Policies Classified According to the Method by Which the Proceeds Are Paid

Reference is had under this heading to the various types of so-called installment policies. Instead of paying the face of the policy in one lump sum in the event of death or maturity, the proceeds are paid in regular installments, either annually, semi-annually, or monthly, over a prescribed period of time, such as ten, fifteen, or twenty years. This installment feature may be applied to the payment of the proceeds of any of the usual types of policies.

Thus it may be arranged that under a $10,000 whole-life policy the principal of $10,000 shall not be paid in full upon death, but the company's liability shall be limited to the payment of $1,000 upon the happening of death and $1,000 each year thereafter until the tenth or last installment has been paid. In case the company's liability should be limited to the payment of the $10,000 in the form of fifteen or twenty installments, each installment would be, respectively, $666.66 and $500. Should the beneficiary die before all the installments have been paid, provision is usually made that the unpaid installments may be continued for the original amount to the deceased beneficiary's estate or to a newly designated beneficiary, or may be commuted and paid in one lump sum.

If the total installments aggregate the face value of the policy, the cost of the contract will naturally be smaller than if the face value of the policy be payable in full upon maturity of the contract. It is apparent that by paying the $10,000 in ten installments the company retains the use of a large part of the policy's proceeds for a considerable period, viz, $9,000 for one year, $8,000 for one year, $7,000 for one year, etc. Mathematically, the company can arrange to give the interest earnings (at an assumed rate) on these balances to the insured during his lifetime in the form of a reduced premium. Many companies, however, follow the plan of charging the same premium that would be required on the same kind of policy when providing for the payment of the proceeds in one lump sum, and then make allowance for interest earnings on the proceeds retained under the installment plan by increasing the size of the installments.

While the ordinary installment policy, as just described, affords the advantage of giving the beneficiary a definite income for a prescribed number of years and thus prevents the possible loss or dissipation of the proceeds of the policy as might be the case if the entire sum were paid at once, it should be remembered that these installments are limited in number, and that upon the payment of the last installment the beneficiary may still be in need of an income. This shortcoming of the ordinary installment policy may he avoided by arranging for the continuance of such payments throughout the lifetime of the beneficiary. Such an arrangement may be effected under the so-called "continuous-installment policy". Here the company agrees to pay a definite number of installments, irrespective of the death or survival of the beneficiary, and to this extent the continuous-installment policy includes the ordinary installment feature. But after the entire face of the policy has been paid in installments the company gives the further very important guarantee that it will keep on paying these installments if the beneficiary be still living and will continue to do so during the lifetime of said beneficiary.

The continuous-installment feature lends itself to a large variety of applications, and almost any set of circumstances requiring a guaranteed income can be met by the contracts of certain companies. The continuous income may be so arranged as to be paid annually, semi-annually, or monthly, as desired. Instead of guaranteeing an income throughout the lifetime of merely one beneficiary, several beneficiaries may be protected. Thus one beneficiary may be assured an income throughout life, and following his or her death, another designated beneficiary may become the recipient of the stipulated income either during the whole of life or for a specified number of years. Similarly, the continuous-installment plan may be combined with the endowment principle. Thus if the folder of an endowment policy should outlive the endowment period an annual income may be promised to him throughout life. Further arrangement may be made whereby, following his death, an annual income may be paid to his wife or other beneficiary or beneficiaries as long as they may live. Or, the policy may be made to contain a guarantee to the holder of, say, twenty definite annual payments with a further promise that such installments will continue, following the payment of the twentieth installment, during either the lifetime of the insured or of the insured and another beneficiary.

Two other types of policies should be mentioned under our classification of policies according to the method of paying the proceeds, viz, so-called "reversionary annuities" and "gold" or "debenture bonds". The first type of contract, said to be the first form of installment insurance written, provides a life annuity to the beneficiary in case of the insured's death before the beneficiary's death. If, however, the beneficiary should die first, the insurance contract is regarded as having expired and all premium payments are considered fully earned. The debenture gold bond plan, like the installment feature, may be applied to any of the ordinary types of policies written. According to this plan, considered in connection with a whole-life policy, the company retains the entire proceeds of the policy upon the death of the insured and issues a bond to the beneficiary bearing an agreed annual, or semiannual rate of interest. At the expiration of the interest-paying period such as ten, fifteen, or twenty years, the bond is redeemed. Usually the interest rate promised is high as compared with the rate of interest which life-insurance companies, use in the computation of their rates. This high rate of interest on the-bond is entirely feasible owing to the fact that the company will have safeguarded itself in advance by charging a higher premium during the lifetime of the insured. Thus, according to the rate book of a certain company, the annual gross rate for a 5-percent, twenty-year gold bond on the ordinary life plan is given as $25.74, while the annual level premium for an ordinary life policy at the same age is given, as $0.14. .In both cases the mathematical computation was based on the same assumed rate of interest, and the larger premium in the case of the bond is simply charged to assure the accumulation of a sum of money sufficiently large to enable the company to guarantee the promised rate of interest on the bond. It is thus apparent that any rate of interest, no matter how high, may safely be promised if the difference between that rate and the assumed rate for computation purposes is collected in the form of higher premiums.