Policies Classified According to the Method of Paying Premiums

Life-insurance premiums are customarily paid on the "annual level premium" plan, i.e. the premium collected by the company each year remains the same during the whole of life or during an agreed term of years. As contrasted with this method there is the "natural premium" plan, according to which the insurance is granted in the form of renewable one-year-term insurance, the annual premium increasing from year to year in accordance with the increase in the cost of insurance brought about by the increased risk attaching to increasing age. This plan is rarely used to-day and, as will be explained in the chapter on the "Reserve" the success of modern life insurance is dependent upon the charging of a uniform level premium.

Annual premiums on any policy may be discounted to their present value, and this discounted amount paid in advance in one lump sum, commonly called the "single premium". Mathematically, the net single premium (i.e. the single premium without any additions for expenses and contingencies) is equivalent, taking into consideration the element of time and an assumed rate of interest, to the net annual level premiums paid for the same policy. Annuities are commonly paid for with a single premium in advance, but life-insurance policies are rarely paid for by this method, the policyholder finding the small annual premium much more convenient, and also not wishing to risk the chance, in case of early death, of losing the much larger sum paid to the company under the single premium plan. It should also be stated that companies, as regards the great majority of policies written, permit the annual level premium to be paid semi-annually or quarterly, while in the case of industrial insurance premium payments are made weekly. While such frequent payments may prove a convenience to the policyholder, the aggregate premium paid is somewhat larger because of the loss.of interest to the insurance company as well as the greater collection expense.

Various other premium-payment plans are in use to-day. Thus under the terms of the so-called "limited-payment policy" an annual level premium is charged for a limited number of years, such as ten, fifteen, or twenty years, and upon the payment of the last premium the policy becomes "full paid". This method of paying premiums may under certain circumstances be applied advantageously to any type of life-insurance contract, except very short term policies. The premium under this plan is, of course, larger than the annual level premium paid throughout the life of the policy. Thus in the case of a limited payment whole-life policy, the ten, fifteen or twenty premiums called for by the contract represent a total payment sufficiently larger than the aggregate amount paid in during the same period under the ordinary annual level premium plan, so that at the end of the designated period the company will have accumulated an amount which will be sufficient, together with compound interest earnings at an assumed rate, to carry the policy to maturity without requiring any further payments from the policyholder.

As contrasted with limited-payment policies, there is the so-called step-rate plan which may be either an increasing or decreasing one. Renewable term insurance is the most common form of an increasing premium policy, the annual premium being level during each term, but the rate for each term rising in accordance with the then attained age. Again, temporary insurance may be combined, for example, with a whole-life policy, the premium being low during the first five years (this period being regarded as term insurance) and the insured possessing the option, at the expiration of the five-year period, to renew the policy as a life policy and at a higher premium. Many fraternal benefit societies also follow the plan of issuing life benefit certificates under various forms of the increasing step-rate plan. The level premium, for example, may be increased at five-year intervals until age 60 is reached, when an increased level premium is charged for the rest of life. This is done to prevent the heavy withdrawals which would inevitably result if the five-year step-rate plan were consistently followed during the older years when the high mortality would cause the term rates to reach prohibitive figures. Some of the societies even encourage the accumulation of a small sum per week during the earlier years of the policy with a view to building up a reserve which can be applied to a reduction of the annual level premium for the period following age 60.

Some companies make use of the decreasing step-rate plan, although it seems that this method has not met with much popular favor. The plan most generally adopted employs four steps. During the first five years, for example, the premium is level; for the next five years the original premium is decreased 25 percent, the reduced premium, however, being again level for that period of years; for the third five years the level premium is reduced to 50 percent, of the original charge; for the last five years to 25 percent.; and at the end of that period the policy becomes full-paid. It will be observed that such a decreasing premium plan constitutes a limited-payment insurance, as already explained, except that the premium in the ordinary limited-payment policy is uniformly level for the entire period during which premiums are paid.