outlives the said twenty-year period.

In either case the policyholder receives $1,000, the payment
at death being provided for under the term insurance feature
of the endowment contract, and the payment upon survival
being provided for under the pure endowment.

The mathematical premium for endowment insurance represents the
sum of the premiums for the term insurance and
for the pure endowment. The premium paid at a given age
will be higher for short- than for long-term endowments because
the company must collect a sufficient amount of money so
that together with compound interest it will have the face value
of the policy at the end of the term. Such policies have become
very popular during the past twenty years, and now represent a
very considerable proportion of the total life insurance
written. They may cover any stipulated period, such as ten,
fifteen, twenty, thirty, and forty years. In Great Britain the
tendency has been towards the selection of the longer terms,
while in America the twenty-year period seems to have proved
the most popular, although various companies are now strongly
urging the long-term period with a view to having the policy,
by making it mature at such ages as 60 or 65, afford a convenient
combination of life-insurance protection with provision for old age.
Their contention is that a whole-life policy
is an endowment policy maturing at age 96, according to the
American Experience table, and that by the payment of a
slightly higher premium, or by leaving all dividend accumulations
with the company, the policy should be made to mature
at a more logical age, such as 60 or 65. Premiums are usually
paid on the level plan throughout the life of the contract.
Often, however, long-term endowments for periods like thirty
or thirty-five years are paid for on the -limited-payment plan,
the premiums, for example, being paid during the first ten or
fifteen years, although the face of the policy is not payable until,
say, twenty years after premium payments have ceased.

Many types of endowment policies are issued in addition to
the ordinary form which promises a stipulated amount in the
event of either death or survival. Thus there may be " double
endowments," in which case the pure endowment equals twice
the sum of the amount that will be paid in the form of term
insurance in case of death, or " semi-endowments," where the
pure endowment equals one-half the amount paid upon death.
.Various special types of so-called " child endowment policies "
are also issued. Sometimes these policies provide merely for
the return in full of all the premiums paid in the event of the
child's death, the face of the policy being paid only upon the
child surviving a fixed age. Policies of this character are not
life-insurance contracts in the true sense, but have for their
purpose the accumulation of a fund for business or educational
purposes upon the child attaining a specified age. In other
instances a smaller premium may be charged because only
the payment of a pure endowment is promised, there being no
return of the premiums in the event of the child's death during
the specified term. Again, it may be provided that upon the
death of the purchaser of a child's endowment policy, usually
the father or some other near relative, all premium payments
shall cease, the policy becoming full-paid and the principal
becoming due when the child reaches a specified age. It may
be added that until recently various companies also extended
the pure-endowment feature to the payment of dividends on
various types of contracts. This was done under the so-called
" tontine plan," whereby the dividends were paid only at the
end of a certain number of years, such as ten, fifteen, or twenty
years, provided the policyholder was living at that time, these
dividends, however, being forfeited in case of death before the
expiration of the indicated number of years.

Related posts:
Classification of policies

Classification of policies

Despite the numerous forms of life-insurance policies already
on the market, each year sees the various companies
announcing to the public new contracts containing some special
feature. Ignoring the numerous minor differences that
exist, life-insurance contracts may be classified briefly under
the following six leading groups. This chapter will merely
undertake to define and indicate the nature of the contracts
comprising each of these groups; the discussion of the special
uses and the relative advantages or disadvantages of the respective
policies being deferred to the next six chapters.

Policies Classified According to the Term Under this
heading contracts may be classified as " whole-" or " straightlife policies"
and " term policies," the first implying that the
policy continues during the whole of the insured's life and
that the face value is payable only at death, and the second
referring to a policy payable only if death occurs during a
stipulated period, such as five, ten, fifteen, or twenty years.
A whole-life policy may be defined as a " term policy for the
whole of life," while a term policy, as understood in life-insurance
terminology, is one written for a definite period of years.
It should be noted, however, that where the company is a
mutual one the dividend distributions on the whole-life policy
may be allowed to remain with the company with a view to
shortening the time of maturity of the contract. In other
words, the dividend accumulations, if left with the company,
may be used to terminate the policy for its face value at a
given date although death may not have occurred by that time.

Policies Classified According to the Method of Paying
Premiums. Life-insurance premiums are customarily paid
on the " annual level premium " plan, i.e. the premium collected
by the company each year remains the same during the
whole of life or during an agreed term of years. As contrasted
with this method there is the " natural premium "
plan, according to which the insurance is granted in the form
of renewable one-year-term insurance, the annual premium
increasing from year to year in accordance with the increase
in the cost of insurance brought about by the increased risk
attaching to increasing age. This plan is rarely used to-day
and, as will be explained in the chapter on the " Keserve," i
the success of modern life insurance is dependent upon the
charging of a uniform level premium.

Annual premiums on any policy may be discounted to their
present value, and this discounted amount paid in advance
in one lump sum, commonly called the " single premium."
Mathematically, the net single premium (i.e. the single premium
without any additions for expenses and contingencies)
is equivalent, taking into consideration the element of time
and an assumed rate of interest, to the net annual level premiums
paid- for the same policy. Annuities are commonly
paid for with a single premium in advance, but life-insurance
policies are rarely paid for by this method, the policyholder
finding the small annual premium much more convenient, and
also not wishing to risk the chance, in case of early death, of
losing the much larger sum paid to the company under the
single premium plan. It should also be stated that companies,
as regards the great majority of policies written, permit the
annual level premium to be paid semi-annually or quarterly,
while in the case of industrial insurance premium payments
are made weekly. While such frequent payments may prove
a convenience to the policyholder, the aggregate premium paid
is somewhat larger because of the loss of interest to the insurance
company as well as the greater collection expense.

Various other premium-payment plans are in use to-day.
Thus under the terms of the so-called " limited-payment policy."
an annual level premium is charged for a limited number
of years, such as ten, fifteen, or twenty years, and upon the
payment of the last premium the policy becomes " full paid."
This method of paying premiums may under certain circumstances
be applied advantageously to any type of life-insurance
contract, except very short term policies. The premium under
this plan is, of course, larger than the annual level premium
paid throughout the life of the policy. Thus in the case of a
limited payment whole-life policy, the ten, fifteen or twenty
premiums called for by the contract represent a total payment
sufficiently larger than the aggregate amount paid in during
the same period under the ordinary annual level premium
plan, so that at the end of the designated period the company
will have accumulated an amount which will be sufficient, together
with compound interest earnings at an assumed rate,
to carry the policy to maturity without requiring any further
payments from the policyholder.

Related posts:
The Use of Life Insurance as a Means of Borrowing Without Collateral

The Use of Life Insurance as a Means of Borrowing Without Collateral

Thus far it has been shown that life
insurance may be the means of strengthening and safeguarding
the credit of a business whose tangible collateral might
be adversely affected by the death of those who are the brains
and the life-blood of the concern. But life-insurance policies
may also be used for effecting loans by persons who possess no
tangible security whatever but who are trusted by the lenders
because of their well-known integrity. The usefulness
of life insurance in this important respect has been too little
appreciated. Thousands upon thousands of young men fritter away
the best years of their lives and fail to take advantage of the
finest opportunities simply because they are laboring under
the assumption that they are handicapped in doing
what they would like to do because they do not actually possess
the necessary capital.

The serviceability of life insurance in helping such young
men to realize their ambition may be illustrated by the fol-
lowing example: A young man desires to obtain a college
education, yet he himself does not possess the necessary means
nor can his parents, owing to their moderate circumstances,
assist him, much as they would like. His best interests require
that he should take the course of study as soon as possible
and pursue it consecutively and without interruption, but this
he feels he cannot do. Assuming that this young man is
determined to get the education, he will see that one of two
courses is open to him. He may first earn the necessary
money, but this course is likely to consume some of his best
years, and will defer the time of graduation and his entrance
into his chosen vocation. Or, he may, as the saying is, " earn
his way through college," but in doing this he is serving two
masters, to the detriment of himself. He is in college for
the express purpose of preparing himself for his lifework,
yet he must give much time and energy that should be devoted
to study, to the performance of work in which he has no other
interest than the earning of necessary funds. Clearly, it is
to the interest of this young man to borrow money, if that is
possible, so as to enable him to give all his time to the
mastery of his studies, and upon their completion, promptly
to begin his vocation with a view to repaying the loan as soon
as possible.
Xow, as is frequently the case, this young man has some
relative or friend who is interested in his welfare, and who
can be induced to advance the necessary amount at the cur-
rent rate of interest and without tangible collateral if only
assurances can be given that the loan will be repaid. Know-
ing the young man's reliability, the lender feels certain that
the loan with interest will be repaid in due course of time,
but he cannot afford to gamble with the contingency of
death, because he knows that should the borrower be removed
by an untimely death the loan would never be repaid. This
uncertain element in the transaction may be obviated in one
of two ways. Either the young man may insure his life for
an amount sufficient to cover the principal of the loan, any
premiums that the creditor might have to pay, and all antici-
pated interest charges, and then assign the policy to the cred-
itor; or, the creditor may, if he so desires, take out a policy
on the life of the debtor. Usually it is best for the debtor to
take out the insurance and protect the creditor with an assign-
ment.
Moreover, if the debtor finds it necessary he may arrange
to have the creditor pay the premiums and consider these
as a part of the loan. Now if the borrower completes hie
course and continues to live he will repay the loan with
interest and at that time the assigned policy will revert to
him and may then be used for family or business protection.
Should the borrower die, however, before he has had time to
repay all of the loan, the creditor will retain out of the in-
surance proceeds the amount still owing and refund the bal-
ance to the person or persons designated as beneficiaries by
the insured.

Numerous other illustrations may be mentioned to show the
value of life insurance as a means of making possible borrow-
ing without collateral. It may serve as a means of enabling
a young man to obtain the initial supply of capital to start
in business. It may enhance the value of an indorsement or
any other obligation when the indorser or debtor is not the
possessor of marketable collateral. It may also advantage-
ously be used in that large number of instances where a
man already established in business may need more credit for
its proper development but where the banker feels that the
business, standing by itself, does not warrant the making of a
new loan. To the banker the man at the head of the business
is a very important asset, and he may feel that while the
business itself does not warrant another loan, the business
plus the man who manages it would justify the extension of
further credit. Here, however, just as in the previous illus-
tration, the contingency of early death must be provided
against, since in that event the last loans are apt to be unse-
cured. In other words a life-insurance policy in favor of the
creditor is a hedge against the contingency of the loss of the
value of the human life upon which the repayment of the loan
is primarily dependent.


Related posts:
The Use of Life Insurance as a Means of Enhancing the Credit of Business Enterprises During Times of Financial Stringency.

The Use of Life Insurance as a Means of Enhancing the Credit of Business Enterprises During Times of Financial Stringency.

Just as endowment insurance proves serviceable
as a means of accumulating a substantial fund without the
insured being conscious of any sacrifice, so nearly all other
forms of life-insurance policies, as will be explained more
fully later, contain a savings feature, although in none does
that feature appear so prominently as in the ordinary types
of endowment policies. Nearly all policies are paid for by
an annual premium which is uniform throughout life or the
premium-paying period, with the result that the company
gradually accumulates through overcharges in the early years,
when the premium is more than sufficient to meet the current
cost of insurance, a fund which when improved at interest
at an assumed rate will just enable the company to meet
its claims as they mature. On a whole-life policy, for exam-
ple, this fund reaches large proportions in the course of years. 4
It follows, therefore, that the taking out of life-insurance
policies from time to time, made payable to either the in-
sured's estate or to his business, means the gradual accumu-
lation of increasing cash or loan values which are obtainable
at any time by surrendering the policy or by borrowing against
its cash value.

It is not intended here to encourage the altogether too
common habit of borrowing the loan value of policies, because
in many instances the privilege is exercised unnecessarily,
simply because some luxury is desired or because the security
market seems low, or because some other apparent opportu-
nity to make money quickly seems to present itself. And,
even where these considerations are not the motive, the insured
frequently uses this asset because it is so easily obtained,
never considering at the time the relation of that asset to his
beneficiary and often overlooking some other available asset
which should have been used in preference to the cash value
of his policy. Borrowing under such conditions is not con-
templated in this discussion. "What it is intended to show is
that the surrender or loan value of a policy is a real asset
which enhances the credit of the business man because it is
available on demand, irrespective of the financial conditions
which may prevail, and usually at the fixed rate of 5 or 6
per cent.
Bankers and other creditors always regard the cash value
of a business man's policies as an additional asset justifying
larger extension of credit on his firm's paper. But sup-
pose the borrower must have additional credit at a time when
the condition of the money market is such as to make it
highly inconvenient or impossible for the banks to meet his
requirements. It is at such times that the loan privilege
contained in insurance contracts affords a convenient and
most excellent means of relief, as has been amply testified to
by many of the nation's leading business men. During the
panic of 1907, for example, when such stringency prevailed
in the credit market as to make impossible the floating of
loans even on the best collateral, millions of dollars were bor-
rowed on life-insurance policies and numerous business men,
firms and corporations used their life-insurance contracts
as a means of securing funds to make up their payrolls or to
meet other pressing obligations. This service of life insur-
ance to the business community and the spirit in which it
should be used is well exemplified by the experience of one
of the nation's leading business men.
Never, except as a last resource, should a man use his insur-
ance policies as the basis for borrowing. It should be a source
of joy and satisfaction that this sacred investment is kept clear
of encumbrance. Whatever advantageous financial operations
may offer with reference to other investments, sums set aside
for insurance should be regarded as of a different class, to be
maintained unimpaired. It is a satisfaction to know that the
gradually increasing cash value offers, however, a resource al-
ways available and unquestionable. It is a stout anchor to
windward holding firm against any storm of family or business
misfortune that may arise. In the autumn of 1907, there was
a panic, during which there was a practical suspension both
of currency payments and of credits. Rates of interest ad-
vanced to prohibitory figures, but notwithstanding the enhanced
rates, loans were practically impossible to obtain. Three or
four years before, one of my partners and I had taken out
life-insurance policies for considerable amounts. These gave
the right to borrow from the insurance company at the fixed
rate of 5 per cent. We were, therefore, enabled to place this
credit at the disposal of the partnership of which we were
members, and about $120,000 of cash was instantly available in
a time of great need. Of course, these loans were repaid to
the insurance company immediately upon the restoration of
normal conditions. Such a privilege must in many cases mean
the avoidance of actual disaster.
Related posts:

Life Insurance as Security for Bond Issues

Life Insurance as Security for Bond Issues

Life insurance may also conveniently be used as a hedge against the
possible failure to pay a bond issue at maturity. Thus,
let us assume that a firm wishes to raise $50,000 on bonds
which will mature in twenty years, and that the nature and
9rganization of the business are such as to make it chiefly
dependent for its credit and successful operation upon the
life of one man. Under such circumstances the unexpected
death of this individual might ruin the company to such an
extent that the liquidation of its assets might not prove sufficient
for the full redemption of the bonds. Unless some
means can be found which will assure the creditors that the
bonds will be redeemed upon maturity, the loan will in all
probability not be effected at all or only under severe restrictions
and at a very high rate of interest.
Proper security to the creditors may conveniently be furnished
in this instance through the medium of endowment
insurance. In other words, the head of the business may
insure his life for $50,000 under a twenty-year endowment
policy. In case of survival, the business is likely to prosper
with the result that the security back of the bonds will greatly
increase. In that case the endowment policy will serve the
purpose of creating a sinking fund which increases year after
year until at the end of twenty years it will amount to $50,000
or just the sum needed to redeem the bond issue then
falling due. On the other hand, should the insured die before
the expiration of the twenty-year period, and this is the
real contingency that the creditors desire to be protected
against, the business at once receives the full face value of
the policy. The firm would thus have on hand sufficient funds
to pay off the bonds at once if that were possible and desirable.
But if it is found, instead, that the business can be
continued advantageously, such a portion of the $50,000 of
insurance money may be set aside in a sinking fund as will
at the current rate of interest amount to $50,000, or the face
of the bond issue, at the end of the twenty-year period. The
balance of tbre insurance money not needed for the sinking
fund may be used for the improvement of the business, thus
in turn still more enhancing the security back of the bond
issue.

Similar in nature to the above function is the further use
of life insurance as a means of accumulating a sinking fund
for the benefit of such institutions as schools, colleges,
churches and hospitals. Many times such institutions are
largely dependent upon the efforts and generosity of one man
or a limited number of men. While he or they live the institution
prospers, but in the event of unexpected death, the
absence of ample endowment funds compels retrenchment
and consequently impairment of usefulness. Such a contingency
the supporters of the institution may obviate by taking out
endowment insurance in its behalf. In case of death
the institution receives at once the face of the policy, while
in the event of survival the policy will enable the insured
gradually to accumulate a sinking fund to be turned over to
the institution in question at the expiration of the term.
During the last few years the graduating classes of a number
of leading universities and colleges have also adopted this
method, and it is mentioned here merely as illustrative of
the numerous ways in which the principle may be applied, as
a convenient method of raising a substantial class fund for
their Alma Mater. The plan adopted consists in each member of
the class pledging himself to take and maintain, say, a
$250 or $500 twenty-year endowment policy, the university
or college being named the beneficiary. In this way one hundred
graduates by setting aside the small sum of only about
3^ or Gy 2 cents a day can during the twenty-year period,
using as a basis the present experience of the average American
company, accumulate approximately $25,000 or $50,000
as a class fund. Ask these one hundred persons twenty years
from date to give that sum, and the refusal will be general.
Through the use of the endowment-insurance plan, however,
this substantial result can be obtained at a sacrifice so small
as to be hardly worth mentioning. It is practically certain
that the sum involved, owing to its smallness, would, in the
absence of this plan, have been wasted in daily expenditures
for trifles, and the large sum that may be secured through
endowment insurance may therefore be regarded as the utilization
of a by-product odds and ends that would not other-
wise have been saved for a noble purpose.


Related posts:
The Insurance of Employees for the Benefit of Their Families

The Insurance of Employees for the Benefit of Their Families

The Insurance of Employees for the Benefit of Their
Families.Thus far attention has been called to the
insurance of officials and valuable employees for the bene-
fit of the business with which they are connected. Numer-
ous policies, however, are issued to-day which have for
their purpose the insurance of the rank and file of the em-
ployees in any given line of business for the benefit of their
families, although the employer pays all or a portion of the
premiums. Although such insurance appears to be primarily
family insurance, it also serves a useful business purpose in
increasing the efficiency of the employer's working force.
Long service on the part of employees is deemed desirable by
employers as one of the best means of keeping up the quality
and keeping down the cost of the product. Frequent change
in the labor force not only necessitates constant instruction,
but, in the long run, spells loss through inefficiency. It is,
therefore, with a view to lengthening the service of its em-
ployees that many corporations and firms have adopted the
profit-sharing plan or are maintaining for their employees,
at considerable expense, comprehensive pension or insurance
plans.

A great variety of methods is used in this respect, but all
have the same general purpose, viz., the elimination of the
loss that is connected with frequent changes in the working
personnel. Sometimes the employer accomplishes this pur-
pose through a plan of self-insurance, while in other in-
stances the insurance protection is obtained from a company.
Sometimes the plan simply provides for the payment to the
deceased employee's family of a stipulated pension or a lump
sum of insurance, while in other instances, and this is com-
ing to be regarded as preferable, the insurance does not ma-
ture as a lump sum payment but the proceeds are paid to the
beneficiary in annual, semi-annual, quarterly or monthly in-
stallments. Again the employer may seek to bind his em-
ployees to himself by rewarding them with an endowment
policy which provides for the payment of a stipulated sum
either in the event of death during a given period like twenty
years, or upon their survival of that period. If the employee
dies during this period and while still in the service of the
employer, the proceeds of the policy pass to the employee's
family either under the lump sum or installment plans of
payment. If, however, the employee remains with the busi-
ness during the entire twenty years the proceeds will at the
end of that period be paid to him directly. Should the em-
ployee cease to remain in the business, the employer usually
has the option of surrendering the policy for its cash value,
or of permitting the employee, if he is willing to refund the
back premiums, to take over and himself carry the policy to
its maturity.

Related posts:
The Use of Partnership Insurance.

The Use of Partnership Insurance.

The Use of Partnership Insurance.To an increasing ex-
tent copartners in any line of business find it advisable to
insure their lives for the benefit of their firm. This may be
done in one of two ways: either each member of the partner-
ship may take out a separate policy on his life and make the
same payable to the firm, or to the surviving member or mem-
bers of the firm ; or the insurance may be taken jointly upon
all or any number of the partners, the contract in this instance
(called a joint-life policy) promising payment to the firm or

and the $4,000,000 carried by his son Rodman Wanamaker; the
$1,000,000 carried by Harry G. Selfridge in establishing his Ameri-
can department store in London; the $500,000 on the late Charles
Netcher, the department store manager of Chicago, who died while
enlarging his store, the prompt payment of which, after but one
premium was paid, largely assisted his wife in continuing the busi-
ness and suggested her carrying $1,200,000 insurance herself."
The numerous benefits derived from partnership insurance
become apparent upon a consideration of the many diffi-
culties that may confront a copartnership upon the death of
one of the members of the firm. In most partnerships the
several partners not only have supplied their respective por-
tions of the necessary capital, but each is a specialist in some
particular department. The death of any member of the firm,
therefore, may involve not only the withdrawal of his share
of the capital by his heirs but the loss of his skill and active
cooperation. If, however, the deceased partner has been in-
sured for the benefit of the firm, the proceeds of the policy
will enable the surviving partners to pay off his interest to his
heirs and carry on the business without delay and embarrass-
ment during the time necessary to find a successor. Fre-
quently the purchase of the deceased partner's interest becomes
highly desirable, especially where the business is a specialized
one, in order to prevent that interest from coming under the
control of persons in the firm who may be entirely ignorant
of the business and possibly hostile to its management.

Related posts:
Life Insurance as a Means of Indemnification Against

Life Insurance as a Means of Indemnification Against

Life Insurance as a Means of Indemnification Against
Loss Through the Death of Officials and Valuable Employ-
ees. Turning now to a discussion of the numerous business
uses to which life insurance lends itself, we find that one
field for its application consists of the numerous businesses
which depend upon, in fact have been built around, some one
man whose capital, energy, technical knowledge, experience,
or power to plan and execute make him a most valuable asset
of the organization and a necessity to its successful operation.
Numerous examples may be pointed to as illustrating the dependence
of successful business upon the personal equation.
Thus a corporation or firm may be vitally interested in one of
its officers whose financial worth as an indorser, or whose
ability as an executive, may be the basis of its bond issues or
bank credit. A manufacturing or mining enterprise may be
dependent upon someone who alone possesses the chemical or
engineering knowledge necessary to the concern. A publish-
ing house may have engaged someone who alone can be the
author of a proposed work and may be obliged to incur con-
siderable outlay before it is written. The sales manager of a
large business establishment' may have made himself indis-
pensable through his ability to organize an efficient body of
salesmen, to employ the most effective methods of selling,
and to develop profitable markets. Again, some officer of the
concern, although not actively engaged in its daily operations,
may prove indispensable because he is its principal owner and
because his experience and business connections make him
its chief adviser.

These are only a few illustrations of the many that might be
given to show the importance of a human life as an asset to the
successful operation of a business. Now why not insure the
business against the loss of that life that asset through
death? Surely, the extinction of such valuable lives will in
many instances prove a more serious loss than that by fire or
any of the other sources of loss in business against which
insurance is invariably procured. The death of the officer
whose indorsement or executive ability is the basis for the
firm's bank and bond credit might result in a refusal on the
part of lenders to renew old and make new loans, thus possibly
jeopardizing the business because of a lack of capital. If
adequately insured, however, for the benefit of the business,
the firm would immediately upon his death receive the face
value of the policy. Not only would the insurance proceeds
help to enable the company to meet any obligations falling
due during the period of adjustment, but the mere knowledge
that the business was the recipient of a large amount of cash
would be a powerful factor in allaying doubt and in restoring
confidence on the part of creditors. Similarly the death of
the person who alone possessed the chemical and engineering
knowledge required by his employer might result in the lower-
ing of the quality or the volume of the output of the com-
modity in question, thus causing much inconvenience and pos-
sible loss of business; while the death of the sales manager
might involve the disintegration of the selling force and the
consequent loss of profitable markets. Furthermore, in niany
instances an untimely death may leave a special piece of work
unfinished and subject the employer to a loss of the advances
made, since no one else can be found to bring the unfinished
project to completion. Here the amount of life-insurance pro-
tection may be made to equal approximately the outlay in-
curred, and if the work is known to require only a few years
for its completion, the term of the policy may be made to
cover only this limited period. Such short-term policies also
often prove desirable for the protection of a business against
the death of its owner or manager during the first five or ten
years required for the business to become firmly established.
All losses of a character like those enumerated may be
guarded against by making the business the beneficiary of a
sufficiently large policy on the lives of the officers or employees
under consideration. 1 In the event of death the business will

2 The following may be mentioned as a few of the notable in-
stances of business insurance which are commonly cited as illus-
trative of the extent to which certain men use life insurance for the
benefit of copartnerships and corporations: George E. Nicholson,
Kansas City, $1,500,000 in favor of four cement companies of which
he is president: H. X. Byllesby, Chicago, $1,250,000 as managing
engineer of electric companies; John H. Jones, Pittsburgh, $1,000,000
in favor of the Pittsburgh-Buffalo Co., of which he is president;
John H. MacMillan, Minneapolis, $500,000 in favor of the Carigal
Elevator Co., of which he is vice-president; F. B. Wells and F. T.
Heffelfinger, Minneapolis, $500,000 each in favor of the F. H. Peavey
Co.; and Arthur S. Ford, $1,000,000 in favor of the Portland Cement
Co., of which he is treasurer.

Related posts:
Business uses of life insurance