Development of Such Policy Loans

The so-called "premium-note" plan constituted the first important form of loan which participating companies made upon the security of a life-insurance policy. According to this plan, used quite generally as far back as 1845, the company required the insured to pay only one-third or one-half of the premium in cash; and accepted his note for the balance. The notes, which bore interest, were considered a lien against the policy, and it was expected that the annual dividends upon the policy would prove sufficient to extinguish both interest and principal of the notes at the end of a certain time. Although issued usually in the form of a personal obligation, attempts were rarely made to enforce payment of the notes, the same being considered as cancelled when the policy became void upon the insured's failure to pay a premium. For all practical purposes, therefore, this plan was equivalent to granting a surrender value, because the sole security back of the loan was the reserve value of the policy. The dividends actually realized, however, failed to take care of the notes as expected with the result that, since the notes were deducted from the face of the policy at death and the interest on the indebtedness was added to the cash part of the premium; the insured was really carrying decreasing insurance at an increasing cost. As a consequence much dissatisfaction resulted among policyholders, and the entire plan was generally abandoned during the decade following 1870.

Although some companies granted individual loans to policyholders during the period just referred to by accepting an assignment of the policy as collateral, this practice did not become general until after 1890. In 1884 one of the leading American companies issued a contract in which it guaranteed loan values up to 50 percent, of the reserve. At first, also, a considerable number of companies sought to limit their policy loans to such advances as would enable the insured to pay his premiums. But this plan proved unsatisfactory, partly because of the public's demand for larger loans to meet personal as well as business requirements and partly because of the willingness of many companies, in the race for business, to meet the desire of the public in the matter. Following 1890 the loan privilege manifested the same rapid development towards liberality on the part of the companies that was noted in connection with the granting of surrender values. "Companies, in their struggle for size and in their desire to issue policies that could be readily sold by the agents," to quote Mr. A. E. Childs, "became more and more liberal in their offers, and even went so far as to instruct their agents to use these liberal policy conditions as the principal talking-points in their efforts to sell insurance."