Burton J. Hendrick

“ 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 ”

“ 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. ”

“ 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. ”

“ 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. ”

“ 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 ”

“ 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 ”

“ 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. ”

“ Deferred Dividends Frequently Exceeded by Annual All this time, the old-fashioned companies have paid their "dividends" annually; have paid back to each policy-holder each year precisely his own overpayments. They have not paid me the surplus that belongs to you; nor to you the surplus that belongs to me; they have treated us all fairly and honestly, and given us all our insurance at its actual cost. In spite of this in many cases they have paid annual dividends to all who have insured actually more than the New York companies have paid to forty per cent. ”

“ 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. ”

“ 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. ”

“ 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. ”

“ In this thirty-five years the history of American life insurance has been one of progressive degeneration. The people have forgotten the old ideals; have persistently abandoned good life insurance and taken up with bad. ”

“ 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. ”

“ There can be no dividend, no profit—no investment—because, even under the most favourable circumstances, the expenses of management are so great. For every dollar collected by a life insurance company, it expends anywhere from eighteen to fifty cents in expenses; manifestly it cannot invest the rest so as to pay you any investment return.
Life Insurance Merely Indemnity—Not Investment Life insurance is one thing, and one thing only. In the social and economic order it performs a single and a simple service. It is the money indemnification for the destruction of a valuable human life. ”

“ With certain limitations, which will be detailed subsequently, life insurance is a science. It is scientific because it deals with one of the few certainties of human experience—that is, death itself. If a company contracts to pay a certain amount at death it knows that it will have to fulfil that promise ”

“ Above all, unless all its 1,000 members join spontaneously, it must have a lively force of insinuating gentlemen to persuade them in—that is, life insurance agents. All these things, especially the agency force, cost money. For want of a better system the association clumsily adds to every premium a certain annual sum to provide a special fund to meet these expenses. ”

“ The Equitable retains this vast sum by virtue of the deferred dividend scheme; it is money, which, according to its own claim, it keeps in its treasury instead of distributing among those to whom it belongs—the policy-holders. It calls this surplus "strength"; more properly we should call it "injustice." The Mutual has some $70,000,000. similarly withheld; the New York Life some $47,000,000. These companies have these great surpluses simply because they do not promptly return the excess cost of insurance; the outside companies have proportionately small surpluses because they do. ”

“ 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. ”

“ They have thus displaced the United States from the world leadership in life insurance which it formerly held, and have made what was one of our greatest claims to national distinction the cause of what is, in many ways, our most shameful national scandal. ”

“ If these sixty per cent should take policies in the companies which annually returned their surplus, they could peacefully die without depriving their families of the protection actually paid for in good cash ”

“ If the company's medical department is inefficient or corrupt, if it insures consumptives, paralytics, and physical degenerates, either because it knows no better or is impelled by the furious ambition of the management to do a large business, manifestly its mortality showing will be bad, perhaps even sinking below the standard of the table. But if it exercises unusual care, and takes people only in the finest physical condition, it will make a much better showing than the table; the company will not have to pay aa much in death losses as it supposed ”

“ They preach life insurance, not as a boon to the poor and the defenceless, but to the fortunate and the rich. In a word, they have grafted upon tho simple life insurance idea endless investment and gambling schemes, most of which are fallacies and some of which are palpable frauds. Consequently hundreds of thousands profit little, or not at all, from the insurance feature of their contracts. In the majority of cases they ignore it entirely. The real situation was eloquently summed up at the recent New York life-insurance investigation. ”

“ We have explained this great life insurance principle on the basis of the single premium—the payment down, in a lump sum in advance, of the entire cost of the life insurance—chiefly in the interest of simplicity. As s matter of fact, few buy their life insurance this way. They make to the common fund not one large contribution, but a smaller one each year, A considerable number pay this uniform sum throughout life. ”

“ Why There Is a Surplus: Three Sources of Gain When the company applies these hypothetical rates to tho actual business of insuring lives, however, the situation changes. It finds that the scheme does not work with quite the precision anticipated. It discovers that the deaths do not occur quite as the mortality table provides; that the interest rate earned is not always three per cent; that the expenses do not always amount to the same sum as the loadings. ”

“ Evidently the remaining forty per cent constitute the fortunate class who live and pay. As a reward they are to receive not only their own overpayments, but the overpayments of all the unfortunate who have died and the poverty stricken who have lapsed. Forty per cent of the policy-holders, that is, are to get, not only their own "dividends," but the "dividends" of the sixty per cent, who get none. ”

“ A great government is responsible for every penny of its surplus. A life-insurance company is not. Its policy contracts are so written, as we have seen, that it can turn over to the insured just as much, or just as little, as it pleases. The Equitable can pay back to its policy-holders the whole $71,000,000. deferred dividend surplus ”

“ Let us see how the idea practically works itself out. Every insurant on the deferred dividend plan belongs to one of three classes; he pays his premium for a few years and then lapses; he pays and dies; he pays and survives the deferred dividend period. ”

“ We insure our lives for the same reason that we insure our houses and our ships. All three things have money value; all stand momentarily in danger of destruction; and all are insured for the purpose of recouping ourselves and our dependents for their loss. ”

“ They do not have enormous surpluses unjustly withheld from the policy-holders to whom they belong; do not pay in commissions for new business larger sums than that business is worth; do not write insurance in forty-five states and all foreign countries, including China, Japan, Borneo, and Malaysia; they remain quietly at home insuring only respectable heads of American families in good physical condition. ”

“ It discriminates, too, against its least fortunate members. Manifestly, if you die, your widow needs these dividends, or the insurance they represent, much more than if you live. The deferred dividend companies take this money from the widows of their dead members and give it to their persisting policy-holders. Again, if you lapse your policy, it is usually because you haven't the money to continue it. The deferred dividend companies take advantage of this misfortune to deprive you of certain equities. ”

“ It declines to pay interest annually; but proposes to hold all earnings in its own treasury for twenty years. It is not obliged to keep an accounting of the earnings; in fact does keep no accounting; and has secured the passage of a state law that prevents any depositor from demanding one. It will pay these accumulated earnings only after twenty years, and then pays just what its trustees deem fair and "equitable." To depositors who have died in that twenty years it will pay no interest at all; when they die their widows get simply the principal. ”