Extent of Policy Loans and the Relation of Such Loans to Lapses and Surrenders

While the loan privilege frequently serves as a means of maintaining policies which would otherwise be surrendered, or at times fulfils a real business need, it is also true that the privilege is grossly abused by many for purposes that should never be allowed to endanger the protection which it is the function of life insurance to afford. Owing largely to the emphasis placed by companies and their agents upon liberal loan values as an inducement to sell insurance, a large element in the insuring public has come to regard the value of policies as little more than an accumulation of deposits to be obtained by way of surrender or a loan upon the slightest provocation. With many, borrowing on policies has become a habit. This conclusion seems warranted by a consideration of the enormous increase of such loans in recent years. Whereas the percentage of policy loans and premium notes amounted to 3.32 percent, of the total reserves of the various companies reported in the Insurance Year Book for the year 1888, that percentage has increased to 16.9 percent, during the year 1913. At present policy loans for 260 companies aggregate $657,994,947 as compared with a total reserve value of policies in these companies of $3,903,615,175. Between 1903-1913 the policy loans of these companies increased 313 percent, as compared with an increase of only 106 percent, in total admitted assets and 73 percent, in total insurance in force, i.e. policy loans increased nearly three times as fast as assets and about four and one-half times as fast as the volume of insurance. During the last four years of this decade the increase in such loans amounted to approximately $212,000,000, or over 20 percent, of the increase in admitted assets and nearly 31.4 percent, of the increase in the reserve value of policies during the same four years.

This alarming increase in the volume of policy loans furnishes ample evidence of the careless manner in which many mortgage the monetary value of their policies for purposes of speculation or needless expenditures. To again quote Mr. A. E. Childs: "The very people who are living up to and even beyond their incomes, depending upon their insurance for the future protection of their families, are the very people who are mortgaging their insurance just as soon as the deposits are large enough to satisfy some of their more expensive desires. They either forget the original purpose for which they took the insurance or they allow their selfish desires for temporary enjoyment to outweigh their appreciation of the necessity for providing for the future." Too frequently policyholders effect loans on their policies simply because they are so easily obtained, never appreciating at the time the vital relation of life insurance to the beneficiary and often neglecting some other available asset which should have been selected in preference to the cash value of the policy. It should again be stated that the fundamental purpose of life insurance is protection to the family. When once acquired, therefore, it is essential that life insurance be conserved, and in this connection it is highly important to bear in mind that the-great majority of such loans are never repaid and that the policy lapses upon failure to make such repayment. As previously stated, "Life insurance should be regarded as a sacred possession to be mortgaged only in case of extreme necessity. Borrowing on the policy depreciates its value and defeats the original purpose it was intended to serve. If not actually necessary, borrowing on a policy is an act of flagrant injustice to the beneficiary."

Much has been written of late to stem the tide against increasing policy loans, and many companies have attempted in recent years to check the abuse by raising the interest rate from 5 to 6 percent, and by reserving the right to defer such loans for sixty or ninety days. The difficulty involved, however, is a deeper one, namely, the failure on the part of the insuring public to understand the fundamental purpose of life insurance. It is therefore highly essential to impress upon the insured as well as the beneficiary the necessity of not allowing unnecessary loans to defeat the sacred purpose of life insurance in protecting the home or in providing for old age. If women the beneficiaries in the great majority of instances understood that a policy loan usually means a lapse, that replacement becomes possible only upon a satisfactory medical examination, and that in any case the loan for the time being impairs the amount of protection, and if they were shown their right to keep themselves posted as to what the insured is doing with his policies, there is reason to believe that the number of policy loans would be greatly reduced and limited in the main to cases clearly justifiable. In this connection also, the agent who originally negotiated the contract could, if again placed in touch with his client at the time a loan is contemplated, render a distinct service by forcibly emphasizing to him the reasons against needless policy loans. Such efforts are apt to prevail, especially if the agent renders the further service of helping to suggest the use of some other assets which the insured may possibly have available to meet his pressing financial needs.