§ 10. Purpose of life insurance. Of all forms of insurance at present, the most important in the extent of its financial operation and as an agency of thrift is life insurance. The total receipts (about $1,800,000,000 in 1919) of life insurance organizations (fraternal, ordinary, and industrial) are almost twice those of all other forms of insurance, and the total assets more than twice as great ($6,800,000,000 in a total of $9,100,000,000 in 1919).

Life insurance is to provide partial indemnity for survivors against the financial loss incurred by the death of the insured. Usually the insured is the bread-winner of the family and the beneficiary is a member of his family; but the number and variety of other cases in which life insurance is provided is now large. In an increasing number of cases the beneficiary is the surviving business partner, a creditor, or a business corporation with an insurable interest in the life of one of its officers or employees. "Babe" Ruth is said to be insured for $200,000 in favor of the owners of the ball club for which he wields his mighty bat; Mary Pickford, Charlie Chaplin, and Douglas Fairbanks are each insured for $1,000,000 in favor of the moving picture company, their "producer"; and one of the large motion-picture corporations insured the life of its managing head in 1921 for $5,000,000. This is said to be the largest life insurance policy ever written, and it was divided among six or more insurance companies.

Life insurance has been much used by persons mainly dependent on labor incomes,5 salaries, professional fees, and active business profits, rather than from funded incomes. In essence and largely in origin it is a cooperative method of providing for survivors, by all in a group contributing a sum to be given to the families of those dying. Naturally, the need is most urgent in families not having accumulated wealth. It has of late been extended rapidly, as "industrial insurance" to wage-earners, in policies never exceeding $1000, but averaging very much less, often being for no more than enough to pay funeral expenses. The premiums on such policies are usually collected weekly and by agents making personal visits. The cost to the insured is, therefore, necessarily high in proportion to the amount of insurance.

5 See Vol. I, labor incomes, in Index.

§ 11. Assessment life insurance. Life insurance plans may be distinguished, with reference to the time and method of collecting the premiums, as assessment and reserve insurance.

In the simplest form of assessment insurance the losses are paid by contributions taken after the losses occurred, each member paying an equal share without regard to age. In a slightly modified plan the assessments are made at the beginning of the year, based upon the expected mortality for the year. Life insurance of this plan is essentially like the mutual fire insurance already described, the percentage of risk for each policy, whether on persons or houses, being assumed to be equal to that of every other policy. The great variation in the chance of loss in the case of various forms of urban property makes simple mutual assessment fire insurance unsuitable in such cases, and even in the case of farm buildings it has been increasingly seen that differences in location, grouping, structural materials, nature of uses, condition of water supply, and other means for fighting fire, cause differences in risk which properly should be recognized. This can be done by classifying risks and insuring on a scale at lower or higher assessment rates. If some concession is not made to the better risks, some enterprising commercial companies will see a profit in giving them a lower rate. Mutual companies which ignore these differences feel the effects of "adverse selection" in that they are left with only the more hazardous property.

Now, in the case of life insurance the risk varies with great uniformity (considering the average mortality of large groups of men) according to the one factor of age. The cost of assessment life insurance, therefore, is closely related to the average age of the members composing the group of insured. The rates are very low in a new organization with a membership of young men; but each year the average age, and therefore the mortality of the membership, rises, and the annual assessments must be increased. By the constant addition of young members this rise of cost may be retarded. But when these members grow older, a still larger addition of young members is required to keep down the average.. But other young men are averse to entering the organization under these conditions; and the result is that the rate of assessment must be steadily increased. Finally failure results, or some form of "reorganization" that drives out the older members. The simple assessment plan carries with it the seeds of its own decay.

To meet these difficulties in part, various modifications of the flat-rate assessment plan are employed, such as classification by age, so that each member pays a flat rate according to age at entry; or large initiation fees at entry, which form a temporary "reserve" to offset increasing mortality in late years. Finally, the policies may be issued on the natural premium plan, by which the members of each age class pay exactly what the insurance costs for the year. Under this plan the company will remain solvent, but the annual cost to the insured rises so rapidly that many surviving members are forced to drop the insurance in later years.

Assessment insurance is sold by stock companies organized for profit, by fraternal orders, and by various types of mutual organizations. Many of the stock companies have had a dismal history of hardship to surviving members and of eventual failure. They are reforming or disappearing under the influence of hostile legislation resulting from a better popular knowledge of insurance principles. The fraternal orders have more than ten million policies in force and incomes totaling more than $180,000,000. They combine insurance with other objects of a benevolent and social character. With good management, a favorable death rate, and very-low expenses, some of them have provided protection at very low rates for many years. Many in the past have failed, with disappointment and disaster to the older members. Still others are struggling with difficulties that presage dissolution. Most of them now have some, though inadequate, reserve accumulations, and some have so improved their methods that they begin to resemble reserve companies. The assessment companies average $1.37 reserves per $100 of insurance in force, and get 10 per cent of their total incomes from their funded investments. Even with the favorable conditions under which fraternal orders conduct their insurance business, they eventually must fail unless they adopt rates and policies based upon adequate reserves. Many thousands of present members are paying for insurance at rates that will not suffice to meet the future losses. The assessment plan fails to eliminate the one great risk, that of leaving the survivors without insurance in advancing years.

References

Gephart, W. F., Principles of insurance, vol. 2, Fire. N. Y. Mac-millan. 1917.

Same, Insurance and the state. N. Y. Macmillan. 1913.

Huebner, 8. S., Property insurance. N. Y. Appleton. 1913.

Willet, A. H., Economic theory of risk and insurance. N. Y. Longmans. 1901. Winter, W. D., Marine insurance. Pp. 450. New York. McGraw-Hill. 1919.

Zartman, L. W. (Ed.) Fire insurance. Yale Univ. Press. 1915.