Burton J. Hendrick

“ A Man With All the Qualities of a Successful Reformer As it turned out, these were precisely the qualities needed in his battle with life-insurance dishonesty. The fight for the policy-holder called for the same sympathies, the same watchful zeal, the same sacrifice of expediency to conviction as the fight for the slave. In life-insurance, as in the slavery agitation, Wright was always the radical. ”

“ This was the beginning of the great modern life-insurance principle of the legal reserve. Wright's old abolitionist persistence, in the face of constant discouragement, redeemed the whole system in this country, popularized life-insurance, and made it one of the great safeguards of society; and saved millions of dollars to the beneficiaries of life-insurance policies. Not improbably he rescued from ultimate disaster such large companies as the Mutual and the New York Life, but, more than that, he gave American life-insurance a standing unattained up to that time by that of any other country. ”

“ Hyde showed this unflagging enthusiasm until the end. On the subject of the Equitable he seemed, at times, almost insane. He worked the first twenty years without a vacation; and then, broken in health, toured the world. When he gazed at the Pyramids, he declared he saw nothing but the new Equitable building; the Taj-Mahal did not compare, in his estimation, with the architecture of 120 Broadway. Ocean voyages were irksome because they destroyed his communications with the home office. His worst enemies never gainsaid his devotion to the Equitable. ”

“ He adopted Tontine—to sum up the situation—to save the Equitable from threatened bankruptcy, to avoid unfavorable comparisons with other companies, to obtain a large fund for expenses, to get a basis for glittering promises of profits and thus entice new business; and also, unquestionably, to increase his own annual income. These were the immediate necessities of the moment; beyond that, Hyde seldom gave a thought. Afterwards the Equitable management also found it a convenient protection against their own dishonesty. ”

“ That they must earn to maintain solvency; anything beyond is theoretically returned to the policy-holders. Thus they have an absolute standard of investment earnings; the unpardonable sin is the realization of less than three per cent. If they have securities yielding less than this minimum, they have a deficit in the reserves which must be made up from other sources—that is, the surplus. Because these companies have this great accumulation to fall back upon they have sunk millions in investments that do not realize the interest rate needed to maintain solvency. ”

“ Given a certain number of lives of a certain age, nothing is more clearly demonstrated than the order in which they will die. Given a certain amount of money, invested at a certain rate of interest, nothing is more self-evident than its precise accumulation in a given number of years. If all life-insurance companies thus used the same mortality tables—anticipated, in other words, the same number of annual deaths—and invested the premiums at the same rate of interest, the cost of the actual insurance would in all cases be the same. ”

“ He had, on the one hand, the option of adopting all the New York methods—high commissions and salaries to agents, reckless advertising, great office buildings, the pursuit of foreign business at the expense of the American members, the adoption of new speculative forms of insurance. In that direction lay success, as most Americans then esteemed success. Thus, and thus only, could Greene maintain the comparative size and assets of the Connecticut Mutual. In this way, of course, he would greatly prejudice his old policy-holders; make their insurance more expensive. ”

“ The agents have thus found it easy to deceive. They have gathered in everybody, from the tenement dweller to the captain of industry. One of the humors of the situation, indeed, has been the ease with which the life-insurance agent has gone into Wall Street and transformed the most aggressive bulls and bears into innocent lambs. ”

“ Agents at that time hardly received enough to justify men in giving their undivided attention to the work. Many companies paid only five or ten per cent, of the first premium. Hyde had a theory that, by increasing these commissions, he could attract more aggressive men. He thus proposed to build up a great corporation, with the hustling agent as the fulcrum. From the first Hyde was never anything more than a great life-insurance agent; the greatest getter of new business the world has ever known. In the highest sense he was not a life-insurance man at all. ”

“ Why not place the enforcement of this law in the hands of an insurance commission which should make this annual calculation? Wright preached this reform with his usual enthusiasm. He was generally ridiculed and opposed. He was told that his scheme was impossible because of the enormous labor involved. Wright appeared before the Massachusetts legislature year after year, only to be jeered at and insulted. But he was one of those cranks who could not be browbeaten nor laughed down. He was engaged in what he regarded as a sacred task: "lobbying for the widow and orphan." ”

“ For the last thirty-five years a constant warfare has waged in the United States between the good and the bad in life insurance. On one side have ranged honesty, economy, and fair and liberal treatment of the insured; on the other, dishonesty, extravagance, and absolute disregard of policy-holders' rights. Certain companies have treated life insurance as a great beneficent institution, organized for the purpose of protecting the weak and the dependent against adverse fortune ”

“ He regarded life-insurance simply as a family protection; on the part of the insured, he declared again and again, it was a purely unselfish act. No policy-holder must himself expect to benefit from his policy. ”

“ The banking house therefore forms a syndicate among certain investors, each agreeing to take a certain proportion at a specified price. Among the largest investors are the three big New York insurance companies. If they actually take the bonds at the price at which they have subscribed, and place them away in their vaults for investment, the operation is entirely free from criticism. But that is precisely what they have not done. Indeed, according to modern Wall Street ethics, the purchase of syndicate securities at the original subscription price is regarded as distinctly bad form. ”

“ The Equitable and the Mutual have had upon the market between two and three hundred forms of policy: all merely changes rung upon these three original types. They have constantly harped upon the "investment idea." "Make the Mutual Life your savings bank," has become the war cry. They have given the semblance of investment frequently by combining one form of policy with another. ”

“ Only in case you live for twenty years, and promptly pay your annual premiums, will you get back your annual overpayments. And then you get back precisely what the company sees fit to pay you—not a penny more. If you study your contract—your policy, that is—you will learn that the company has not legally obliged itself to pay you a single dollar! Your share of the twenty years' accumulated surplus is merely what is "equitably determined by the actuaries of the company." You find that the company is not obliged to give you any accounting ”

“ As long as human nature retains its gambling instinct, it always will. Thousands willingly staked their own chances of living and paying against the similar chances of their fellow-insurers. They readily risked all their own life-insurance for a possibility of getting a part of that of their less fortunate associates.
Thus Hyde placed in the hands of hundreds of agents his "blue books" and sent them forth to preach the gospel of Tontine. He raided the leading offices; got away the best men, paying them unheard of commissions—made possible, of course, by this Tontine fund. ”

“ All investments are made by finance committees; the members of these finance committees invariably hold directorships in endless banks, trust companies, railroads, and miscellaneous corporations. They get these positions, and the enormous opportunities for personal profit furnished thereby, simply by virtue of the investments they make for their insurance companies. In other words, to advance themselves, they sacrifice millions in interest earnings for their policy-holders. ”

“ The Mutual Life, and all the other mutual companies, had been organized as pure democracies. They had no shareholders, the theory being that the policy-holders would elect, by a general plebiscite, the trustees and equally participate in all the benefits of the business. Winston and McCurdy, declared Elizur Wright, had transformed their company into a pure autocracy. They held proxies enough, he said, to insure their own election, in "the face of any opposition, short of the miraculous." In fact, they had twenty thousand or thirty thousand ready to vote at the slightest indication of revolt. ”

“ Life-Insurance Agents Necessary Theoretically, no life-insurance company should employ an agency force. He who has dependents and no income except the product of his own toil is as morally bound to carry life-insurance as he is to furnish his children food and shelter. Obviously, he should not be hounded into performing this simple duty. However, that theory seldom works. Experience has demonstrated that men do not insure of their own free will. They must be clubbed into it. The company that employs no agents does no business. The old Equitable of London pays enormous "bonuses" or "dividends" ”

“ The deferred dividend plan is thus clearly a discrimination against the unfortunate in favor of the prosperous. It overcharges most—and they the less prosperous—in order that it may undercharge a few—and they the more fortunate. Actually, as we shall see, it does not even treat its minority fairly. Far from paying back to the persistent the "dividends" of all who die and lapse, it does not always pay back their own!
Let us imagine, for a moment, a savings bank organized on this basis. It requires all depositors to leave with it stipulated sums each year. ”

“ If your horse wins, you get your ten dollars; if your card turns up, you pocket your twenty. Any other policy would be an incitement to riot. In Tontine, however, you laid down a specific sum every year; but, even though fortune went your way, you hadn't the slightest idea what the prize would be. It was a blind pool with a vengeance. Hyde guaranteed no winnings. He stipulated in every contract—every policy, that is—that, at the expiration of the Tontine period, each survivor's share "should be equitably apportioned by the company." ”

“ In 1880 Massachusetts passed Wright's cash surrender bill. All companies have adopted his ideas; cash values and loans are now written in nearly every policy issued. The New York companies make more noise over their cash surrender features than any others—entirely forgetful of the viciousness with which they opposed them for years. The Mutual, which, in Wright's time, gave only a small part of the reserve on surrender, now loudly boasts that it gives more. ”

“ The majority pay an annual level premium not through life, but for a stated number of years—twenty, fifteen, ten, or perhaps five. After this premium paying period has elapsed, their policy is, in life insurance terms, paid up. They pay no more; all they have to do to get the full value is to die. All these various premium systems—annual level, twenty payment, fifteen payment, ten payment, or five—are derived from the single payment, already detailed; all are simply variations of it. All premium calculations are first made upon the theory that the cost is paid in one large sum ”

“ The same man has even drawn more than one advance from the same company. A few years ago the New York Life discovered that one man was drawing seven advances of $25 a week from seven different New York agencies under seven different names. Indeed, at times it has almost seemed that the best man was not the one who wrote the most insurance but the one who drew the most advances from the most companies at the same time. ”

“ Wright's denunciations of the Equitable now have all the sanctity of prophecy. He had a certain admiration for Henry B. Hyde as a pushing life-insurance man, but abhorred his practices. He denounced the Tontine scheme—of which the modern successor is the deferred dividend—when first started, and increased his vehemence as its full meaning appeared. In 1882, three years before he died, he said: "Some day there will be a terrible crash in the Equitable. Its disruption is only a matter of a few years." ”

“ Theoretically only one is indispensable; the mortality law. This enables the company to foresee, for a long period of years, its annual expenditures, and consequently to make provision for their payment. With this principle alone, however, life insurance would not be an accomplished reality, because its cost would be excessive. The interest element, by making life insurance cheap, brings it within the purview of the poorest citizen. It transforms life insurance from an unutilized theory into a most salutary fact. ”

“ They employ men and women, educated and ignorant, high and low born. Broken-down clergymen, superannuated college professors, briefless lawyers, bankrupt business men, cast-off politicians, actors, reporters, artists—they press all into service. Evidently the managers argue that every man has a few friends; and is useful at least until he has exhausted them. "Anyone who has two hands and a hip pocket for a rate book can become an agent,"—so say life-insurance men themselves. ”

“ Our compensation is the great one that, when we die, our dependents will not be beggared. This is so great an advantage, it adds so wonderfully to the sum of human happiness, that we are willing to pay for it all that it costs. No one regards the insurance upon his house—one's fire insurance—as an investment—as something upon which he receives an annual income ”

“ Any merchant who knew just what his expenditures would be through a long series of years, and who had the power to adjust his income so as to equal them, could not possibly fail. That is the position of the life insurance company. Any accurate mortality table, common honesty, and good executive judgment—with these as capital no life insurance company could possibly collapse. Fire, marine, and other forms of insurance are not thus scientifically based. These companies cannot figure in advance their future losses. No natural laws regulate the burning of houses or the destruction of ships. ”

“ But, fortunately for the cause of life insurance, it varies always in one direction. The company's charges, that is, always exceed the actual cost. It almost invariably has fewer death losses than the mortality tables indicate; and it commonly earns more interest than the estimate assumes. That is to say, it pays out each year less than it has provided for; and earns, in interest, more than it needs to pay all claims. A company properly conducted also uses less every year for expenses than the amount provided in the premium loadings. ”

“ Two Scientific Bases of Life Insurance—Mortality Law and Interest Rate The application of this mortality law to the cost of life insurance may now be illustrated in its simplest form. Let us take 1,000 men, all aged 40, who desire to insure their lives. They might take out policies in some existing company, but not necessarily—they can carry their insurance just as well themselves. So they enroll themselves into what may be called a life-insurance association. They agree that $1,000 shall be paid to the widows of all that die. ”

“ At the beginning, therefore, it is plain why life insurance, in the usual commercial sense, is not an investment. The company puts your premiums at interest, not that it may furnish you a return in addition to the insurance, but that it may accumulate a fund out of which the policy itself is paid. ”

“ The most popular companies, indeed, have largely ceased to do a life-insurance business at all. If you study the literature they circulate, you will find the life-insurance feature of their contract only incidentally mentioned. They talk little about protection of one's family, but much about savings banks, investments, guaranteed incomes, five per cent Consols, and gold bonds. They ask you to buy their policies, not that thereby you may provide financial protection for your dependents, but that you may thereby reap financial advantage yourself. ”

“ From Interest If it invests the premiums with bad or dishonest judgment, if it buys depreciated bonds merely because its investment department has been annexed by a Wall Street banking house; if its directors constantly unload upon it, at a good profit to themselves, investments which they themselves have purchased on the quiet; if its directors receive a substantial "rake off" on every investment made, evidently it will make a bad showing on its interest earnings. ”

“ Theoretically, at least, and in many instances actually, these great companies are trusts, in the real meaning of the term; their directors are trustees in the most sacred sense. Similarly, life insurance is not gambling. As now practised, certain lottery attachments have been added to it; at times it has been reduced almost to the par of faro and roulette. Above all, life insurance is not an investment. The word "dividend" applied to it has been the most prolific cause of evil. ”