Benefits Granted - Kinds and Amounts

Two classes of benefits are ordinarily given by these clauses, the one allowing the further payment of premiums to be waived without in any way affecting the values granted in the insurance contract; the other allowing the policy to mature and the value to be paid in some form to the insured. Payment of the policy may take one of three forms: a fixed number of installments, a single cash sum, or a life annuity. Some clauses give only one benefit, others allow a choice.

In case the waiver of premium benefit is given, its cost to the company will consist of the number of premiums that will fall due between the time of disability and the time of death. The magnitude of the benefit will, therefore, depend statistically on the average time elapsing between disability and death. From the only American data bearing on the subject it appears that this period is one year, four months, and twenty-eight days 5 among fraternal society risks. Accepting these data as being approximately true for the old-line companies, the benefit will therefore equal an average payment of two premiums, for at the time of death the face value of the policy will be payable in any case. This fact explains the small cost of the disability clause.

The above data likewise furnish a basis for estimating the proper value that should be given where maturity benefits are promised and for comparing this value with the values actually given. If the average period between .disability and death is one year, four months, and twenty-eight days, then the value of a policy at the time of disability, scientifically determined, will be that sum of money approximately6 which with interest for one year, four months, and twenty-eight days will equal the face value of the policy, say $1,000. If this amount were given as a maturity benefit it would be exactly equivalent to the waiver of premium benefit so generally available. The insured would hesitate to accept any smaller amount except under the pressure of urgent necessity if he realized this fact clearly. If the full face value of the policy were given at the time of disability its cost to the company would be only the difference between $1,000 due now and the value now (present value) of $1,000 due in one year, four months, and twenty-eight days, and no company would be increasing its liability to unwarrantable proportions by giving a value equivalent to $1,000 at the time of disability.

The ordinary installment benefits consist in the payment of specified amounts per year for a period of ten, fifteen, or twenty years. The amount is usually named as one-tenth, one-fifteenth, or one-twentieth of the face value of the policy. The discounted values of $1,000 paid in ten installments of $100 each, fifteen installments of $66.67, or twenty installments of $50 on a 3½ percent, interest basis, are, respectively, $861, $795, and $736. Thus the policyholder surrenders for these amounts a policy that in less than one and one-half years would mature for $1,000. By giving a maturity benefit such as the above a company thereby actually decreases its liability.

A few companies have provided for the payment of the policy as a continuous installment, that is, twenty guaranteed payments, and in case the insured lives beyond the period of these certain payments, the same yearly amounts will continue until death. Considering the average life of a disabled person, this continuous feature will occasion but little extra liability. The first case of a continuous installment based on ten- certain payments appeared in 1915.

The settlement of a disability contract by the payment of a cash sum is offered by a few companies. The full amount insured is given in a few instances, but this apparent liberality is destroyed by the restrictions under which the benefit is paid, the clauses covering disability due to accidental injury only, and in some cases limiting the kinds of injury. Equally open to criticism are clauses which promise to pay half the face value on disability.

The payment of the policy as an annuity is allowed in some cases after disability, the payment being so much per year until death. In one case $50 per year is paid; in another, $100 per year, but the latter is limited to five payments at most, thereby making the maximum recoverable under this contract equal in present value to $467, and since death is probable to occur in one and one-half years, the amount received in most cases will be far less than $467. Other annuities pay an amount, based on the age at the time of disability, which could be purchased by the face value of the policy, but the death rate among active lives is used in computing this amount and not the death rate among disabled lives.