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