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" cash value " of the policy, and may either be withdrawn by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.
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