§ 6. Limited premium payments. A second feature in which policies differ is in regard to the number of premium payments to be made according to the calculation. If the number of payments is any less than the number of years of the term the policy is one of "limited payment." The most limited payment is the single premium already described, which may be used in connection with any term from one year to life. The single premium is simply the reserve required to meet the cost of the insurance, without further payments, to the end of the term. The net single premium, or reserve, for a straight life policy, at age 96 is $1000, the face of the policy. The most common limited payment policy is the twenty-payment life. The annual premium for this at age 35 is $27.40, which is more than twice as much each year as the premium on a twenty-year term ($10.80) although it provides no more indemnity. But whereas the reserve on the term policy at age 55 is zero, the reserve on the twenty-payment life is $566.15, this being just the amount of a single-payment life policy if taken at age 55.

By just as much as the experience of any company (or separate group of insured) is more favorable than the figures assumed as to rate of yield on investment, mortality, or expenses, there will be excess premiums to refund ("dividends"), which may be used by the insured to reduce his annual premiums or to purchase additional insurance or to add to the reserve. In the more successful companies an ordinary life policy eventually accumulates a reserve sufficient to carry the policy to the limit of age without further payments, and thus becomes in fact a limited payment policy.

Fig. 2, Chapter 13. Comparisons of net premiums and of reserves on different types of policies.

§ 7. The endowment feature. A third feature in respect to which life insurance policies differ is as to the extent to which they include the feature of saving with that of insurance. We have seen that, just to the extent that any reserve whatever is accumulated to keep the premium level, to prevent its "stepping up" as the mortality rate advances with age, there is an act of saving distinct from the payment of a premium for insurance in that year. This is brought out clearly in the case of many insurance policies which provide for a "surrender value" annually equal to the accumulated reserve. So, in our example, the reserve of the straight life policy was $310.75, and that of the twenty-payment life was $566.15. If the insured survives he may, according to the terms of many policies draw for his own benefit these amounts, the "surrender value." This privilege in many cases unfortunately defeats the purpose of insurance for the families, and tempts men to use the proceeds of their policies for enjoyment or for investment in business.

A further step is taken in the savings process in endowment policies. In these the level premium for a definite term is made high enough to accumulate a reserve more than sufficient for a single-payment life policy beginning at the end of the limited payment period. The premium on endowment policies is so calculated that the reserve equals the face of the policy at the end of the payment period. For example, on a twenty-year endowment the net annual premium is $38.35, the terminal reserve is $1000, which is the surrender value. Many persons are attracted to endowment insurance by the oft expressed thought that " You don't have to die to beat it." But this is a mistake. The endowment policy is merely a convenient but somewhat costly plan of saving, hitched on to an insurance policy, with which "actuarially" it has no essential connection. In "scientific" insurance the insured pays its full actuarial cost for each feature of the policy that he buys: so much for the insurance, so much additional for the accumulation of the endowment. The premium for endowment insurance is much higher than that for term life insurance alone during the same period. If insurance is the thing one needs, one is purchasing only a fraction as much for the same annual outlay.

It will be observed that only the survivors to the end of the term get the endowment, and those dying earlier receive no more than if they carried the cheapest term insurance. This gives to the endowment policy a strong "tontine" or lottery character, the survivors profiting at the cost of those who die within the term. This often deceives the uninformed applicant for insurance into the belief that, despite the costs of management, an endowment policy yields a much higher return than other conservative investments at compound interest. The excess of the net endowment premium over the net term premium in our example is annually $26.65, which, compounded at 4 per cent, would be about $825 at the end of the period; but this is sufficient to give the survivors $1000 each, or approximately 6 per cent compound interest. The survivors are lucky not only in living but in getting a monetary prize (paid for by those who have died) for their success. All those who have died, however, would have been better off if they had taken out some cheaper form of policy (term, or straight life, or limited premium) and had deposited in the savings bank each year the difference in the premiums.

§ 8. The choice of a policy. The choice of a policy by an applicant for insurance presents much difficulty in view of the manifold differences in the details of the various contracts, the contingent nature of so many features on which the ultimate cost will depend, and further because of the various circumstances of the insuring individuals, making different policies suitable to their different needs. Moreover, the advice of the agent is too often of little assistance, when it is given in view of the amount of his commission, and with the desire to make an immediate sale, rather than with regard to the true interest of the insured. The first condition of a wise choice is to get into a sound company, of which there are now many, for mere size does not necessarily indicate either superior soundness or superior economy in a reserve company. The various policies written by any honestly conducted reserve company are all actuarily equivalent on the basis of the assumptions made, and all provide reserves adequate to meet their outstanding contracts. There are certain questions on which the applicant must be clear and which he alone can answer.

(1) What is it he most needs - is it the protection of insurance, or is it an opportunity to deposit savings regularly? The insurance method differs from the method of depositing savings by its contingent nature, the resulting income of any individual being possibly much greater than the amounts actually saved (e. g., when the insured dies or is injured soon after taking insurance), and possibly less or nothing at all.

(2)   What is the period within which insurance is most needed ?

(3)   How much can he devote to insurance or to saving respectively, and how will this amount probably change in the course of years, increasing or decreasing? The premium in personal insurance (life, accident, sickness, invalidity, old-age pensions) is in almost all cases paid out of some current income. The premium paid is just so much subtracted from the amount available for present direct use and applied to the purchase of future incomes for one's self or family.

(4)   What would be the most suitable mode and distribution of indemnity payments? The payment usually takes the form of a lump sum payment at death or at the maturity of the endowment. In recent times there has been a growing use of original forms of payment which give to the beneficiary annual or monthly instalments for a definite number of years or for life.

In the light of the foregoing discussion, it is apparent that the more immediate and greater the need of insurance, and the more limited the present income of the insured, the briefer the term for which insurance should be taken for the greater the amount of indemnity that can be bought with a given outlay. A young man in his twenties or thirties, with a limited salary or with his capital invested in business, needs particularly to protect his wife and his children until they are of age. The difficulty with term policies, especially for shorter terms, is the stepping up of premiums, which later makes the cost prohibitive. However, life insurance is essentially needed by one having dependents (wife, young children, sisters, parents, etc.), and is far less often important to the older man than it is to the man between twenty and fifty years of age. A good golden mean for many men is a twenty-payment life policy, its surrender value at age fifty-five being an endowment for nearly two thirds the face of the policy. The best general purpose policy for the active business man who can use and invest his funds safely and well is the "straight life." A very desirable kind of insurance (as yet little developed) for salaried men is that terminating at some chosen retirement age, (say sixty-five years) combined with an old-age pension for life thereafter. § 9. Insurance assets and investments as savings. Of all savings institutions insurance probably is destined to be the most important. It is probable that abstinence will more and more express itself not in accumulating large capital sums to provide for one's old age or for survivors, but in providing insurance for dependent survivors, and invalidity and old-age pensions for the insured and others, payable as terminable annuities. In any case, the results to be expected in the changing forms and magnitude of private fortunes are certain to be great. The assets of life insurance companies in the United States have already attained the enormous sum of nearly $7,000,000,000, a sum equal to the reported savings bank deposits. In the last thirty years life insurance assets have more than doubled in each decade, and are now increasing by more than a quarter of a billion dollars annually. These great funds, which in equity nearly all belong to the policyholders, form already approximately one thirtieth of all the private capital of the country. They are invested in many ways, in real estate, in loans secured by mortgages on real estate, in bonds, municipal, railroad, and industrial. This is one of the ways in which the equitable ownership of the wealth of the nation is being practically and effectively socialized. The problem of wise legislation for these organizations, of their competent and honest management, and of their relation to the social, business, and political life of the nation, is certain to be of ever increasing importance. "We are hardly more than emerging from the experimental stage of insurance, hardly more than at the beginning of its development.