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.
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