The Origin of the Reserve

The life-insurance reserve arises as a result of the method of paying premiums. In the three chapters immediately preceding., an analysis of net or mortality premiums has been undertaken and the statement is there made that life-insurance policies may be purchased by a single cash payment or by annual premiums paid during life. The fact was demonstrated furthermore that mortality rates increase with increasing age and that the annual cost of insurance therefore augments rapidly with advancing age. This results in the creation of a surplus from the annual level premiums paid in the early policy years when mortality costs are low, and this surplus is available in the later years of high mortality when premiums are inadequate. The purpose of this fund is to average the varying yearly costs so that the burden of insurance premiums can be carried at all times. These level premiums thus bring into the possession of the company, funds which are not used immediately to pay policy claims but which must be accounted for by the company and placed to the credit of the policyholder until needed at some future date. In like manner when a policy is purchased by a single premium this premium becomes the total contribution of the insured toward claims paid under contracts of this class., and in the early years of the policy contract a large share of this single premium must still be in the possession of the company.