The Level, or Periodic, Premium System

Insurance policies may be purchased by a single cash sum or by periodic payments made weekly, monthly., quarterly, send-annually, or annually. The method of computing the net single premium has been described in Chapters XIII and XIV. Therein it was explained that policies are ordinarily purchased by annual or periodic premiums but that the determination of the latter is possible only after the single premium has been ascertained. It requires but a brief comparison to show why most insured persons choose the annual- rather than the single-premium method of paying for insurance. The net. single premium on a $1,000 whole-life policy issued at age 35 (American Experience 3 percent, basis) is $419.88 while the net annual level premium is only $21.08. Two reasons favor the choice of the latter method of payment. In the first place most persons insure to protect an income the continuation of which during their lifetime enables them to assume certain definite family or business responsibilities, the cessation of which income by death would leave these obligations unfulfilled. It is a man's earning power which enables him safely to marry or to engage in business, for the majority of people do not obtain their capital by inheritance. It is from current income, therefore, that insurance premiums must ordinarily be paid. If the protection of a $4,000 income requires $10,000 of insurance, this amount on the single-premium plan for whole-life insurance at age 35 would cost $4,198.80 while on the annual-premium plan it would mean an outlay of $210.80 per year. The former sum is clearly impossible of payment from a single year's income, while the latter would occasion no special hardship.

A second reason for the choice of annual rather than single-premium payments for life insurance lies in the reduced cost of a policy purchased by the former in case of early death. If the insured in the above illustration should die within one year after the issue of his policy this insurance would cost him $4,198.80 under the one plan and but $210.80 under the other. This difference cannot be lightly overlooked. It will require the payment of twenty annual, premiums before the amount paid in will equal the single premium and therefore the annual plan of premium payments is the cheaper to the policyholder whenever death occurs before the twentieth year of insurance is begun. There is a corresponding disadvantage in the annual-premium plan if the insured lives beyond the payment of his twentieth premium for he will then pay more than would have been the case with the single premium. In other words among the policyholders of an insurance company for everyone who pays in less than the amount of the single premium there must be someone who pays correspondingly more than that amount.