Features Peculiar to Life Insurance

Protection and investment. While most kinds of insurance contracts have a single purpose, namely, the assumption of a particular risk, the great majority of life-insurance policies embody a twofold purpose by combining insurance with investment. Every policy which contains an endowment feature, i.e. which creates a fund available upon survival for a stated period is to that extent an investment, and the increase of this investment fund constantly minimizes the insurance element. For instance, a policy issued ten years ago and having an endowment fund to its credit at the time of the insured's death equal to $500 will pay this $500 and in addition $500 more out of the "insurance fund". In other words, by the growth of the "investment fund" the insurance element of the policy is constantly decreased. While this fact is clearly apparent in the case of an endowment policy, it is not so evident in the so-called "ordinary life" policy. But there is no difference in principle, for the ordinary life policy accumulates a reserve which eventually wipes out the insurance. As is often stated, an ordinary life policy based on the American Experience table of mortality matures as an endowment at age 96. This difference between life insurance and fire insurance, for instance, is fundamental, for the loss in fire insurance is measured by the total risk of burning, whereas in life insurance it is always equal to the total risk involved less the reserve fund.

The hazard of death. Closely associated with this reserve factor in the life-insurance contract is the nature of the hazard or risk insured against. Fire insurance may again be called upon for a contrast. In fire insurance, the risk is loss by fire; and fire may or may not occur. The premium therefore need only provide against the possibility that fire occur within the term of the policy, and there is always the chance that the property may never burn. But not so with life insurance. While property may never burn, death is sure to occur eventually and death, therefore, as such, cannot be insured against. It can be provided for. That is, the risk insured against is the possibility of death at some particular time. A company can insure against the chance of dying within one year, for instance, but if it agrees to pay $1,000 at death whenever it may occur, it really must provide two funds, one against premature death and one to provide for the certainty of death at an advanced age. Since the American Experience table assumes that all lives have failed by age 96, the company basing premiums on this table must have a reserve fund equal to the face of the policy by the time the insured has reached that age. This furnishes another reason why the ordinary life policy is sometimes called an endowment at age 96.

A long-term unilateral contract with a fixed and unchangeable premium. A third peculiarity of life-insurance policies lies in the fact that they are usually issued for long terms at a premium fixed in advance and that the company does not retain the right of cancellation. It has been variously estimated that from eighty percent, to eighty-five percent, of all insurance in force in the United States is composed of whole-life policies and twenty-year endowments and the most recent statistics show that about two-thirds of the insurance in force is insurance for the whole of life; hence it follows that a company in computing premiums must estimate its experience for at least twenty years and in the vast majority of cases for much longer, since the company must continue the contract in force for so long as the insured pays premiums. . Furthermore, the company cannot change the premium on any policies in. force, and if policies-have been issued at inadequate premiums, these contracts must be carried at a loss. If the deficit cannot be made up out of surplus, of course, the company will become bankrupt.

This necessity of issuing a long-term contract, without the right of cancellation, and at a premium that cannot be changed, compels the company to exercise great care in determining the premium to be charged for the risk. The mortality tables used to measure Life risks represent one of the highest developments in the application of past experience to the determination of future events. In fire, marine, casualty, and in fact in most other kinds of insurance the contract is usually for one year or for a short term at most, and the company withholds the right in most cases to cancel the policy at will. In a contract covering one of the last-named risks the company needs only to collect a premium adequate to cover the risk for one year or for a few years at the most. If this should turn out to be insufficient, the company can cancel the policy and thus prevent insolvency, or it can avail itself of the opportunity on renewing the contract to increase the premium.

Application of the principle of indemnity in life insurance. Life insurance differs again from other forms of insurance with respect to the part played by the principle of indemnity in determining the amount of insurance which can be carried. In fire underwriting it is a fundamental principle, admitting of no exceptions, unless state statutes stipulate to the contrary, that the insured shall not collect more than the actual cash value of the property destroyed. But who will determine what is the financial worth of a human life? To be sure a rough estimate may be arrived at, based on a man's income-producing power, but so long as the amount of insurance applied for is such as could be reasonably needed by a man in any occupation or profession the right of the insured to decide for himself how much insurance he will carry is not questioned.