The Atlantic Monthly/Volume 18/Number 107/Life Assurance
One of the subjects which for some time has commanded the public attention is that of Life Assurance: the means by which a man may, through a moderate annual expenditure, make provision for his family when death shall have deprived them of his protection.
The number of companies organized for this purpose, their annual increase, the assiduity with which their agents press their respective claims, the books, pamphlets, and circulars which are disseminated, and the large space occupied by their announcements in the issues of the press, all unite in creating a spirit of inquiry on this interesting subject. We propose in this article to submit a few statements, the collection of which has been greatly furthered by recourse to the treatises of Babbage, Park, Duer, Ellis, Angell, Bunyon, Blayney, and other writers on insurance.
In the early history of insurance, objection was continually made that it was of the nature of a wager, and consequently not only unlawful, but contra bonos mores; yet the courts of law in England from the first drew a distinction between a wager and a contract founded on the principle of indemnity, which principle runs through and underlies the whole subject of insurance. Lord Mansfield denominated insurance "a contract upon speculation," and it has universally been considered as a contract of indemnity against loss or damage arising from some uncertain and future events.
Insurance may be defined generally as "a contract by which one of the parties binds himself to the other to pay him a sum of money, or otherwise indemnify him, in the case of the happening of a fortuitous event provided for in a general or special manner in the contract, in consideration of the sum of money which the latter party pays or binds himself to pay"; or, in the words of an eminent English judge, "It is a contract to protect men against uncertain events which in any wise may be a disadvantage to them."
The contract securing this indemnity is called a policy, from the Italian polizza d'assicurazione, or di sicurtà, which signifies a memorandum in writing, or bill of security. The sum paid for the indemnity is called a premium, or price; the party taking upon himself the risk being termed the underwriter, because his name is written at the bottom of the policy, while the person protected by the instrument is called the assured. Says one, "The premium paid by the latter and the peril assumed by the former are two correlatives inseparable from each other, and the union constitutes the essence of the contract."
Some writers, Mr. Babbage among others, use the words "assurance" and "insurance" as having distinct meanings; but with all underwriters at this day they are considered synonymous.
Insurance in the first instance was exclusively maritime, and great efforts have been made to prove its antiquity. Some have endeavored, by appeals to Livy, Suetonius, Ulpian, and Cicero, to show that insurance was in use in ancient Rome, and that it was invented at Rhodes a thousand years before the Christian era; while others claim that it existed at Tyre, Carthage, Corinth, Athens, and Alexandria.
There is little doubt, however, that it was first practised by the Lombards, and was introduced into England by a Lombard colony, which in the thirteenth century settled in London, and controlled entirely the foreign trade of the kingdom. After the great fire in London, in 1666, the protection hitherto afforded by insurance to ships only was extended to goods and houses; and insurance as a contract of indemnity was subsequently extended to human life.
It is a singular fact that the subject of effecting insurance on lives was largely and excitingly discussed on the continent of Europe before it had attracted the slightest attention in England; yet at this day it prevails throughout Great Britain, while upon the Continent it is comparatively unknown; its operations there being chiefly confined to France, the Netherlands, Germany, and Denmark.
In Holland, as early as 1681, Van Hadden and De Witt produced elaborate works upon the subject, while no publication appeared in England until twenty years after. These writers were followed by Struyck, in 1740, and by Kirseboon, in 1743; while Parcieux, father and son, St. Cyran, and Duvillard, in France, with Euler, Suchmilch, and Wargentin, in Germany, were with great ability pressing the subject upon the notice of their countrymen. But these efforts led to no practical results, and it was reserved for England at a later day to illustrate the principles of life assurance, and enable the public to enjoy extensively its privileges.
Policies of life assurance were issued in England before any companies were organized to prosecute the business. Like marine policies, they were subscribed by one or more individuals; and the first case we find is that of a ship captain, in 1641, whose life had been insured by two persons who had become his bail. The policy was subscribed by individual underwriters, and an able author observes that the case singularly illustrates the connection which probably once existed between life and maritime insurance, and shows how naturally the latter may have sprung from the former.
No business, with the exception, perhaps, of the express system and of photography, has grown in the United States so rapidly as that of life assurance. There is scarcely a State that has not one or more companies organized[Pg 310] for the prosecution of this business. There are six chartered under the laws of Massachusetts, and twenty-six of those organized in other States are doing business in this Commonwealth, These companies had in force, November 1, 1865, 211,537 policies, assuring the sum of $563,396,862.30. In 1830 the New York Life and Trust Company was the only life assurance company in New York. At the close of the year 1865 there were eighteen companies chartered under the laws of that State. They had 101,780 policies in force, assuring the sum of $289,846,316.50, while their gross combined assets reach the sum of $32,296,832.03.
An insurance upon life is defined as "a contract by which the underwriter, for a certain sum proportioned to the age, health, profession, and other circumstances of the person whose life is the object of insurance, engages that that person shall not die within the time limited in the policy; or if he do, that he will pay a sum of money to him in whose favor the policy was granted."
A person desiring to effect an insurance on his life usually procures from the office in which he proposes to insure a blank form, containing a series of interrogatories, all of which must be answered in writing by the applicant. To these answers must be appended the certificate of his usual medical attendant as to his present and general state of health, with a like certificate from an intimate personal friend. The party is then subjected to an examination by the medical examiner of the company, and, if the application is in all respects satisfactory, a policy is issued.
On the death of the party assured, and due proof being made thereof, the company must pay the full sum insured. The time fixed for this payment varies with different companies. Some agree to pay at thirty, some at sixty, and some at ninety days after the proofs of death have been received and duly approved.
The peculiarity of life assurance companies is, that they are required to pay the entire sum assured on the happening of a single event, making the loss a total one; but in fire and marine policies there is a distinction made between total and partial loss.
A clause is usually inserted declaring the policy void in case the assured should fall in a duel, die by the hands of justice, or by his own hand, or while engaged in the violation of any public law. An interesting case in point is reported in the English books. On the 25th of November, 1824, Henry Fauntleroy, a celebrated banker in London, was executed for forgery. The Amicable Society of London, the first company established in England, had written a policy on his life, upon which all the premiums had been paid. The rules of the company declared that in such cases the policy was vitiated, but the clause was not inserted in the instrument. The company resisted payment, but a decision was given sustaining the validity of the contract, which was, however, reversed, on an appeal being made to the House of Lords.
This clause, declaring a policy void in case the assured commits suicide, has given rise to much litigation. Some companies use the word "suicide," while others insert the words "shall die by his own hand"; but the courts of law in various adjudications have considered the expressions as amounting to the same thing. The word "suicide" is not to be found in any English author anterior to the reign of Charles II. Lexicographers trace it to the Latin word suicidum, though that word does not appear in the older Latin dictionaries. It is really derived from two Latin words, se and cædere,—to slay one's self. The great commentator on English law, Sir William Blackstone, defines suicide to be "the act of designedly destroying one's own life. To constitute suicide, the person must be of years of discretion and of sound mind."
In a case submitted to the Supreme Court of the State of New York, Chief-Justice Nelson settled the whole question. A life company resisted payment of the amount specified in their policy, on the ground that the assured had committed suicide by drowning himself in the Hudson River. To this it was replied, that, when he so drowned himself, he was of unsound mind, and wholly unconscious of the act.
Judge Nelson, after stating the question to be whether the act of self-destruction by a man in a fit of insanity can be deemed a death by his own hand within the meaning of the policy, decided that it could not be so considered. That the terms "commit suicide," and "die by his own hand," as used indiscriminately by different companies, express the same idea, and are so understood by writers in this branch of law. That self-destruction by a man bereft of reason can with no more propriety be ascribed to the act of his own hand, than to the deadly instrument that may have been used for the purpose. That the drowning was no more the act of the assured, in the sense of the law, than if he had been impelled by irresistible physical power; and that the company could be no more exempt from payment, than if his death had been occasioned by any uncontrollable means. That suicide involved the deliberate termination of one's existence while in the full possession of the mental faculties. That self-slaughter by an insane man or a lunatic was not suicide within the meaning of the law.
This opinion of Judge Nelson was subsequently affirmed by the Court of Appeals.
The whole current of legal decisions, the suggestions thrown out by learned judges, and the growing opinion that no sane man would be guilty of self-slaughter, have induced several new companies to exclude this proviso from their policies, while many older ones have revised their policies and eliminated the obnoxious clause. It is not that any man contemplates the commission of suicide; but every one feels that, if there should be laid upon him that most fearful of all afflictions, insanity, or if, when suffering from disease, he should, in the frenzy of delirium, put an end to his existence, every principle of equity demands that the faithful payments of years should not be lost to his family.
Another important principle, which has involved much discussion, is, that "the party insuring upon a life must have an interest in the life insured." Great latitude has been given in the construction of the law as to this point; the declaration of a real, subsisting interest being all that is required by the underwriters. In fact, the offices are constantly taking insurances where the interest is upon a contingency which may very shortly be determined, and if the parties choose to continue the policy, bona fide, after the interest ceases, they never meet with any difficulty in recovering. So also offices frequently grant policies upon interests so slender that, although it may be difficult to deny some kind of interest, it is such as a court of law would scarcely recognize. This practice of paying upon policies without raising the question of interest is so general, that it has even been allowed in courts of law.
The great advantages derived from life assurance are proved by its rapid progress, both in Great Britain and the United States, after its principles had once been fully explained. As already stated, the first society for the general assurance of life was the Amicable, founded in 1706; but, most unreasonably, its rates of premium were made uniform for all ages assured; nor was any fixed amount guaranteed in case of death. Hence very little was done; and it was not until 1780 that the business of life assurance may be said to have fairly begun. Since then, companies have been formed from time to time, so that at present there are in Great Britain some two hundred in active operation, and the amount assured upon life is estimated at more than £200,000,000.
In America, the first life-assurance company open to all was the Pennsylvania, established in 1812. And though many others, devoted in whole or in part to this object, were formed in the interim, so little pains was taken to inform the public upon the system, that in 1842 the amount assured probably did not exceed $5,000,000. But, in a Christian country, all material enterprises go swiftly forward, and of late years the progress of life assurance has equalled that of railroads and telegraphs; so that there are in the United States at least fifty companies, which are disbursing in claims, chiefly to widows and orphans, about five millions of dollars annually.
With this large extension of business, the fundamental principles of life assurance are now universally agreed on; but, in carrying them out, there are differences deserving attention.
Life-assurance companies may be divided into three classes,—the stock, the mutual, and the mixed. In the stock company, the management is in the hands of the stockholders, or their agents, with whom the applicant for insurance contracts to pay so much while living, in consideration of a certain sum to be paid to his representatives at his death; and here his connection with it ceases; the profits of the business being divided among the stockholders. In the mutual company the assured themselves receive all the surplus premium or profit. The law of the State of New York passed in 1849 requires that all life-insurance companies organized in the State shall have a capital of at least one hundred thousand dollars. Mutual life-insurance companies organized in that State since 1849 pay only seven per cent on their capital, which their stock by investment may produce. In the mixed companies there are various combinations of the principles peculiar to the other two. They differ from the mutual companies only in the fact that, besides paying the stockholders legal interest, they receive a portion of the profits of the business, which in some cases in this country has caused the capital stock to appreciate in value over three hundred per cent, and in England over five hundred per cent.
To decide which of these is most advantageous to the assured, we must consider the subject of premiums, and understand whence companies derive their surplus, or, as it is sometimes called, the profits. This is easily explained. As the liability to death increases with age, the proper annual premium for assurance would increase with each year of life. But as it is important not to burden age too heavily, and as it is simpler to pay a uniform sum every year, a mean rate is taken,—one too little for old age, but greater than is absolutely necessary to cover the risk in the first years of the assurance. Hence the company receives at first more than it has to pay, and thus accumulates funds to provide for the time when its payments will naturally be in excess of its receipts. Now these funds may be invested so as of themselves to produce an income, and the increase thence derived may, by the magical power of compound interest, reaching through a long series of years, become very large. In forming rates of premium, regard is had to this; but, to gain security in a contract which may extend far into the future, it is prudent to base the calculations on so low a rate of interest that there can be a certainty of obtaining it. The rate adopted is usually three per cent in England, and four or five per cent in this country. But, in point of fact, the American companies now obtain on secure investments six or seven per cent.
Again, in order to cover expenses and provide against possible contingencies, it is common to add to the rates obtained by calculation from correct tables of mortality a certain percentage, called loading, which is usually found more than is necessary, and forms a second source of profit.
Again, most tables of mortality are derived from the experience of whole communities, while all companies now subject applicants to a medical examination, and reject those found diseased; it being possible to discover, through the progress of medical science, even incipient signs of disease. Hence one would expect that among these selected lives the rates of mortality would be less than by ordinary statistics; and this is confirmed by the published experience of many companies. Here we find a third source of profit.
In these three ways, and others incidental to the business, it happens that all corporations managed with ordinary prudence accumulate a much larger capital than is needed for future losses. The advocates of the stock plan contend that, by a low rate of premium, they furnish their assured with a full equivalent for that division of profits which is the special boast of other companies. In a corporation purely mutual, the whole surplus is periodically applied to the benefit of the assured, either by a dividend in cash, or by equitable additions to the amount assured without increase of premium, or by deducting from future premiums, while the amount assured remains the same. The advantages of the latter system must be evident to every one.
It is of course important in all companies, whether mutual or not, that the officers should be men of integrity, sagacity, and financial experience, as well as that due precautions should be taken in the care and investment of the company's fund; and it is now proved by experience in this country, that, when a company is thus managed, so regular are the rates of mortality, so efficient the safeguards derived from the selection of lives, the assumption of low rates of interest, and the loading of premiums, that no company, when once well established, has ever met with disaster. On the other hand, there has been a rapid accretion of funds, in some instances to the amount of many millions of dollars. The characteristics of a good company are security and assurance at cost. It should sell, not policies merely, but assurance; and it should not make a profit for the capitalist out of the widow and orphan.
The policies issued by life companies vary in their form and nature. The ordinary one is called the life policy, by which the company contracts to pay, on the death of the assured, the sum named in the policy, to the person in whose behalf the assurance is made.
In mutual (cash) companies, when the premium has been paid in full for about sixteen years, judging from past experience, the policy-holder may expect that his annual dividend on policy and additions will exceed the annual premium, thus obviating the necessity of further payments to the company, while his policy annually increases in amount for the remainder of life. But, on the contrary, when the dividends have been anticipated, as in the note system, by giving a note for part of the premium, the policy-holder insuring in this way, although he may at first receive a larger policy than he has the ability to pay for in cash, may lose the chief benefit of life insurance. For should he become unable, either by age, disease, or loss of property, to continue the payment of his premiums, his policy must lapse, because there is no accumulation of profits to his credit on which it can be continued.
In other forms of life policies, called "Non-forfeitable," premiums are made payable in "one," "five," or "ten" annual payments. In all cash companies, and in some of the note companies, after the specified number of premiums have been paid, the policy-holder draws an annual dividend in cash.
A further advantage arising from this plan is, that the policy-holder, at any time after two annual payments have been made, is always entitled to a "paid-up" policy for as many "fifths" or "tenths" of the sum assured as he shall have paid annual premiums. For example: a "five-annual-payment policy" for $10,000, on which three premiums had been paid, would entitle the holder to a "paid-up policy" for $6,000; a "ten-annual-payment policy" for $10,000, on which three payments had been made, would entitle the holder to $3,000; and so on for any number of payments and for any amount, in accordance with the face of the policy.
Another form is denominated the Endowment Policy, in which the amount assured is payable when the party attains a certain age, or at death, should he die before reaching that age. This policy is rapidly gaining favor, as it provides for the man himself in old age, or for his family in case of his death. It is also fast becoming a favorite form of investment. We can show instances where the policy-holders have received a surplus above all they have paid to the company, with compound interest at six per cent, and no charge whatever for expenses or cost of insurance meanwhile.
The Term Policy, as its name implies, is issued for a term of one or more years.
Policies are also issued on joint lives, payable at the death of the first of two or more parties named in the policy; and on survivorship, payable to a party named in case he survives another.
Some companies require all premiums to be paid in cash, while others take the note of the assured in part payment. These are denominated cash and note companies, and much difference of opinion exists as to their comparative merits.
The latter is at first sight an attractive system, and its advocates present many specious arguments in its favor. The friends of cash payments, however, contend that the note system is detrimental and delusive, from the fact that these notes are liable to assessment, and, in case of death, to be deducted from the amount assured; also that the notes accumulate as the years roll on, the interest growing annually larger, and the total cash payment consequently heavier, while the actual amount of assurance, that is, the difference between its nominal amount and the sum of the notes, steadily lessens; and thus a provision for one's family gradually changes into a burden upon one's self.
But whatever differences of opinion may exist as to the comparative value of various systems, few will deny the advantages which life assurance has conferred upon the public, especially in America, whose middle classes, ambitiously living up to their income, are rich mostly in their labor and their homesteads,—in their earnings rather than their savings; and whose wealthy classes are rich chiefly through the giddy uncertainties of speculation,—magnificent to-day, in ruins to-morrow. In a country like this, no one can estimate the amount of comfort secured by investment in life assurance. It is the one measure of thrift which remains to atone for our extravagance in living and recklessness in trade.
Henry Ward Beecher spoke wisely when he advised all men to seek life assurance. He says:—
"It is every man's duty to provide for his family. That provision must include its future contingent condition. That provision, in so far as it is material, men ordinarily seek to secure by their own accumulations and investments. But all these are uncertain. The man that is rich to-day, by causes beyond his reach is poor to-morrow. A war in China, a revolution in Europe, a rebellion in America, overrule ten thousand fortunes in every commercial community.
"But in life assurance there are no risks or contingencies. Other investments may fail. A house may burn down. Banks may break; and their stock be worthless. Bonds and mortgages may be seized for debt, and all property or evidences of property may fall into the bottomless gulf of bankruptcy. But money secured to your family by life assurance will go to them without fail or interruption, provided you have used due discretion in the selection of a sound and honorable assurance company. Of two courses, one of which may leave your family destitute, and the other of which assures them a comfortable support at your decease, can there be a doubt which is to be chosen? Can there be a doubt about duty?"