Insurance Policies And Premium Rates
( Originally Published 1911 )
Classification of policies.—In considering life insurance policies, one of the first classifications might be into "participating" and "non-participating policies." Participating policies entitle the holders to a share in the company's profits. The payment of such amounts is often referred to as "dividends," although in the ordinary sense of the word there is no such thing as a dividend to holders of life insurance policies. There would, of course, be no reason for "dividends" if life insurance costs could be figured exactly. Mortality tables and interest calculatiQns can, at best, furnish only the basis for close approximations. What is meant, then, is that the companies to be on the safe side arrange premium payments which will absolutely protect them against failure. This is done by means of so-called "dividends," that is, by paying back to the insured certain sums of money on the policies taken out.
Some, however, prefer a lower annual charge without the feature of dividend participation. To such parties policies are issued on what is known as the "non-participating" basis; that is, they pay a fixed annual charge for the policy so long as the term shall run or so long as they shall live. Thus, they have the advantage of knowing just what the insurance is going to cost them and just what the return will be. It may safely be said, however, that most policies are issued on the participating basis, the dividend feature being a not unpleasing one to the average individual.
Kinds of policies.—A life insurance policy may be issued, and in the majority of cases is issued, for life; that is, the amount of the policy is payable to the beneficiary on the death of the insured. An endowment policy is payable at death or at a fixed period of time. For example, a twenty-year endowment policy would be payable if the insured died within twenty years or, if the insured were to live, would be payable at the end of the twenty-year period.
Term policies are infrequently written and are usually issued for some specific purpose, as to cover a life for a short term of years. Such a policy may be taken out to cover loss for a certain period, as, for example, on the life of an inventor while he is engaged in developing an invention; or such a policy might be taken out to cover the head of an institution where it was felt that the successful development of the plant depended so much on his life that in the event of death the money invested might be a total loss.. Such a form of risk may be insured by the term policy. As might be expected, this type of policy is cheaper than the other forms since it covers only a limited number of years, usually a term of years in early or middle life when the death rate is less than in the later years.
Annuities.—An annuity, as far as its working principles are concerned, might be said to be the reverse of life insurance, the company paying an annual sum to the annuitant, after having received in one payment a sum for this purpose. In other words, in an annuity, as contrasted with life insurance, the company and the insured change places. In an annuity, the risk is carried, not by the company, but by the annuitant, for if he dies prematurely the company is relieved from the obligation of further annual payments. The business of annuities is much smaller in the United States than in England, the idea apparently not appealing strongly to the American people. Possibly conditions may later change so as to make annuities more popular in this country. The annuity is without doubt a most useful form of investment, since it provides a stated sum payable according to definite terms, thus avoiding the dangerous practice of entrusting large sums to persons who, because unskilled in money matters, are often likely to make unwise investments.
Classification of risks.—Theoretically, a life insurance company accepts only such risks as are up to its standard. Some provision, to be sure, is made for "sub-standard" lives, but comparatively speaking it is slight since standard lives are the ones which insurance companies are more desirous of insuring. It will readily be seen that this policy differs radically from that of property insurance, for while there are different standards, as in fire insurance, to which a risk should attain, rarely, if ever, does it do so; the substandard condition, therefore, is the one most frequently met. From the standpoint of the insurance companies, risks have been classified as "preferred," "ordinary," and "doubtful." In the doubtful class are the underweights and over-weights. The following reasons have been set forth by an authority for their being in that class:
(1) The Underweights.
(a) They are abnormal and die short of their expectation.
(2) The Overweights.
(a) They are abnormal.
From the insurance standpoint occupation is important. Some occupations are obviously so hazardous (aviation, for example) as to cause a company to decline the risk, although other conditions might be favorable.
Insurance might be granted in such a case but the rate would be almost prohibitive. As a rule, the company expects the applicant to continue in the same line of occupation as that in which he was engaged at the time the policy was written for him, but statistics regarding the hazards of various occupations have never been complete enough to make possible any hard or fixed rule about change of occupation. A change that did not involve a radical degree of increased hazard would be permitted without any question. The matter of race, of course, is taken into consideration, since it is well known that longevity varies widely in different races. This is true not only in different countries inhabited by their respective races but also where different races are found under the same climatic conditions.
Influence of climate on mortality.—The territory in which one lives or the part of the earth he occupies has to be considered. In the Temperate Zones, for example, which are the more highly settled and civilized, living conditions are fairly stable and all protective influences that make for long life are enforced by the general authorities. In the Torrid Zone, however, the Anglo-Saxon race does not flourish. Fifty years ago the restrictions were quite severe, even in the United States, where yellow fever was looked upon as a dangerous epidemic. Today one may live in practically any part of the United States without suffering thereby from an insurance standpoint. There are differences, of course; some sections are more healthful than others but the differences in healthfulness are not as yet considered sufficient to affect insurance policies to any extent. Once a company is satisfied that certain regions are not those in which lives should be insured, they will cease to solicit insurance in those regions.
The moral hazard.—The moral hazard, of course, exists in life insurance as in every form of insurance and possibly in every station of life. It is not enough that the insured shall have passed the medical examination and otherwise have qualified. The ordinary qualifications are important, to be sure, but in addition the company endeavors to ascertain something of the moral standing of anyone who applies for insurance. This information is secured by means of research work and special investigations conducted quite independently of the usual sources of information. The extreme care exercised is fully warranted, since a contract of life insurance is, so far as the company is concerned, one which it cannot cancel after the policy has once been issued and the premium paid. For so long thereafter as the insured shall pay the premium the policy continues in force. The insured, of course, may cancel the policy at any time, although, as has just been mentioned, the insurer may not. For this reason, therefore, it is exceedingly important that the company use the utmost care that its policy shall not be issued to cover risks which, from the moral standpoint, would be undesirable. Again, referring to suicide, it may be said that this has always been one of the specific problems. It is a fact that suicide in the United States is on the increase. Statistics show that for each one hundred thousand of the population in sixty-five cities the increase was from 12.3 in 1890 to 20.6 in 1909.
Features of the insurance contract.—The modern policy contract, in its general features, represents a somewhat simple condition. Formerly it was filled with prohibitions; now it is filled with privileges. Brief mention may be made of such points as are found in the majority of policies.
The premium is due at the time stated in the contract and is payable only at the home office of the company unless other provision is made.
The contract is not subject to alteration, and the policy with the application, if there be one, tells the whole story. Other matters cannot be brought into it. There may be a few exceptional cases but they would be so rare as to be negligible.
Due notice of an assignment, if made, must be given the company.
The average life insurance policy is incontestable from date of issue except for suicide and usually is incontestable for that feature one year after issue. In connection with suicide, an attempt was made to do away with the special provision for one year. It was found, however, that with this restriction removed, the number of suicides apparently increased so that the suicide clause was restored as a protection to the insurance companies. People contemplating suicide would, just before taking their lives, secure policies so long as they could get those which were incontestable from date of issue.
It might naturally be assumed that insurance applicants could be relied upon to state their ages correctly, and yet there have been sufficient cases of misstatement to warrant rules being made to provide the proper means of adjustment. The rule generally in force at the present time is that if the age has been misstated the correction may be made and the proper payment under the policy for the given age be made the basis of settlement.
Thirty days of grace had by custom become established for the payment of premiums. In many states it is now the rule and one month is allowed by law during which payments may be made.
The beneficiary of an insurance policy in the early days could not be changed without his or her consent. This provision proved an unwise handicap in some cases; in fact, if it had been retained in insurance policies it might, and probably would, have retarded the growth of life insurance. The practice has, however, been changed so that to-day the beneficiary can usually be changed if the policy holder, when he takes out his insurance, expresses his desire to have this privilege embodied in the policy.
Paid-up policies.—A life insurance policy that has been allowed to lapse after having been in force for three years does not become a complete loss to the insured. It is supposed to be of some worth, is carried as a policy for that amount and is payable at the stated time as though it had been carried to completion. If a policy which has a paid-up insurance value is permitted to lapse or is cancelled, it is customary, if the insured so desires, to grant a paid-up policy for the amount.
Cash value.—At the end of three years, the cash value feature comes into play, so that the policy, if cancelled, has a certain value; that is to say, the insured, under the terms of the policy, is entitled to a certain amount if he gives up his right to the policy. This feature of the cash surrender value of a policy was introduced into the business, on this side of the Atlantic at least, by Elizur Wright, one of the early Commissioners of Massachusetts. He held that as the payments in the early days of life insurance constituted, in part at least, a reserve for the payment of the policy, the insured should not lose this total sum if he found it necessary to allow his policy to lapse, but should have the benefit of a certain cash value. This provision is now a recognized principle in all life insurance contracts.
The medical examination: Practically all forms of insurance are written only after some form of examination, or "inspection" as it is termed in fire insurance, of the risk to be insured. The medical examination in life insurance corresponds, in a sense, to the property inspection in fire insurance. In early days, in fact for several decades, there was no medical examination in connection with life insurance. Under the existing conditions it was hardly necessary, since the entire process was a slow and formal affair and the work of the societies confined to local territories, where applicants were generally known to two or more trustees of the society. To-day, the medical examiner of a life insurance company is an important official. An applicant for insurance covers the general questions to which the company desires answers before it issues a policy, but he is not obliged to write out answers to purely medical questions. A typical medical examiner's report runs as follows, and a consideration of these questions will reveal the points emphasized by the company in considering the application.
One or two questions which involve a moral view-point may be worthy of special attention. Under 14 (d) and (e), questions are asked in regard to intoxicating liquors, and under 36, with subdivisions running from (a) to (h) inclusive, the subject is covered still more fully. The word "temperate" does not mean the same thing to everyone. To one applicant it might mean a moderate use of alcoholic liquors; to another it might mean excess or almost total abstinence. The word is open to so many interpretations that nowadays it is generally taken to mean, not total abstinence, but rather the use of alcoholic liquors only to a certain extent. A statement as to what that extent is must come from the applicant. One who does not use such liquors would be a total abstainer. As a matter of fact, but very little trouble is experienced in finding out the exact status in each case since the applicant is usually quite willing to state whether he does or does not use liquors, and in the event of his using them, to indicate the frequency of his indulgence. Notice under question 36 (b) and (c) that the times of use, daily, weekly, and monthly, are taken up quite minutely, forming a record which runs back over two years.
The use of drugs, apparently, stands on a different moral basis from the use of alcoholic liquors. Probably no applicant for insurance would confess to the use of drugs. To detect a user of drugs, therefore, calls for the keenest discernment and discrimination on the part of the medical examiner.