Committee on Economic Security (CES)
Volume VI. Social Insurance
D. Insurance, Savings and Income
By
Ralph B. Harris
Survey of Report
To What Extent Does Life Insurance Function as a Savings Institution to
Meet Need for Security?
Ordinary Insurance - Year 1929 to 1933.
An average of 245,815 policies were paid each year as death claims with
an average payment of $2,583 per policy. This amount, however, is quite
materially more than the average policyholder received, due to the effect
of the large policy claims on the average amount paid.
The companies paid maturing policies averaging 88,550 per year, for the
period for an average amount of $1,066 each, which average amount is also
affected by the policies for larger amounts.
Policies given up by policyholders during the period reflected the most
meager results for the holders, these terminated policies averaging 4,198,944
per year for an average face value of $8,064,835,845 but on which the
total realized value to the policyholder averaged only $562,576,026 per
year, or a little less than 7%, with an average return per policy of only
$171. The surrendering of insurance by large holders, in times of financial
strain, to protect other investments undoubtedly makes the return per
average policy appear larger than it really is. It also is a logical explanation
for the average in 1929 of $151, being materially greater than it was
for 1930 of $127.
Industrial Insurance - Years 1929 to 1933.
Results produced here show up as follows:
Average death claims paid probably not over $185.
Average matured policy claims paid probably not over $100.
Policies dropped and sold back to the companies constituted by far the
largest item, from the standpoint of the number of policies involved and
the least to the average policy holder.
An average of 19,033,002 policies given up during period for average face
value of $4,327,536,978, on which companies paid an average face value
of $375,659,474 per year or an average per policy of only $19. The average
amount paid by the companies each year constituted only 8% of the fact
value of the policies. However, whereas only about one-fourth of the policies
in the Ordinary branch were of the higher premium endowment type, nearly
seven-ninths of Industrial Insurance is of this type. This means that
the industrial policyholder paid, much more in proportion to what he realized
from the policies.
Policy Loans, 1929-1933.
Data on policy loans is more limited and less specific than any data covered.
All companies keep their records by policies and not by individual policyholders.
Facts concerning loans are reported in total volume, with no established
reference to purpose and without reporting number of loans made each year
of total outstanding.
A limited picture was obtained from the home offices of five companies--the
facts submitted being confidential--and some trends are possible from
this data.
The contractual right to borrow money on policies is contained only in
the Ordinary branch of the business. Loans made during the period showed
a steady increase each year until 1933 when a marked decrease occurred,
the yearly increase averaging approximately $475,000,000 to 1933, when
there was a decrease for the year in loans outstanding of $36,000.000.
Thirty percent or more of the loans are thought to have been for paying
premiums. One reporting company showed a steady increase for surrendered
policies in percentage of cash and loan values having been already borrowed
before surrender, with only 8% paid in cash in 1933.
To What Extent Does Life Insurance Function as a Savings Institution to
Meet Need for Security?
The question of the extent to which the institution of commercial life
insurance meets the need for individual savings to provide personal and
family security is one of which the public has little or no conception.
The whole subject of life insurance, to say nothing of the true significance
of the provisions of various types of policies, seems to have been one
which the public has been unwilling to study and too indifferent to think
about.
The two types of insurance, Ordinary and Industrial, need to be studied
separately because of the differences in the contracts and also the methods
of selling each.
In a previous report, entitled: "Trend of Savings Through Life Insurance,"
there was shown the extent to which the public is making new investments
in insurance as well as continuing to carry insurance policies purchased
in previous years. Here, covering the same period, will be considered
the main results obtained by policyholders under the main contract provisions
of their policies, namely: (1) The amounts paid to the estates or families
of policyholders who die (death claims paid); (2) The amounts paid to
the policyholders themselves under the policies that contract for such
payments at the end of specific periods, (matured policies paid); and
(3) The amounts paid to the policyholders themselves who, for various
reasons, give up their policies, (policies lapsed, surrendered and purchased).
The matter of borrowing on policies will be treated separately from the
points mentioned above because of several aspects of the problem of policy
loans. In the first place, borrowing affects only the Ordinary Insurance
field, as Industrial Insurance policies have no "Loan Provision,"
the policies being too small to make practicable amounts available for
loans. Agin, a loan is merely an advance by the company of a portion (up
to 100%, less interest) of what the policyholder could take in cash if
desired. General practice, by companies, causes a duplication of figures
in connection with surrenders as they treat the loan as repaid and the
full value paid as a surrender. Since there is no compulsion on the policy
holder to repay a policy loan, this type of borrowing is extremely slow
in repayment and is one of the most important causes for subsequent dropping
insurance.
Ordinary Insurance - Death Claims Paid.
Since no general figures are available showing the length of time policies
had been in force when they were paid as death claims, or what type of
policies they were, considerable conjecture is necessary. However, certain
interesting facts are evidenced over the period 1929 to 1932, as shown
by the accompanying Table II and by Table I in the report referred to
above:
(a) Whereas the average size of new insurance purchased annually varied,
during the period between a high of $2439 in 1929, to a low of $1678 in
1933 showing a steady decline throughout the period-the average death
claim paid, during the same period, increased in amount through 1931 and
then receded each year for the years 1932 and 1933. Year by year during
the period, the average death claim paid, for both 1929 and 1930, was
somewhat smaller than the average of new insurance purchased in corresponding
year. In 1931, however, whereas the average size of new insurance was
only $2160, the average death claim was the largest of any year, being
$2827, showing a marked increase over the previous year.
(b) Two conclusions are justifiable, namely, a material increase in death
claims among the buyers of larger policy amounts, and second, death claims
among the policyholders who had purchased their policies more recently.
Suicide, as is usually the case, undoubtedly played its usual part in
this experience. The decline in size of the average policy in 1932 and
1933 can probably be explained by a return toward a more normal mortality
experience although it remained materially above the average size of policies
in force at the end of the respective years. This definitely indicates
that the mortality experience was continuing heavy among the larger policyholders.
(c) After allowing for the distortion in the average amount of insurance
protection carried --caused by the larger volume buyers, it is apparent
that "death claims paid" by life insurance companies afford
only very small support for those dependent upon the earnings of the deceased
policyholders.
Matured Policies.
In considering security provided by this branch of payments, it is well
to emphasize the fact that these payments arise from policies which offer
the greatest percentage of the "savings" and the smallest percentage
of the "protection" element, as, under the terms of these policies,
the issuing company agrees "to pay the face of the policy to whom-so-ever
the insured directs in case he should die before the end of a designated
period, or to pay the vace value to the insured in case he is still living
at the end of said period."
The increased cost of this "savings" feature is indicated by
the smaller average payment by the companies when compared either to the
average size of policies in force during the years shown or to the average
size of death claims paid, which latter includes also whole life and term
policies.
Here again, the average does not reflect the size of the average policy
holder's benefit, due to the effect of the buyers of large policies. However,
after due allowance for this fact, the inadequacy of this form of saving,
in meeting need for security is apparent from the company payments during
the years under consideration, as the average payment is, at best, sufficient
to carry on for only a year or two.
When considered in connection with the total number of insurance policies
carried, as indicated both by the number paid as death claims and the
total in force at the end of each year, it will be realized that such
endowment policies represent but a small portion of the total number in
which the public is investing. The average amount of endowment insurance
purchased varies, according to published figures, between one-fifth and
one-third of the other types. In most cases, the cost of endowment insurance
prohibits the average buyer from carrying any unreasonable amuont.
For the individual who fails to continue to carry the policies he has
purchased, the results of life insurance buying shows the most discouraging
picture. Small as the results are for the average of other policyholders,
they loom large by comparison with results of this type of company payments.
Table I of the preceding report, refereed to above, shows the average
annual payment into new insurance purchased is from$34 to $55. Under the
terms of the policies, there is no cash value until the end of two or
three years and even then it is negligible for several years thereafter--in
comparison with the annual payment by the policyholder--because of surrender
charges, as well as the basic principles on which life insurance is operated.
Therefore, it is evident that the average paid by the companies on policies
in this group represents a return of only a small part of what has been
paid to them by the policyholders. From a "savings" standpoint,
therefore, this huge number of "lost" policies represent negative
savings to the buyers of these policies.
This loss is further illustrated by a comparison of the face value of
these policies and the aggregate paid by the companies to the policyholders.
In 1929 the aggregate paid was only 4% of the face value of the policies
and in 1933 it was a little less than 10%. This would indicate two things:
that the policies purchased most recently are the first to be sacrificed
and that the respective loss to the insured is greatest thereby because
he has not had time to receive a material period of protection but he
has borne a heavy portion of the company's cost of putting this insurance
on their books.
Industrial Insurance
A study of this type of the insurance business discloses the operation
of the same principles as those described for the ordinary type, except
that the benefits to the policyholder are even smaller. This is due to
the fact that this type of insurance involves overhead costs that are
such greater in proportion to the volume of business produced and maintained
by the companies.
Reliable figures are not available on numbers of policies and amounts
paid by the companies for death claims and matured policies for the years
1929 and 1930. However, it is reasonable safe to assume that the average
paid was not larger, if as large as for 1931. The presumption is that
the average death claim for those years was $170 to $175 and the average
matured policy was $95 to $100.
Death Claims and Matured Policies Paid.
During the years 1929 to 1933, the average annual payment for new industrial
insurance purchased was approximately $5 and the average industrial policy
in force ranged from $200 in 1929 to $208 in 1933, with the largest average
policy purchased during these years being $208 in 1933.
For both death claims paid and matured policies paid, as shown by accompanying
table III, the hopeless inadequacy of industrial insurance in providing
any real security, either to the insureds' dependents or to himself is
immediately apparent. The extra cost of the endowment policies is undoubtedly
responsible for the smaller average size of the policies.
Policies Lapsed, Surrendered and Purchased.
It is in this aspect of the industrial insurance business that the results
obtained by the policyholders subjects the companies to the gravest criticism.
Industrial policies generally entitle the policyholder to no cash return,
in case of termination, until they have been in force for ten years. The
buyers of this class of insurance are woefully ignorant of the contract
provisions and are peculiarly susceptible to "high pressure"
salesmanship. It is little wonder that so much of what is bought fails
to stay in force long enough to build any appreciable surrender values.
As is the case with ordinary Insurance, only to an exaggerated extent,
this portion of Industrial Insurance represents a negative method of savings.
Because it carries no loan provisions, it does not offer even this very
limited advantage to the buyer, who, he wants to realize any cash from
his policy must "sell" it back to the issuing company. Thus
he at once loses the protection value of the very wide margin between
the face value and the cash value of the policy which he must have been
paying on for many years.
Policy Loans.
As explained on pages 1 and 2 of this report, borrowing money on the security
of policies is possible only in Ordinary insurance. The only possibility
of placing a lien of any kind against an Industrial policy is as follows.
In case a policyholder drops a policy and later wishes to reinstate it,
but lacks the case necessary to pay the back premium, companies generally
take care of it by means of a special lien note, signed by the policyholder,
covering the amount required to reinstate the policy, but they will advance
no cash. Even this is but a matter of practice and is not a provision
of the policies. In table IV, such advances on industrial insurance are
included with the reported figures under "companies writing both
Ordinary and Industrial Business" but such advances are reported
to constitute less than 1%. All of the balance in this column covers loans
on Ordinary policies.
Loans to policyholders must be considered under two heads: (1) Premium
notes and (2) loans to policyholders.
Under premium notes, various companies include different items so that
table IV, showing aggregates for all companies, reflects mixed practice.
Apparently the item may include: (a) Notes given in settlement for first
year--or even subsequent --premiums but before the policies have a cash
and loan value; (b) Notes given for premiums after policies have cash
and loan values, but under which certain formalities of regular policy
loans are dispersed with; (c) premium advances under an "automatic
premium loan" provision contained in some companies' policies, but
which require no separate note to be signed to cover the advance.
Item (a) has no security behind it--other than in case of death of the
policyholder before the note is paid--to protect the companies accepting
such notes, except the required endorsement of the selling agent or his
general agent. It is a practice which is not general among companies and
one which is very debatable from several practical standpoints. Probably
most important, in the interest of the public, is the danger of such a
practice stimulating sales to people who are not financially able to carry
additional policies.
Items (b) and (c) both have policies as the direct security behind them.
They are made available as both a convenience and an additional protection
to policyholders. They are governed and limited by the same laws that
regulate regular policy loans.
Prior to 1931 the figures for premium notes and loans to policyholders
were not tabulated separately in aggregate tables. The figures for 1931-2
and -3 in table IV, however, show the general relationship as well as
trend of the two headings.
Loans to policy holders, under which the policies themselves constitute
the sole security for the loans, and which are carefully governed by state
laws, are by far the most important loans to be considered. The bulk of
such loans are made by means of specially worded loan agreements, which
must be properly signed by the individual policyholder and any other parties
holding a legal interest in the policy.
The aggregate service rendered by insurance companies, when measure by
volume of loans made, is impressive. However, the average benefit to the
individual can not be large because of the small average holdings and
the low limit of available borrowing power within the policy as regulated
by law. Legally no company "can loan on a policy amounts which in
the aggregate, together with interest to the next anniversary of the policy,
exceed the cash and loan value of the policy on such anniversary."
The average amount paid per policy as shown in table II for policies lapsed,
surrendered and purchased, indicates, as closely as available figures
permit, the maximum loan privileges of the average policyholder.
The specific experience with policy loans of five large companies, chosen
to secure a territorial sample, has been secured and studied. The detailed
facts furnished by these companies were given confidentially so the names
of the companies or their specific experiences can not be embodied in
this report. However, certain definite trends are indicated and some specific
conclusions can be drawn from this material.
Borrowing on policies showed a marked increase each year over the previous
year, throughout the entire period, until 1933. In this year there was
a decided curtailment in both number and amount of new loans as well as
in total loans outstanding.
From the rather meager facts presented, only between 30% and 40% of all
policyholders borrowed on their policies. Only one company's figures could
be calculated year by year. In this case the percentage of policyholders
who borrowed on their policies showed a steady increase each year throughout
the entire period, increasing 13% from 1928 to 1933 inclusive.
Of those borrowing on their policies, it appears that from 40% to 60%
of loans on policies are made to pay premiums. This can be but a very
broad estimate, because there is no way of a company knowing the real
purpose of many loans that are made as straight policy loans.
Only one company reported facts in connection with the extent to which
policyholders had borrowed on their policies before surrendering them.
This experience showed a steady increase over the period until in 1933
the surrenders showed that the policyholders had, prior to the time of
giving up their policies, already borrowed up to 92% of their cash values.
This would indicate that loans constitute a serious cause for ultimate
surrender and lapsed policies. (Table II), is a very questionable means
of savings.
The history of life insurance companies in the United States leaves no
question of doubt as to their safety as a depository of funds and as a
protection against premature death. The institution is rendering a valuable
service to thousands who could not create equivalent estates in any other
way. However, commercial companies have not reached sufficient people
in sufficient volume to meet the need for real security. Many causes must
be considered in explaining the limited results obtained up to the present
time, and most of the causes which have been brought forward have been
attacked vigorously as being both unsound in theory and ill-advised from
a practical standpoint.
Table III. PRINCIPLE CONTRACT PAYMENTS TO POLICYHOLDERS ---ORDINARY INSURANCE
Death Claims Paid Matured Policies Paid Policies: Lapsed, Surrendered
& Purchased
Year Number
of
Policies Amount
Paid-$ Average Paid per Policy-$ Number of
Policies Amount
Paid-$ Average
Paid per
Policy-$ Number
of
Policies Face Value of
Insurance-$ Amount
Paid-$ Average
Paid per Family
1929 230,189 508,940,981 2,211 72,460 55,644,476 768 2,315,386 8,540,001,525
8,540,001,52
(1)
1930 236,621 542,530,184 2,293 85,544 97,867,386 1,144 2,863,317 6,556,064,347
363,649,967 127
1931 253,520 732,127,630 2,827 90,744 106,835,526 1,177 3,253,232 7,656,853,359
504,130,709 155
1932 257,036 723,375,305 2,814 96,835 110,118,430 1,137 3,954,693 9,360,193,591
783,529,953 198
1933 251,712 697,532,406 2,771 97,149 107,501,709 1,106 3,608,092 8,211,066,406
81x,610,824 225
(1) Source - Letter from Spectator Co. with table.
Source: Spectator Year Books - Life Insurance
Table III. PRINCIPLE CONTRACT PAYMENTS TO POLICYHOLDERS ---INDUSTRIAL
INSURANCE
Death Claims Paid Matured Policies Paid Policies: Lapsed, Surrendered
& Purchased
Year Number
of
Policies Amount
Paid-$ Average Paid per Policy-$ Number of
Policies Amount
Paid-$ Average
Paid per
Policy-$ Number
of
Policies Face Value of
Insurance-$ Amount
Paid-$ Average
Paid per Family
1929 873,712 298,857,959 342 139,181 53,119,002 382 14,114,076 3,160,106,896
164,246,658 12
(1) (1) (1)
1930 892,911 157,571,803 176 131,202 12,080,688 97 17,677,688 4,101,178,843
250,573,036 14
1931 842,919 159,079,409 188 125,812 12,875,499 102 19,308,347 4,411,782,844
356,492,414 18
1932 803,474 153,775,277 191 130,768 13,058,611 99 23,885,812 5,449,609,724
562,583,289 24
1933 772,539 148,863,402 192 128,145 13,082,513 102 20,179,089 4,515,006,585
544,001,976 27
(1) Source - Letter from Spectator Co. with table.
Source: Spectator Year Books - Life Insurance 1930 to 1934
LOANS TO POLICYHOLDERS
Table IV.
Year Type of Advance Companies Writing only
Ordinary Premiums
(a) Companies Writing both
Ordinary and Industrial
Business
(b) Total
1929 Premium Notes and Loans $1,873,970,141. $505,390,246. 2,379,360,387.
1930 " " " ‘ 2,197,041,156. 609,971,039. 2,807,012,195.
1931 Premium Notes 108,202,047. 8,653,788. 116,855,835.
Loans to Policyholders 2,524,768,270. 727,522,440. 3,252,290,710.
Total 2,632,970,317. 736,176,228. 3,369,146,545.
1932 Premium Notes 123,400,252 15,781,704. 139,181,956.
Loans to Policyholders 2,805,816.790. 860,753,217. 3,666,570,007.
Total 2,929,217,042. 876,534,921. 3,805,751,963.
1933 Premium Notes 142,393,842. 25,592,263. 167,986,105.
Loans to Policyholders 2,700,495,905. 900,874,177. 3,601,370,082.
Total 2,842,889,747. 926,446,440. 3,769,336,187.
Number of reporting companies in above figures, (a) and (b):
1929- (a) 285; (b) 68. 1930-(a) 283; (b) 69. 1931-(a) 274; (b) 69. 1932-(a)
260; (b) 68.
1933-(a) 252; (b) 66.
Source: Spectator Co. Year Books - Life Insurance, 1930 to 1934 inclusive.
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