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

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.