Ordinary Installment Policies

Having stated the general purpose of installment insurance, we may next examine the several methods of applying the principle in actual practice. One plan, as already noted, consists in paying the proceeds of a $1,000 policy in a definite number of installments, such as ten installments of $100 each, fifteen of $66.67, twenty of $50, etc. The advantage of this plan, as compared with an ordinary life policy payable in one sum, is twofold. Not only does the policy spread the payments over a number of years and thus protect the beneficiary against the loss of the principal, but its premium, in proportion to the face of the policy, is also smaller.

To understand the nature of this policy it is only necessary to ascertain the discounted value of the installments at an assumed rate of interest. If the rate of interest used by the company in its rate computations be 3½ percent, it must have on hand at the death of the insured $860.77 in order to pay $1,000 in ten annual installments of $100 each, the first installment being paid at death. If the sum is to be paid in twenty installments of $50 each, the discounted value of the installments at 3½ percent, is $735.49. It is only on this commuted value of the installments (the real amount of the insurance), and not on $1,000, that the company needs to charge premiums. In other words, the lower premium on this policy is accounted for by the fact that the interest accumulation at the assumed rate which the company makes on the proceeds of the policy which it holds following the death of the insured is made available during the insured's lifetime in the form of a reduced annual premium. The policy, however, may be written at the regular ordinary life rates, i.e. for insurance amounting to $1,000 at maturity. In that case the interest earned on the funds held by the company will be used to increase the size of the installments, which in the case of the ten-installment plan (assuming 3½ percent, interest) will now amount to $116.18 instead of $100, and in case twenty installments are paid, to $67.98 instead of $50. But whatever the plan used, ordinary installment policies still have the objection that the beneficiary may outlive the installment period by many years and be without the steady income to which she has become accustomed. This situation is particularly serious when the age and physical condition of the beneficiary, at the time the installments cease, is such as to preclude the earning of a livelihood.