Distinctive Characteristics of Fraternal Insurance

As insurance associations, fraternal societies issue to their members so-called "benefit certificates", according to which they promise, in return for "assessments" or "contributions" from the certificate holder, to pay certain stipulated "benefits" in the event of death or whatever other contingency may be covered. Yet it is apparent that "any organization which guarantees the payment of a definite sum of money, under certain circumstances, dependent upon the contingency of human life, in return for certain contributions, does an insurance business". The document containing the promise to pay may be called a "benefit certificate" instead of a policy the term "contribution" or "assessment" may be used instead of premium, and the final payment in the event of death may be designated as a "benefit" instead of a claim, yet the whole transaction is essentially a form of insurance.

The ordinary life-insurance policy is simply a definite promise to pay, in return for a fixed consideration, a stipulated sum on the occurrence of the specified contingency, and contains all the conditions which govern the parties to the contract. In this respect fraternal societies follow a radically different plan. Although the certificate is issued on the basis of an application which is similar to that required by regular old-line companies, the benefit certificate differs from an ordinary policy in three important particulars:

1. The certificate is comparatively brief, usually stating that the holder thereof is a member of the society, that he is entitled to all its privileges and to a certain portion of the beneficiary fund, and that the society's promise in this respect is conditioned on the member's compliance with the constitution and laws of the society, which are declared to be a part of the contract. In other words the benefit certificate, unlike an ordinary life-insurance policy, does not specify in detail the conditions which govern the indemnity agreement; instead, these are found in the society's rules.

2. The certificate merely recognizes the holder's rights as a member in the society to share in the benefit for a specified amount. The certificate remains the property of the member, who is usually given the right under the rules to change the beneficiary at will, while the ordinary life-insurance policy is the property of the beneficiary designated therein unless the insured has expressly reserved the right in the contract to change such beneficiary at will. Usually the holder of a benefit certificate can only name as beneficiary some member of his family or other dependent.

3. The certificate, according to the laws of most states, cannot be an agreement promising the payment of a definite amount for a fixed premium as is the case with old-line contracts. Prom a practical point of view the most important difference between fraternal and old-line insurance has been the failure of the former to maintain a reserve sufficient to guarantee the payment of all obligations as they mature. In fact, until recently, the reserve idea was bitterly opposed by most fraternal orders as an unnecessary overcharge. Instead of accumulating adequate reserves, the societies proceeded on the plan of charging low premiums (which experience soon demonstrated to be woefully inadequate) and reserved to themselves the right, in case the funds on hand should prove insufficient to meet current claims, either to assess their members for an amount equal to the Deficit or to scale down the amount of the benefit so as to make its payment possible with the funds on hand. In .reality, therefore, the benefit certificate does not constitute a promise to pay a definite amount for a definite consideration. Since they have not promised to pay more than the funds on hand together with the assessments which they are able to collect from their members, enable them to pay, fraternal societies, considering the matter from a purely theoretical standpoint, cannot become insolvent. Yet a very large number of such societies -have passed out of existence as utter failures because they were unable to obtain sufficient funds through assessments upon their members to pay the benefits upon which members were relying for the protection of their families in case of death and for which they had been contributing for years.

The unfortunate experience of so many fraternal orders is primarily due to the failure to recognize, until too late, that the only practicable plan of life insurance, as already explained, is one involving the payment of a level premium and the accumulation of an overcharge in the early policy years with a view to meeting the deficit in the premium in the later policy years when it is insufficient to meet the cost of insurance. The societies operated on the plan of giving protection at the lowest possible cost. They went on the theory that, as benevolent organizations, they should not conduct an insurance business for profit, and placed their reliance upon the collection of assessments to meet any unforeseen contingencies that might arise. Unusual deficits were not expected because it was believed that the constant enrollment of young members would keep the average death rate 'about the same from year to year. But even assuming that deficiencies might occur, it was believed that the fraternal spirit would cause the membership to remain united and willing to pay the increased assessments which the society might see fit to levy.