Insurance and Protection

SMITH and Jones, adopting the philosophy of the Vicar of Wakefield, married early and started families, instead of remaining single and writing of population.

Smith is monogamous and happy. He has one wife, three small responsibilities, and an income. His standard of living is as simple as the general pace of the times will bear. The expenses of maintaining it fall well within his spendable income. What shall he do with his savings?

Jones also is monogamous, but not so happy. He, too, has one wife, three small responsibilities, and an income as large as Smith’s, but more worry. His standard of living is a little wabbly from trying to keep up with the rest of the Joneses. Expenditures encroach upon income. How shall he provide for the future?

SMITH, the prudent, buys a twenty-year sinking-fund debenture bond on installments, an interest-bearing promissory note of a corporation, callable at the option of the corporation under conditions, on dates, and at prices named in the indenture.

At the same time Jones buys a policy on installments, also an interest-bearing promissory note, from a reputable life insurance company. The insurance company, in consideration of the payments to be made, binds itself to redeem its promise at the option of the buyer at prices and at times named, and to call it for payment at full face value on satisfactory evidence of death, which the lawyers are pleased to call an ’Act of God.'

Shortly thereafter these transactions leak out, and some of the neighbors fancy they see Smith walk about with his head held a little higher, because he is ‘owning’ a bond: others imagine they see Jones plod along with his shoulders a little more stooped, because he is ‘carrying’ insurance.

The facts are that Smith owes for his bond, while Jones owns his estate. For life insurance is the only plan as yet devised whereby a man can create an estate now, pay for it if he lives, and have his indebtedness on account of it canceled if he dies.

TIME passes. The corporation, one of whose bonds Smith is in the process of buying, prospers. From gross earnings collected from customers it pays all operating expenses, interest on bonds, and sets up a special sinking-fund reserve sufficient to retire, or pay off according to the contract. whatever amount of its bonds good business judgment and conditions may warrant. Besides, it has paid liberal cash dividends to its stockholders and has in addition accumulated a surplus large enough to meet the unforeseen and unforeseeable hazards incident to the conduct of its business.

In the meantime the insurance company, one of whose policies Jones owns, has prospered as well. Out of moneys paid in by Jones and others on their installment contracts, and from income received from investments, it has met all its operating expenses, has laid aside enough, or created a sinking fund large enough, to meet the incalculable calls arising at the option of its living policyholders and the calculable death claims.

Besides, it has been able to return to the policyholders, or give them credit for on their accounts, what il has been calling dividends, but what in reality is a sort of returned overcharge made for safety’s sake. In addition it has built up a handsome surplus against unusual and unpredictable risks.

SMITH and Jones, each as he sees it and to the best of his ability, have met their obligations to their respective families. Each has paid his bond installments and insurance premiums as they have fallen due.

Competence here and estate hereafter are functions of thrift and time — one habit, the other accident. Smith has one, but gambles on the other. Jones develops the one, and eliminates the other.

What happens to Smith’s family depends upon how time treats Smith. That is uncertain. What happens to Jones’s family depends upon what time does to Jones and some sixty-seven million of his fellow policyholders. That is calculable.

Yet there are those who insist on comparing incomparables — as, for instance, a 5 per cent yield on a bond investment with a 3 per cent or a 3,000,000 per cent yield on savings put into life insurance. Then there are others who say that those who insure must die to realize, as if death were not the occasion of all estates.

In the country neighborhoods from which many of us came, most of us can recall some substantial old patriarch who, without the aid of insurance, managed to leave his family an estate of a few thousand dollars. Because of his estate and of his virtues, the community accounted him a success.

But, by comparison, the memory of that man of like virtues who outwits time by the aid of insurance, dies younger, and leaves a like amount to his dependents, is entitled to even higher regard.

Contrast Smith and Jones under like circumstances. One eventful day the corporation called its bonds and paid Smith what was due him under the contract.

Jones, measuring the equity he had built into his insurance policy, its cash surrender value, against Smith’s money, found it short by a few hundred dollars and died of the shock, forgetful, it is believed, of the protection he had enjoyed.

Smith, unmindful of the risk he had run, and puffed up by vanity at seeming victory, died of overjoy.

Thus they were gathered to their fathers. And verily each had his reward: Smith left what he had saved, Jones what he had saved and what he might have saved if he had lived.

INSURANCE deals with a continuous group and therefore conquers time. Smith refused the help of its omnipotence. His family paid the price of self-sufficient folly. Jones accepted its help and projected his earning power beyond his power to earn. His family reaped the reward of humble wisdom.