Theodore Wehle

“ A person that insures for life virtually agrees to contribute to the death-claims of other members as long as he himself lives, and should he withdraw ought to pay his share of the liabilities assumed and the expenses of management attendant thereon. It becomes the duty of an insurance company to prevent the unnecessary withdrawal of its members, and self-preservation compels it to constantly strive to acquire new lives to retain the institution in a prosperous condition. Therefore, while it would be unjust to confiscate the whole accumulated reserve on lapsed policies. ”

“ Some intelligent men, even, imagine that a company should be compelled to reinstate a lapsed policy without reëxamination of the insured life, or that, at least, the whole amount of premiums paid ought to be returned, since no loss has occurred. However absurd such notions, they have caused much dissatisfaction, and, as they spring from a total misconception of the aims and functions of the institution, they ought to be dispelled. The companies themselves are not free from blame, however, for permitting many false impressions to gain ground. ”

“ At present more than 600,000 lives are insured in the United States alone; and the usefulness of the institution is only beginning to be properly appreciated. In view of this fact, and of the general interest that cooperative enterprises are attracting just now, it may be well to point out that life insurance must be reckoned among the grandest and most successful efforts ever attempted in that direction. It has, moreover, a century's experience to attest the strictly scientific principles upon which it rests. ”

“ The higher the age, the greater the value of selection; and, the older the members of a life-insurance company become, the more do they approximate the health of the community at large.
Another factor that operates as a selection against the mortality experience is what is called lapses. A large number of policies are constantly allowed to terminate through the indifference of the insured, and for various other reasons. But, while the healthy often forfeit their insurance upon slight provocation, there are few indeed, of those that think their health impaired, that will do so. ”

“ We have now touched upon most of the distinctive features of life insurance that interest the general reader, and but little remains to be said of the general management. It has been shown that next in importance to the collection of premiums is the accumulation of a reserve, which must earn at least the minimum rate of interest assumed as the basis of calculation. This is no easy task in the present condition of the money market, and exceptional skill, prudence, and forethought, are required to secure safe and profitable investments. ”

“ On the other hand, it may be urged that there is no normal standard of life nor of its surroundings, and that length of life is merely an expression of the sum total of social influences upon the organism. A community may be divided into ever so many groups, each of which will have its peculiarity, and the summary of all these units will give as resultant the average of life. ”

“ A life-insurance company once fairly established, however, ought to be as safe as any other financial institution, and, where failure occurs, it may always be traced to either gross mismanagement or intentional fraud. State supervision, which has been of great benefit to the system and to the community, can never supplant individual judgment or probity. In fact, it ought to be limited to prescribing minimum reserves, the character of investments, and the publication of truthful statements of the condition of companies. ”

“ But, however instructive these details, it may be well, to avoid confusion, to sum up the whole process in the statement that the annual premium is a device to collect a larger amount than the death-rate in the earlier years of insurance, and to use these over-payments, improved at compound interest, to meet the deficiencies which arise in later years. The premium and reserve are so nicely adjusted that they are strictly equitable for the living as well as the dying at every year of life. ”

“ But the same methods can not be applied to human life. If the policy were to terminate annually, and a new examination could be demanded, many persons whose health had become impaired would be declined at the beginning of every new year. Then, as has been shown, from a very young age, upward, the rate of mortality constantly increases. That would necessitate a higher premium charge from year to year, so that, finally, a person who should be fortunate enough to reach the highest age of the table would have to pay one hundred per cent, for that one year. ”

“ THE mortality tables, forming the theoretical basis of life insurance, having been explained, it remains to be shown how they are employed in practice. There is a fundamental difference between life and fire or marine insurance that must first be considered. The hazard attaching to a building or a ship may remain unchanged for a very long term of years, and the rate of premium once determined need not be altered. ”

“ It is a provision against a contingency to which every human being is subject. A proper appreciation of its great benefits would prompt most men to seek its protection as far as their means permitted. To the majority of insurers, however, it is an actual expense, though allotted among them upon the most equitable basis. On the other hand, the amount of premiums paid can never be totally lost, since every life policy must eventually become a death-claim. But only those should insure who really require it and can continue payments to the end. ”

“ At some ages, and they may be the very highest, no deaths at all may occur. We know, however, that it is not in the course of nature that in any one year of life no human being should die, and properly ascribe it to the small number and the short space of time observed. Here the mathematician steps in and determines, from the insufficient data gathered, what the probable percentage of deaths would be for every year of life, in large communities living under similar conditions. ”

“ A little reflection will show that large numbers must be observed for a long term of years, to have deaths occur for every single year of life, and in the proper proportion for each age. Take as an illustration the Carlisle table based upon 1,840 deaths in eight years, which would average 230 deaths per year. According to the present mortality of England, about forty per cent. of the deaths of the whole population occur among children under five years old, forty per cent, between the ages of five and sixty-five, and twenty-per cent, in old age, between sixty-five and one hundred years. ”

“ No amount of care or precaution can detect all misrepresentation or trace every inducement to fraud and self-destruction, and, while it may amount to less than some assume, it undoubtedly reduces the standard of absolute health. Of far greater importance is the observation that the effect of selection nearly wears away in about five years. Taking a class of live? selected by medical examination, say at twenty-five years, it will show a reduced mortality during the first year; but after five years, at age thirty, very nearly the usual average is again reached. ”

“ Even after science had taken the initiative, and formulated the law upon such data as were accessible, a long period elapsed before steps were taken to apply its principles to practical ends. The conditions of society were as yet too unsettled, property and life too insecure, to permit such experiments. Not until after the middle of the eighteenth century did the desire to provide for widows, orphans, and other dependents, become so general as to lead to the establishment of a life-insurance society in London. ”

“ It was contended that the reserve pertaining to each policy should be considered equivalent to a deposit in a savings-bank, to be withdrawn at the pleasure of each individual insurer. This position was combated as wrong in theory, and as absolutely subversive of the business in practice. Insurance when applied to the individual becomes an absurdity, and it can only be safely conducted on averages dependent upon large aggregates. ”

“ It has already been stated that premiums are payable at the beginning, while death-claims are due at the end, of the same year. To bring these different amounts and dates to a common basis we must determine the present value of each, at the age at which the insurance begins. Knowing, from the table, the amounts of the contributions and the number of deaths and the time at which they become due, it is to be ascertained what amount of money deposited at the beginning of the period, improved at compound interest, would be equivalent to the total of these sums. ”

“ Not that the precise duration of an individual life can be predicted, but that the ratio of deaths out of large gates will remain the same under similar conditions. This conception, so self-evident to-day, was slow to dawn upon the human mind. ”

“ At the younger ages, up to thirty years, the mortality is greater, while from thirty to seventy years it is somewhat less than in England. During this latter, the most active period of life, the strain upon the system is very great in this country, and the vital forces are used up to such an extent that after seventy years the death-rate rises rapidly. The table ends at ninety-five, while the English is carried to ninety-nine. ”

“ The proper selection of business and the safe investment of funds require prudence and sagacity, and devolve great responsibility upon executive officers. But mutual-insurance companies (and nearly all stock companies in the United States also embody the mutual principle) have a margin far above any probable exigency, in the excessive loading of premiums. ”

“ On the other hand, well-managed companies accumulate a surplus over the net reserve, and have their interest income largely increased from this source. Still more important is the fact, as far as New York is concerned, that, since Massachusetts and some other States have established four per cent, as the legal standard for reserve, and all companies desire to transact business in those States, they keep their surplus sufficiently high to be virtually on a four per cent, basis. ”

“ Such arrangements, when a mere subordinate feature of benevolent societies, may work well for a time, but they can not serve as substitutes for life-insurance companies. These can only be founded on scientific principles, and all other devices must be futile and short-lived, as a century's experience has amply shown. The difficulties to be encountered were clearly foreseen and explained by the mathematicians of the day, and their labors did not prove in vain. In 1761 a number of gentlemen petitioned Parliament for a charter for a life-insurance association. ”

“ The Society, now basing the reserves on the Northampton table, which showed a lower rate of mortality than Dodson's, found the surplus to accumulate rapidly, and large and frequent dividend additions were made to the old policies. With the reduction of the premiums the business increased steadily, and numbers of new companies were started in competition, whose fate we need not follow. Life insurance had become a practical system, established on a scientific basis. ”

“ In all illustrations hereafter given the American Experience Table and four and a half per cent, interest will be employed, that being the official standard for the State of New York.
From this table it appears that, to insure $1,000 for one year at a time, it would cost $7.47 at age 20, and that the amount would have to be continually increased, until at age 90 it would be $434.96, while the same purpose would be accomplished for an equal annual premium of $11.97. The somewhat larger expense in the earlier years of insurance avoids the necessity of enormous charges at the high ages. ”

“ LIFE insurance is based upon the theory that there is a law of mortality governing life; that is to say, that at all ages from birth to the utmost limits of life a certain proportion of individuals will die during fixed periods. ”

“ Probably no theoretical point has been so hotly contested, and certainly none has offered equal difficulties in practice. In the early days of the institution, when it was prudent to err on the side of safety, the view prevailed that a policy was a contract for life, from which neither party could withdraw. Instead of a single premium in advance, annual account payments were accepted, but it was thought that a violation of this condition could only be regulated by absolute forfeiture of all previous contributions. ”

“ The larger the number of deaths a prospectus would promise, the greater the expected gain to the survivors. No reliable calculation or precise prediction of the mortality was necessary, since they were to be guided by the actual experience only. But the very ease with which they could be formed tended to make them deteriorate into little better than mere lottery schemes, used by designing men to plunder the credulous. ”

“ It will be noticed that in 1849 the increase over the previous year was about 42,000, while in the following year, 1850, there was a falling off to 30,000 below the number of deaths in 1848. For the period of five years from 1848 to 1852 the annual average of 400,000 remained undisturbed. This would indicate that, when through a powerful influence an excessive death-rate prevails, a large proportion of the weak and sickly is carried off, so that by way of compensation the surviving, healthier population will for a time show a mortality below the average. ”

“ Nor is it generally known that more boys are born than girls, and that the weaker sex has such decided advantages in life over the stronger. But, while nearly five per cent, more male than female infants are born, the very reverse appears in the whole population, there being about five per cent, more females living than males. Of course, these proportions refer to England only, and they vary in different countries, according to conditions and influences that the reader can readily picture to himself. ”

“ The London mortality bills could not serve as a proper basis for insurance calculations. The large and fluctuating population of a city like London, with its extremes of social conditions, could not be deemed a fair exponent of the value of healthy lives of the whole country. Dr. Price set to work to collect data from which trustworthy tables might be computed. ”