Volume 4 — OBJECTIONS TO LEVEL-PREMIUM LIFE INSURANCE.

BY G. A. LITCHFIELD.

In considering the objections to level-premium life insurance, as at present administered, it will not be assumed that there is not much in the system to commend. It has subserved, and is now subserving, a great and beneficent end.

It is the channel through which millions of dollars have been disbursed to families in the time of their sorest need.

It has encouraged habits of economy, and stimulated the noble resolve to lay by a part of earnings, scarcely adequate to meet present necessity, for a time of greater necessity still.

Thousands of families have experienced exemption from actual want, and thousands more have enjoyed comforts, not to say luxuries, that they would never have known but for the forethought of husbands and fathers who availed themselves of the provisions of life insurance when in health, and with a long life in prospect.

We have no disposition to detract from the excellent results accomplished, and perhaps the severest criticism that can be made upon a system embracing such beneficent possibilities is that it has failed so disastrously to realize them in such numerous instances. While it has carried relief and comfort to many families whose wage-producers have been taken from them by death, it has bitterly disappointed many more who had made it their dependence for such a time of need.

While it has encouraged many a poor man to heroic self-sacrifice in the effort to save the premium required from his scanty wages, it has too often absorbed the products of his toil, and left his children to cry for bread. Such results have been reached sometimes by extravagant and incompetent management, and again by dishonesty and gross betrayal of important trusts. The preposterous claim is frequently made by the advocates of level-premium insurance, when contrasting it with assessment insurance, that patrons of the former system may pay their money with the absolute certainty of securing the benefits for which they pay, while patrons of the latter are placing their hopes upon a rope of sand. We do not hesitate to assert that more money has been actually lost to the people by the collapse of a single level-premium life company that we might name than by all the failures combined that have ever occurred in assessment companies in this country; because, in assessment companies, for the most part, a fair equivalent is rendered from year to year, while in the former large over-payments are required upon the promise of future returns. There have been in the United States some eight hundred level-premium life companies, only about fifty of which are now in existence. It is unnecessary to recall the disastrous ending of such companies as the "Continental" and the "Knickerbocker." It is well known that the former was at one time receiving not far from half a million of dollars annually in premiums through its Boston agency alone, and that the latter, in the midst of seeming prosperity, collapsed so suddenly that millions of dollars of supposed assets disappeared beyond recovery.

The history of the "Charter Oak," with its more than ten millions of assets at one time, its subsequent compromise with its policy-holders at sixty-five cents on the dollar, and its now possible passage into the hands of a receiver,—that functionary at the tail end of a life-insurance company that has so often been the "bourne" whence few dollars have ever returned to the pockets of the unfortunate policy-holder,—is too well known to require rehearsing here. Yet the assertion is brazenly made that level-premium companies alone give insurance that insures; that there is no safety in any other form of insurance, and that assessment insurance, disbursing its millions to the families of our land, is but a temporary craze that will soon pass away.

It is a question that may well be asked: What is the explanation of results so deplorable in level-premium insurance?

That they occur is too well known to admit of question.

That a very large proportion of those who patronize these companies become dissatisfied, not to say disgusted, with their practical workings, there is abundant evidence to prove.

That level-premium insurance does not meet the requirements of the people is shown by the fact that there are only about 600,000 policy-holders in these institutions in a population of about 60,000,000. While lack of confidence undoubtedly deters some from patronizing them, yet there are many other considerations that tend to produce this state of things. To insure in them is attended with too great expense. It is not possible for the average mechanic to save from his earnings a sufficient sum to carry any considerable amount of insurance in these companies. The principles upon which the system is founded are such as to render it needlessly expensive. Experience has shown that for various reasons a very large proportion of the insured do not continue to pay until the maturity of their policy by death, or by limitation of the contract, yet the system requires the payment of a sum which, after amply providing for expenses, computed at a given rate of interest, will amount to the face of the policy at the expiration of the life limit, making no account of gains by lapses nor from a mortality below the expectancy.

The premium includes three items, viz.:—

First, Cost of pure insurance.

Second, The amount to be placed in reserve.

Third, The expense charge.

The cost of pure insurance is about one third of the premium, or perhaps a little less. Now, does any unprejudiced person believe that it is necessary to charge three dollars for the purpose of disbursing to the families of the insured one dollar? Is not any system of insurance properly open to criticism that continues to assume and charge a cost that experience has shown to be so excessively beyond the necessities of the case? We do not overlook the fact that a part of this overcharge is returned to the insured upon certain conditions, nor the other fact, that the proper expense of conducting the business must be provided for; but, after giving credit for both these items, a very large and needless overcharge remains to discourage those desiring insurance from assuming its obligations. This may be more clearly shown in the light of a few facts.

By examining the Massachusetts Life-Insurance Report for 1884, it will be seen that several companies report an income from investments largely in excess of the amount required to pay death-losses. It will be borne in mind that the premium charge includes the amount required for the payment of death-claims, and it is supposed to be, and undoubtedly is, amply sufficient for all purposes in the absence of large accumulations from which to receive such a princely income.

In other words, the companies go on requiring the payment of the same premium from the party proposing to insure, one third of which is for claims by death, when income from investments more than pays this important item.

But it may be said that the surplus returns to policy-holders are proportionately larger, when claims by death are more than met by income from investments. This surely is the result that would naturally be looked for, and which should be realized; but unhappily it is not always the case. The writer holds a policy in one of the companies referred to above, and has paid premiums on the same for some twenty-five years. Judge of his surprise when, three or four years ago, he was called upon to pay 20 per cent in excess of the premium he had been paying for years; and when an explanation was asked, the reason given was that the per cent realized from investments was much less than formerly. Yet this same company more than pays its death-losses by income from investments. This is not an isolated instance.

Many readers of this article have, no doubt, enjoyed (?) a like experience. Is not such a system of insurance fairly open to criticism in its practical workings?

But perhaps the most astonishing feature of level-premium insurance is found in the fact that there is absolutely no obligation assumed on the part of the company, and no power anywhere to enforce an accounting for the vast sums entrusted to it, so long as it can be made to appear that it holds securities in the aggregate to meet the legal requirements of a reserve.

These vast sums of money are paid in by policy-holders without any knowledge of, or means of knowing, the uses to which they will be applied. They know, in a general way, that a part of the premium will be used for reserve, a part for expenses, and a part for losses, but how much will go for each purpose they have no means of ascertaining. The company places it all in a common pot, and can put in the hand of extravagance, of avarice, or of dishonesty, and take out any amount for personal aggrandizement, or for expense of management, so long as it can be made to appear that the legal standard of reserve is maintained. There is absolutely no limit put upon the extravagant conduct of the business. There is no separation of trust funds from expense account. No man who insures in a level-premium life company knows whether such company will use for expenses $5 or $25 for each $1,000 of insurance which he carries. He has the vague promise of a dividend,—falsely so called, for it is really nothing but a return of a part only of his own money which he has paid in excess of what he should have paid,—and this vague shadowing of some possible relief of the excessive pecuniary burden he is compelled to assume if he insures, is all that is given him. There is exhibited here the most astonishing credulity, and, too often, as thousands can testify from sad experience, a misplaced confidence on the part of the insuring public, that seems childlike and puerile in the extreme.

The official reports of Level-Premium Life Companies to the Insurance Departments of the several states show that these companies actually use, for expense of conducting the business, from $6 to $25 for each $1,000 of insurance outstanding. A man carrying $10,000 insurance for his family in these companies must pay on the average, for the expense of the business, about $80 per annum, and if it should be twice or three times that amount he has no redress. Should not these companies stipulate, in every policy, a sum for expenses which could not be exceeded? Should they not separate the mortuary and expense account, and contract with every policy-holder to use, not exceeding a specified per cent of the premium paid, for expenses, and to hold the balance a sacred trust for the payment of claims, the surplus above such requirement to be returned to the insured? To what other branch of business would men apply such unbusinesslike methods as to pay two or three times the value of the article purchased, upon the implied or real obligation of the seller to return, at some time in the future, some part of the overpayment, but with no definite agreement as to how much, or at what time it should be returned? What merchant could maintain his credit for any considerable time if he made his other purchases as he does his life insurance? Life insurance is a commodity to be bought and paid for at a fair market price.

In the earlier history of the business, there were no data at hand to fix its value. Experience of fifty years and more has furnished such data, and its value can now be determined with very considerable closeness, and very far within the charges of level-premium companies. There should be some margin charged above probable cost, as shown by the experience of companies; but such charges should not contemplate nor admit of such extravagant expenses as have, and do now, obtain in level-premium companies. The experience of assessment companies has shown that the business can be done for from $2 or $3 at most, for each $1,000 at risk.

Is there any reason why level-premium companies should not be limited to twice that amount? The recent law governing assessment insurance in Massachusetts requires that in every call for an assessment it shall be distinctly stated what the money is to be used for, and no part of the mortuary fund can be used for expenses. Will any man say that assessment insurance is not in advance of other forms of insurance, in these respects at least?

Another important objection to level-premium insurance is found in the fact that it has drifted away from its primal purpose. Originally it contemplated simple life insurance.

Its intent was to offset, to some extent, the loss incurred by the family in the death of its wage-earner. The death of the father involves the family in a pecuniary loss represented by the amount of his yearly earnings, and if this occur before he has had time to accumulate a surplus above yearly expenses, the hardships of poverty are added to the pain of separation from so valued a friend. Life insurance was intended to come in with its benefits at such a time, as the result of forethought on the part of the father in depositing a part of his savings with the life company. If this simple form of insurance had been adhered to, the temptations to unwarranted and hurtful competition would, in a large measure, have been avoided; but with most level-premium life companies this form of insurance is now largely neglected, and their energies are given to other forms, some of them highly speculative in their character. Contrary to the original purpose of life insurance, banking has been combined with insurance, and people have been taught to believe that they can secure better investments through life-insurance companies than elsewhere. It has never been clear to the writer how such results can be reached, in view of the excessive cost of conducting the business. Any suggestion of this kind, however, is at once met by the reply that the company has an immense amount of money invested, from which it derives a large income.

But whose money is it? Who paid it to the company, if not the policy-holders? Still, if the business were confined to simple endowment insurance in connection with pure life insurance there would be less objection, although banking is properly no part of insurance; but the fact is, a far more speculative business is done, called Tontine insurance. This form may be fitly characterized as the gambling form, inasmuch as the only hope of profit to a few is that the many will be robbed of their savings. Tontine insurance is profitable to the few in just the proportion that misfortune shall overtake those who participate in it. No man would risk large payments with the certainty of losing all if he should fail to make one such payment in a term of years, if he were not tickled by the hope that others would be the unfortunate ones compelled by circumstances to discontinue and lose all, while he would be the exception and profit by their loss.

But he should consider that, even if he persists in paying through the specified term, he is still at the mercy of the company in the division of the spoils. They may use as large a part of the plunder as they please in the expense of the business, and the experience of many will attest that, while for the company it was "turkey," for them it was "crow."

President Greene, of the Connecticut Mutual Life, in a series of able articles, has exposed the injustice of this system, and shown, to the satisfaction of unprejudiced minds, that it is no part of legitimate life insurance. Still, some companies are making Tontine and Semi-Tontine insurance their specialty.

There is one other form of insurance practised by level-premium companies that demands brief notice here. It would seem that to mention it would be to call down upon it public reprobation: we refer to what is called prudential or industrial insurance. The peculiarity of this form is that its patrons are found among the poorest and the lowest classes of our population, and, in the judgment of others than the writer, it appeals to the very worst instincts of those unfortunate people. The insurance is effected upon the lives of helpless infants and children to the amount of one hundred or two hundred dollars or more, ostensibly to provide for suitable burial expenses in the event of the child's death. While, doubtless, in some cases the motive is a worthy one which prompts to such insurance, one's thought shrinks with horror from a contemplation of the crimes which it must, in many cases, suggest to the minds of the low and depraved. How many children are there in our large cities whose lives are not worth even one hundred dollars! How many are there whose death would be hailed as a deliverance from an expensive and unwelcome burden! The simple suggestion is enough to carry with it a sense of obligation to lovers of humanity to see that a premium is not placed upon infanticide and kindred crimes. If such insurance is to be effected at all, which is extremely questionable, it should be under the strictest restraints of law.

Another serious objection to the system is that it necessitates nearly double the cost of even regular level-premium rates, from the fact that weekly collections of five and ten cents must be made by agents employed for the purpose.

Of course a large part of these collections, wrung from the poor, are absorbed in agents' fees, the balance going to the company. The lapses also must be very numerous, and but little benefit is ever realized by those who part with these pittances from their scanty earnings. It is a well-known fact that companies realize very large profits from this business, and in some instances the writer has been credibly informed the expenses of the general business are met by the profits of this branch. This article is written in no spirit of hostility to level-premium insurance; it is simply a criticism upon its defects and its abuses. Properly administered, there is an ample field for the prosecution of its business. There will always be those who will prefer to pay the larger price, for what to them may seem the better form of insurance; but there will be large numbers, as now, who will prefer assessment insurance in reliable companies.

There is an ample field for both assessment and level-premium companies to prosecute their work. There need not and should not be antagonism between the two systems. Each will and should be criticised, but always in a spirit of fairness. To some extent modifications in both systems may be desirable, and doubtless a healthy competition will bring such changes to pass. Perfection is a quality of slow growth, but it should be the aim of those who administer the far-reaching and sacred trusts of either system of life insurance.

Such companies can undoubtedly be made permanent by providing for the entrance of new members at any time in the history of the company at a cost for mortuary assessments substantially as low as in the earlier history of the company. This may be accomplished in either of two ways:—

1. By advancing the rate of assessment with advancing age, by what is called the step rate process, or,—

2. By the accumulation of funds to meet the increased assessments beyond a fair or normal rate.

To say that a company which does not adopt the first of these systems is necessarily "doomed," as was asserted by a recent writer in your columns, is to make a very extravagant claim at least, and one to which the writer of this article would beg to demur. The objection to the plan of step rates is that it is not popular with the people who are the purchasers of insurance.

The company adopting the plan says, "We shall get rid of our undesirable risks, those who are getting old, because the rate of assessment will be so high they cannot afford to pay it." The individual says, "I don't like a plan by which I am to be increasingly burdened as I grow older, and by which it is altogether probable I shall be compelled to sacrifice the savings of years, and lose my insurance at the last."

This practical freezing-out process has never yet been made popular; perhaps it may be in the future.

It is objected to the second method that some will pay more for the same value received than others, and it is therefore inequitable. But there is some inequity in any plan of insurance, and this last has not the element of injustice that would compel the aged and unfortunate to lose the entire savings of years because of unavoidable increasing cost.

Assessments in most companies are graduated so that 800 or 1,000 policy-holders responding to a mortuary call would make a $5,000 policy good for its face, and the income from $2,000,000 at five per cent would pay twenty losses of $5,000 each.

Is it then an absurd statement that an assessment company properly and honestly administered, with that amount invested, can be perpetuated for all time?

Long before the reduction of membership to a number insufficient to pay the face of the policy from direct assessments, the income from the reserve would so lessen the cost that members could not afford to lapse their policies, and new blood could always be secured.