as a clear gain, while as regards those unfortunate few who suffer a total loss the extra sum collected would prove woefully inadequate to indemnify the value destroyed. But let us now assume that these 5,000 house-owners can combine their risks into a group. By doing this they can substitute for the great uncertainty of loss which confronted them as individuals a certain definitely known loss, amounting on the average to $50 per house and $250,000 for the group. This sum plus a proper addition for expenses, contingencies and reasonable profit, is all that the company needs to charge in order absolutely to secure these owners against the risk of loss by fire. "The risk that an insurance company carries is far less than the sum of the risks of the insured, and as the size of the company increases the disproportion becomes greater."

"9

Now just as each house-owner was enabled to use fire insurance to substitute certainty for uncertainty at the lowest possible cost, so it is also possible through life insurance to hedge against the uncertainty of life by providing for the payment of a definite sum of money at death, whenever that may occur, to replace the economic value of the deceased individual. From a family and business standpoint nearly all lives possess an economic value which may at any time be snuffed out by death, and it is as reasonable to insure against the loss of this value as it is to protect oneself against the loss of property. In the absence of insurance we saw that propertyowners could at best practice only some form of self-insurance, and that it was impossible for them to effect any arrangement which would give absolute certainty. Similarly, in the absence of a system of life insurance which makes possible the application of the law of average, no arrangement can be found which will render certain the indemnification of the value of a human life lost through death. The practice of saving such a sum in anticipation of probable death by no means takes the place of insurance as an agency in substituting certainty for uncertainty, because saving requires time and

9 WILLETT, ALLAN H., The Economic Theory of Risk and Insurance, 108,

death may occur before the savings fund has reached an appreciable size. Unlike the practice of saving, a life-insurance policy means certainty because it guarantees a definite estate from the moment the first premium is paid. Moreover, it furnishes this element of certainty to the public at the lowest possible cost since the companies are enabled through the combination of many risks to determine the exact average cost of the protection for the entire group. From the company's point of view we have seen that life insurance is essentially non-speculative; in fact, probably no other business operates with greater certainty. But it is equally important to remember that from the insured's point of view life insurance is also the antithesis of gambling. Nothing is more uncertain than life, and life insurance offers the only sure method of changing that uncertainty into certainty. Failure of the head of a family to insure his life against the sudden loss of his value through death amounts to gambling with the greatest of all chances, and the gamble is a particularly mean one since in case of loss the dependent family and not the gambler must suffer the consequences.

BIBLIOGRAPHY

DAWSON, MILES M., The Business of Life Insurance. New York, 1911, chap. 1.

Elements of Life Insurance. New York, 1911,

chap. 1. HOLCOMBE, JOHN M., "Economical Function of Life Insurance With Relation to the Family," Yale Insurance Lectures, i, 26-38.

"Definition of an Insurance Policy and Observations on Insurance History," Yale Insurance Lectures, i, 9-25. MOIR, HENRY, Life Assurance Primer. New York, 1907, chap. 1. WILLETT, ALLAN H., Economic Theory of Risk and Insurance. New York, 1901, chaps. 1, 6, 7.

CHAPTER II

FAMILY AND PERSONAL USES OF LIFE INSURANCE

The primary purpose of life insurance is the protection of the family. Every family is dependent for subsistence upon an income which necessarily varies in amount with the particular circumstances surrounding its case. In some instances this income is obtained from the return on invested funds which have been accumulated or inherited, but in the overwhelming majority of cases the subsistence of the family depends upon the current earnings of the husband. He is the breadwinner who has definitely assumed responsibility for the support of those dependent upon him, and his wife and children have a right to look to him for adequate maintenance. His life has a value (and the same is also often true of the mother or son) to the dependent members of the family, and it is this value of one life in its relation to another that justifies the existence of life insurance. If a man owns a house or other destructible property he usually allows little time to pass before insuring it in some fire-insurance company. Yet why consider the value of property as more important than the value of the life of the owner, when in the great majority of instances the value of the latter to the family exceeds that of the former? Moreover, the property may never burn or be otherwise destroyed, since it appears that only about one fire occurs to every one hundred and seventy-five fire policies, while death is certain to happen. As Benjamin Franklin aptly stated: "A policy of life insurance is the oldest and safest mode of making certain provision for one's family. It is a strange anomaly that men should be careful to insure their houses, their ships, their merchandise, and yet neglect to insure their lives, surely the most important of all to their families, and more subject to loss."

Capitalization of the Value of a Human Life and Indemnification of That Value.- Recognizing the value of a human life from both the family and the business standpoint (the two being nearly always closely interrelated), it should next be noted that life insurance constitutes the only safe method of indemnification against the loss of that value through death. Briefly stated, life insurance makes possible the capitalization of that value. By furnishing this capitalized value in the event of death, life insurance may be said to perpetuate the earning capacity of the life for the benefit of those dependent upon it. Through experience and toil the human life may be constantly growing more valuable, the dependent family in the meantime becoming more and more accustomed to a higher standard of living, and suddenly this entire value may be swept away by death. Unless some substitute some sort of hedge can be found there will be nothing to take the place of the economic value of the deceased. Life insurance constitutes such a hedge and it should be the purpose of every man who has assumed family obligations to take out such an amount of insurance to capitalize himself to such an extent - that the principal if put out at the current rate of interest will yield an income equivalent to from one-third to one-half of his earning capacity during life. Nearly all other values are being capitalized in this modern age, and it is entirely proper, in fact essential, that the value of a human life should also be capitalized.

This naturally brings up the question as to how much lifeinsurance protection should be taken out for dependents. While this is a practical question opinions differ greatly and everyone must answer the question according to his opportunities and obligations. One rule which has been frequently advanced, and which assumes that there should be a continuance to the family of at least one-half of the current income earned by the insured at the time of death, is to the effect that "A man's life insurance should be large enough, when invested at the current rate of interest, to produce an income half as large as he earned while living.” Others try

to arrive at some rough answer to this question by ascertaining the principal which ought to pass upon death to the family of the insured in order to purchase an "income equal to the insured's probable earnings should he survive." Assuming that a $500 income is under consideration, the following table will serve to indicate the present value, at 4 per cent. interest, of such an income during the expectancy of life at various ages, according to the American Experience table of mortality. Thus, as the management of one company states: "At age 30, a sum of $9,332, computed at 4 per cent. interest, or of $8,187, computed at 5 per cent., would be required to produce an income of $500 per annum for thirty-five years, which is the life expectancy of a person aged 30, and an insurance of $9,332, or of $8,187, according to the rate of interest, would be required to indemnify his family fully for the loss of $500 income which would be occasioned by his death thirty-five years in advance of his expectancy." If an income of $1,000 per annum were under consideration the amount of insurance would be twice that indicated.

The Duty to Insure. Since life insurance furnishes the surest method of hedging the family against the uncertainty of life, it is essential that all who have assumed family obligations should use it as a means of protecting dependents against the want that may be occasioned by an untimely death. The capitalization of the value of a human life for the benefit of the household depending upon it is a fundamental duty that