Life Insurance as a Means of Enhancing the Credit of Business Enterprises During Times of Financial Stringency

Just as endowment insurance proves serviceable as a means of accumulating a substantial fund without the insured being conscious of any sacrifice, so nearly all other forms of life insurance policies, as will be explained more fully later, contain a savings feature, although in none does that feature appear so prominently as in the ordinary types of endowment policies. Nearly,all policies are paid for by an annual premium which is uniform throughout life or the premium paying period, with the result that the company gradually accumulates through overcharges in the early years, when the premium is more than sufficient to meet the current cost of insurance, a fund which when improved at interest at an assumed rate will just enable the company to meet its claims as they mature. On a whole-life policy, for example, this fund reaches large proportions in the course of years. It follows, therefore, that the taking out of life insurance policies from time to time, made payable to either the insured's estate or to his business, means the gradual accumulation of increasing cash or loan values which are obtainable at any time by surrendering the policy or by borrowing against its cash value.

It is not intended here to encourage the altogether too common habit of borrowing the loan value of policies, because in many instances the privilege is exercised unnecessarily, simply because some luxury is desired or because the security market seems low, or because some other apparent opportunity to make money quickly seems to present itself. And, even where these considerations are not the motive, the insured frequently uses this asset because it is so easily obtained, never considering at the time the relation of that asset to his beneficiary and often overlooking some other available asset which should have been used in preference to the cash value of his policy. Borrowing under such conditions is not contemplated in this discussion. What it is intended to show is that the surrender or loan value of a policy is a real asset which enhances the credit of the business man because it is available on demand, irrespective of the financial conditions which may prevail, and usually at the fixed rate of 5 or 6 percent.

Bankers and other creditors always regard the cash value of a business man's policies as an additional asset justifying "larger extension of credit on his firm's paper. But suppose the borrower must have additional credit at a time when the condition of the money market is such as to make it highly inconvenient or impossible for the banks to meet his requirements. It is, at such times that the loan privilege contained in insurance .contracts affords a convenient and most excellent means of relief, as has been amply testified to by many of the nation's leading business men. During the panic of 1907, for example, when such stringency prevailed in the credit market as to make impossible the floating of loans even on the best collateral, millions of dollars were borrowed on life insurance policies and numerous business men, firms and corporations used their life insurance contracts as a means of securing funds to make up their payrolls or to meet other pressing obligations. This service of life insurance to the business community and the spirit in which it should be used is well exemplified by the experience of one of the nation's leading business men. He writes:

Never, except as a last resource, should a man use his insurance policies as the basis for borrowing. It should be a source of joy and satisfaction that this sacred investment is kept clear of encumbrance. Whatever advantageous financial operations may offer with reference to other investments, sums set aside for insurance should be regarded as of a different class, to be maintained unimpaired. It is a satisfaction to know that the gradually increasing cash value offers, however, a resource always available and unquestionable. It is a stout anchor to windward holding firm against any storm of family or business misfortune that may arise. In the autumn of 1907, there was a panic, during which there was a practical suspension both of currency payments and of credits. Rates of interest advanced to prohibitory figures, but notwithstanding the enhanced rates, loans were practically impossible to obtain. Three or four years before, one of my partners and I had taken out life-insuance policies for considerable amounts. These gave the right to borrow from the insurance company at the fixed rate of 5 percent. We were, therefore, enabled to place this credit at the disposal of the partnership of which we were members, and about $120,000 of cash was instantly available in a time of great need. Of course, these loans were repaid to the insurance company immediately upon the restoration of normal conditions. Such a privilege must in many cases mean the avoidance of actual disaster.