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