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.


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The Insurance of Employees for the Benefit of Their Families