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Volume 1

[-74-]

LIFE ASSURANCE.-I.

FOLLOWING up the remarks contained in the article on "Ways and Means," in a previous number (page 39), we now proceed to explain the principles upon which life insurance, or more strictly life assurance, depends. It is usual to speak of the insurance of any doubtful event, such as fire or loss at sea, and of the assurance of an event certain to happen, as death.
    The theory of life assurance depends upon calculations based upon the uniform mortality which has been observed to prevail among large numbers of individuals, and upon the increase of money at compound interest.
    From the death registers, mortality tables are constructed which tell us how many persons out of a certain number living at each age, die annually. From these tables the actuary computes what money payment - usually a sum or premium paid annually in advance throughout life - is sufficient to provide for the payment of a fixed sum, say £100, at death. Several tables are in use for this purpose, of which the principal are the Northampton, the Carlisle, and the English life tables.
    The following is a simple illustration of the manner in which the premium for a life assurance is deduced.
    Supposing, according to any table of mortality, that out of 500 persons, all aged forty years, five die in the year, and that it is required to provide £500 for the families of those who die, the contribution of each of the 500 will clearly be a five-hundredth part of £500, or £1. In practice, however, the premiums being invested at compound interest, a less sum than £1 would be required, viz., such a sum as invested at interest for the year would produce £1 at the end of the year. An addition to the net premium thus deduced is then made by the office for the expenses of management, and to provide for the bonuses, the nature of which will be hereafter explained.
    Upon these two simple principles of mortality and interest, the whole theory of life assurance depends, and upon them contracts have been undertaken by the different companies in the United Kingdom alone amounting probably to £400,000,000 sterling.
    Life assurance is an institution which has now been in operation for 170 years, the first company dating from 1706, and, notwithstanding the large amount of business transacted, it has not been, we may say, until 1869 that discredit has been cast upon life assurance companies.
    It is almost essential for us to make a passing allusion to this matter, as a temporary panic appears to have then taken possession of the public in consequence of certain appeals to the Court of Chancery, which resulted in the compulsory winding-up of one large company.
    It cannot, accordingly, be too clearly understood that the collapse in that case arose mainly from numerous ill-considered amalgamations with unsuccessful companies, [-75-] whose business was acquired at an excessive cost, and from reckless disregard of the well-known fundamental principles of life assurance, which are based upon unchangeable and mathematical laws, that cannot be ignored with impunity.
    The public were very much indebted, in this matter, to the intelligence of the writers in the daily papers, by whom this great question, one of the gravest importance to a large portion of the community, was very generally taken up. Of their widely-expressed opinions on this point, these remarks are an echo.
    The writer of this article long before pointed out the mischief that must arise, if the unsatisfactory methods of business pursued by a particular class of life assurance companies were persevered in. The result proved that his view was correct.
    The absolute necessity of life assurance in the case of persons whose incomes are dependent upon their lives - and this is so with the far greater portion of the population of this country - we assume to be admitted by everyone.
    There can be no doubt of the fact that no other method exists by which a provision can be so well made for a dependent family, as by a policy of life assurance, for the moment the contract is executed, no matter whether death take place the next day or twenty years after, a capital sum is provided, which can be invested for the benefit of the family of the assured, or applied in any way for their advantage, according to the circumstances and requirements of the case.
    No investment, in either a savings bank or a friendly society, will answer the same purpose-the essential peculiarity of a life policy being that the amount contracted for is paid at death, whenever that event shall happen, and, from the uncertainty of life, it does occur, over and over again, that claims become payable and are honourably met, very shortly after the policy is effected. So that a young man with a fixed income derived from a profession or other source, need not be deterred from marriage on account of it being impossible for him to make a due provision for his wife and family-indeed, we may safely say that by means of life assurance, many marriages take place which otherwise prudence must have prevented altogether.
    The first thing to be done by a person who has made up his mind to effect an assurance on his life, is to fix upon an office. There are two descriptions of companies, viz., proprietary and mutual, the former being joint-stock or trading companies, and the latter private partnerships on a large scale - all the profits of the business belonging strictly to themselves, while, in the proprietary companies, only a certain proportion of the profits are divided in the shape of bonuses among the policy-holders, the remainder belonging to the shareholders.
    There are numerous good companies of both classes to be found. We feel a difficulty in pointing out how a selection should be made, and can only suggest that the applicant should make choice of an office which, above all things, regularly publishes full and intelligible accounts, showing clearly the amount of the liability and the sum in hand to meet it, and particularly how that sum is invested. Probably, one of the best tests will be the fact that the statements of the office fixed upon can be readily understood by the intending applicant ; for the accounts of many companies are so mystified as to be unintelligible to the general public.
    The prospectus of the company should next be thoroughly studied. The date of establishment, though no guarantee in itself, still affords evidence of whether the company has stood the test of time. The names of the directors should be scrutinised, to see if they are men of business and of good standing in the commercial world. The rates of premium should then be consulted. These vary according as the Northampton, Carlisle, or other tables are adopted as a basis. The Northampton table gives an unfavourable view of life at the younger ages - say, up to forty-five - and the premiums deduced from it are consequently higher than those that are based on the Carlisle mortality; while, on the other hand, the Northampton rates are decidedly favourable at ages above forty-five - the exact reverse being the case with the Carlisle table.
    The applicant would accordingly do well to select his office according to his age, provided always that the office charging the higher rate of premium does not offer, which it very possibly may, some compensating advantage; for it must be borne in mind that the rate of premium is not the only point to be considered in the choice of an office-the amount of bonus addition likely to be allotted to the policy, and the character of the company for liberal conduct and honourable dealing being important elements to be taken into account.
    The bonus system will be explained hereafter. 
    The annual premium per £100 for a life of thirty varies in the different companies from £2 1s. 8d. to £2 19s. 3d.; at sixty, from £6 1s. 9d. to £7 15s. The rates without participation in profits are of course less.
    Life premiums are usually paid annually in advance. Some companies receive half-yearly or even quarterly payments.
    Assurances may also be effected by the payment of a fixed number of premiums, which are of course much higher than those quoted. Some companies grant endowment assurances, by which the sum assured becomes payable at death, or on the life assured attaining a certain age, and indeed, generally, contracts can be entered into with the large companies for the issue of policies to meet almost every conceivable requirement.
    The applicant, if at all likely to go abroad, should ascertain the regulations of the company with which he is in treaty as to foreign residence, for which an extra premium is charged, according to the healthiness or otherwise of the locality. The conditions in this respect of some companies are much more liberal than those of others. It is now very usual to allow free residence in any part of the world distant more than 33º north or south of the equator, as well as in certain other healthy places within the excluded limits.
    Policies become void if the person assured die by his own hand, by duelling, or by the hands of justice, or if the premium be not paid annually within the thirty days of grace which are allowed from the date of the same becoming due.
    Tables showing the amount of bonuses declared will be found in the prospectuses of most of the offices, and though the past bonuses afford no just criterion of what the future results may be, still they are the best guides the public can have as to the prospects of bonus additions to their policies. It often happens that the assured, from unforeseen circumstances, are unable to continue their annual payments. When this is the case, a return of some portion of the premium paid is made, such return being called the surrender value of the policy. And here it may be desirable to point out that in such cases a return of only a small proportion of the premium paid (usually about a third, without interest) can be looked for, for though in the individual case no claim for payment of the sum assured has been made upon the company, still other policies effected at the same period having become claims, the excess of premium paid on the policy to be surrendered must be retained by the company to meet the losses occasioned by premature deaths.
    Loans, also, for amounts varying with the value of the policies, are advanced upon their security. usually at five per cent, interest. We propose to continue our remarks on life assurance in a future number.

[-134-] 

LIFE ASSURANCE.-II.

WE will now assume that, after a careful examination of the various published statements of the Assurance Companies, an office has been selected by the applicant, and that he has been provided with the form of declaration which is the basis of the contract between himself and the company. In this document he is called upon to set forth his name, description, and age next birthday-evidence of which should be furnished by the registrar's certificate of birth, by an extract from a family Bible, or otherwise, when the age is admitted by the company, and no question can thereafter arise with reference thereto. He is required, also, to state whether he has suffered from gout, spitting of blood, or from any disorder tending to shorten life ; and he has to give the names of two persons, to be referred to as to his health and habits of life, and generally to reply to the questions as to his health and family history that may be asked him by the medical officer of the company, before whom he has to appear for examination as to his health. Persons in decidedly bad health are not eligible for life assurance; but for any trifling deviation from the usual standard, an extra premium may, perhaps, be required, varying, with the circumstances of the case, according to the report of the medical examiner of the company.
    This ordeal having been gone through, and the life having been "passed" by the doctor, the risk is accepted by the directors, the premium is fixed, and the amount thereof announced to the applicant, which he has to pay in the course of a month from the date of acceptance. On the premium being paid, the policy is prepared, and in due course issued. It is a legal document, signed by three directors of the company, and impressed with the necessary government stamp, at the expense of the office, and hinds the company, in consideration of the regular payment to them of the annual premium, to pay to the legal representative of the policy-holder the sum contracted for, at the expiration of three months from the death of the person assured.
    The policy recites the conditions as to foreign residence, death by suicide, duelling, or the hands of justice, &c.; and declares the contract to be void if the declaration upon which the policy is based be untrue. Too great care, therefore, cannot be exercised in filling up the necessary forms, and in replying fully and honestly to the inquiries of the medical examiner. The policy must be carefully preserved for production to the office by the legal representative of the assured upon the claim arising Formal notice of the annual premiums becoming due is regularly given by the office in writing; and they must be paid within a month of their becoming due, otherwise the policy becomes void - or "lapses," as it is termed - and all advantage from the previous payments is lost to the holder.
    After the expiration of five, or, in some offices, seven years, the policy, if effected on the participating scale of [-135-] premiums, will become entitled to a bonus, or addition to the sum assured, arising from the profits of the concern, and payable at death with the amount of the policy.    
    The bonuses periodically allotted by life assurance companies owe their origin to the impossibility of assessing in anticipation the exact amount of premium required for each particular risk undertaken. To be on the safe side, therefore, it is usual to charge a larger premium than may ultimately be found to be necessary, so that due provision may be made for excessive mortality, and for other fluctuations in the business. A periodical return of profit is, therefore, made, which may be received as an addition to the sum assured at death, in a present cash payment, or in the shape of a corresponding annual reduction of the premium throughout life. The profits of a life assurance company depend upon the careful selection of lives (all bad lives admitted to participation in the benefits of the company naturally tending to reduce the rate of profit by their premature death), moderation in the expenditure, and the careful investment of the premiums at an adequate but safe rate of interest.
    In the mutual societies, the whole of the profits belong to and are divided among the policy-holders. In the proprietary companies, the proportion allotted may be two-thirds, three-quarters, or four-fifths, or in other words sixty-six, seventy-five, or eighty per cent. ; but it may easily be seen that two-thirds of a large amount of surplus may exceed three-quarters, four-fifths, or even the whole of a lesser amount.
    The bonus system has the advantage of benefiting the families of the assured, at the expense of the larger out lay made by the policy-holder during his life. Most companies have, however, a non-participating scale of premiums, by which an additional sum can be assured in the first instance. For example:- Supposing the participating rate at the age of forty to be £3  7s. 11d. and the corresponding non-participating rate £2  17s. 11d. for every £100 assured. The difference between these rates, viz., 10s., would assure an additional £18. So that an immediate reversionary bonus of that amount would be secured to the policy-holder, payable whenever death might occur. This is not, however, a favourite method of assurance with the public, who do not avail themselves of the plan to any great extent, and probably for these two reasons, one being the fact that the non-profit rates are not generally as low as they should be, if they were equitably adjusted, as compared with those on the participating scale, and the other because the element of uncertainty and speculation is lost, which to so many persons has a great charm.
    So valuable, indeed, have the bonuses on old policies of large amounts become, that a system of assuring the bonus itself has arisen in the practice of assurance companies. In order to participate in each successive division of profits, it is required that the life assured should be living on a certain fixed day, and the failure of the life before that day - at any time, in fact, between two bonus periods - would involve the loss of the bonus to the family of the policy-holder. An assurance on his life for the amount of the anticipated bonus for the term of years required to be survived is accordingly frequently effected the premium for which is often very high, as it is usually only in cases of extremely advanced age that this system is had recourse to. The older the life assured, the greater the risk of his losing the bonus, and the greater also his reluctance to run any risk in the matter. He therefore makes a sacrifice of a portion of the expected bonus to secure the balance, as men do in some other precarious transactions.
    What the principles are which are involved in the computations by which profits are estimated and assessed, although somewhat complicated, we shall endeavour to explain in our next.