What Is Life Insurance?

This department is designed to help readers to a better understanding of the general business conditions which affect their investments. It is obviously impossible to give advice as to specific investments.

by HOWARD DOUGLAS DOZIER

SOME of those who read these lines will recall the time when life insurance was looked upon only as a racket whereby live widows could convert dead husbands into quick assets. The itinerant life-insurance salesman and the vagabond patent-medicine vendor were of the same cloth and cut by the same pattern. Each was accorded a like degree of popular esteem — and a low degree of esteem it was, too. Of late years the insurance salesman has gone professional. Life insurance itself, however, remains as it always has been, the most scientific and the most altruistic in objective of all branches of business — and still a mystery to many.

A regular reader of the Financial Counselor, who says that he buys his insurance on faith rather than on knowledge, regrets that he cannot keep his insurance advisor off technicalities long enough to talk rudiments. He asks the writer, though a layman who may know little of insurance, to try to explain that little to a fellow layman who knows even less. With thanks for the compliment and permission to make one preliminary observation, I shall try.

Ruthless though life insurance seems, and heartless, yet it is beneficence itself. It seems cruel only because for actuarial purposes it has to reduce sentient human beings to the level of mathematical animal nonentities. In reality ii is most kindly in that it is a way, and the only way 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. It extends men’s earning power beyond their power to earn.

Just how does it bring all this to pass?

For convenience’ sake and by way of illustration, let a thousand of us organize the Thirty-Year-Old Club, a prerequisite to membership in which shall be that the applicant shall never have heard the two words ‘life insurance.’ Let nine hundred and ninety-nine readers and the writer — all hale, hearty, virile, happily married thirtyyear-old males — become suddenly fired with the laudable desire to leave the widow of each a thousand dollars when he dies. The natural impulse, as is always the case in coöperative enterprises, is to levy an assessment, take up a collection. We as husbands prefer to pass the hat among ourselves in behalf of our prospective widows rather than leave it for somebody else to do later in behalf of our real ones.

At the very outset two immediate and pressing questions have to be answered and certain basic information has to be obtained. The first question is how much money it will take to carry through to completion our objective. This is not too difficult for our least versatile member. He can multiply one thousand dollars by one thousand widows and reach the conclusion that it will take a round million to do the job. The second is whether it will be better to raise this thousand dollars every time somebody dies or to collect it by equal annual dues from all surviving members. The former method is obviously so impracticable that the second is adopted without dissent. Here matters come to a standstill. Not a single member in the thousand knows what the dues will have to be or where or how to find out.

Somebody suggests Washington as a possible source of information and moves the appointment of a committee on investigation. The chairman goes to Washington, shops around among the various government departments, and, after being shunted from one to another, finds a lone woman in the Department of Commerce who has all the facts necessary for the determination of the amount of the dues and knows more about vital statistics than anybody else in the government service, and quite as much as anyone anywhere else.

She tells him that during the year 1936 four and thirteen-hundredths members — but not which ones — will die. She tells him how many will die in each succeeding year until all are gone except one lone threequarters of a member a hundred and five years old with half a year yet to live in 2011.

The chairman reports the facts. The committee makes its calculations and reports that the club is going to do 37,541 man-years of living. This is the life span of each member set end to end. Now, by spreading the needed million dollars over the 37,541 years of living, it is ascertained that the dues tentatively agreed upon will have to be $26.64 per survivor per year. This is the figure which no member knew how to get at. This is progress, but not the end.

When will the dues have to be paid? The answer to this is not difficult. The minute the club effects its formal organization all members are alive, but a second later one may die from overjoy at his new-found sense of security and thus leave a widow entitled to receive a thousand dollars. Each sees that dues will have to be paid in advance and orders his affairs accordingly. No sooner are these questions settled than another matter bobs up.

Won’t there always be money in the treasury, and if so how much, and what is to be done with it ? Yes, there will be, and for this reason. One thousand dues in 1936 at $26.64 each will bring in $26,640: four and thirteenhundredths widows will each take out $1000, or $4130, the first year. The difference between income and outgo is $22,510 in favor of income. For a considerable number of years thereafter the amount collected from dues will exceed the outgo, and there will be a gradual though progressively retarded growth in surplus. Eventually a year will come in which income and outgo will be in balance. Thereafter outgo to widows will exceed income from surviving members, and the annual deficit will have to be made good by drawing down surplus. But all the way from organization to dissolution the treasury will have a surplus, an increasing amount in the earlier years, a decreasing amount in the later, until the last one thousand dollars goes to the last widow. This surplus, of course, can be invested, and the annual interest used to reduce annual dues.

During the year 1936 the affairs of the Thirty-Year-Old Club leaked out, caused a deal of talk, and produced imitators. A Thirty-One-Year-Old Club was formed to begin with January 1, 1937. Its membership was equal and its objectives the same as those of its forerunner, but its experience was less. Its president had not been to Washington. It suggested consolidation on the same footing and payment of the same dues, but was turned down. Inasmuch as its membership was thirty-one years old already, it would have a thousand less man-years in which to do the same job. Its dues would have to be higher — $27.37, ascertained by spreading a million dollars over 36,541 manyears of living. Its members got the point, hastened to modify their proposition as to dues, and were received.

This age-club idea spread like wildfire, and those of all ages up to sixty-five formed themselves into like groups. Nor did the excitement abate with the pissing of time. Members of the earlier clubs continued their affiliation with these and in addition joined others as they grew older, paying, of course, the higher dues that were necessary. This interclub relationship became so complex that almost all members belonged to all clubs. Consolidation under suitable rules was a mere formality. Surpluses were merged and invested, and the interest received used to cut down the dues for everybody or to pay dividends, which amounted to the same thing. An organization was set up to administer the joint interests. And finally the state was induced to appoint an inspector to supervise activities.

Now if the layman for whom these paragraphs are written will go back through them and substitute policyholder for husband or member, estate or beneficiary for widow, premiums for dues, reserve for surplus, insurance company for organization, and state insurance commissioner for inspector, he will have a story of the evolution of life insurance as an insurance man, and not a layman, tells it.