with the result that much of their insurance in force was maintained by thus temporarily assisting their policyholders. Not to grant loans in times of financial distress, and at the same time offer cash surrender values, may cause the surrender of many policies in order to realize much needed cash. For many persons, therefore, the policy loan is the means not only of preventing the loss of their insurance but also of temporarily protecting the family from want. Furthermore, the loan privilege has frequently served a very useful purpose in enabling business men to realize additional cash at a time, especially in the midst of a panic, when it is impossible for bankers to meet their requirements. It is at such times, as we have seen, that the loan value of life-insurance policies is a real asset which enhances the credit of the business man because it is available on demand, irrespective of the conditions which may prevail, and usually at the fixed rate of 5 or 6 per cent." In fact, the extent to which policy loans were obtained during the panic of 1907 demonstrated their usefulness as a means of helping in time of need to such an extent as to raise prominently the question whether it is not advisable for lifeinsurance companies to follow the practice of savings banks in protecting themselves against a possible run at a time when interest rates are excessive and when it is impossible, except at a great sacrifice in values, to realize upon their securities. It is for this reason that many companies have in recent years reserved the right to defer the making of policy loans, except for the purpose of paying renewal premiums, for a period of from sixty to ninety days.

Extent of Policy Loans and the Relation of Such Loans to Lapses and Surrenders.— While the loan privilege frequently serves as a means of maintaining policies which would otherwise be surrendered, or at times fulfils a real business need, it is also true that the privilege is grossly abused by many for purposes that should never be allowed to endanger the protection which it is the function of life insurance to af7 See pages 40 to 42 of this volume.

ford. Owing largely to the emphasis placed by companies and their agents upon liberal loan values as an inducement to sell insurance, a large element in the insuring public has come to regard the value of policies as little more than an accumulation of deposits to be obtained by way of surrender or a loan upon the slightest provocation. With many, borrowing on policies has become a habit. This conclusion seems warranted by a consideration of the enormous increase of such loans in recent years. Whereas the percentage of policy loans and premium notes amounted to 3.32 per cent. of the total reserves of the various companies reported in the Insurance Year Book for the year 1888, that percentage has increased to 16.9 per cent. during the year 1913. At present policy loans for 260 companies aggregate $657,994,947 as compared with a total reserve value of policies in these companies of $3,903,615,175. Between 1903-1913 the policy loans of these companies increased 313 per cent. as compared with an increase of only 106 per cent. in total admitted assets and 73 per cent. in total insurance in force, i.e. policy loans increased nearly three times as fast as assets and about four and one-half times as fast as the volume of insurance. During the last four years of this decade the increase in such loans amounted to approximately $212,000,000, or over 20 per cent. of the increase in admitted assets and nearly 31.4 per cent. of the increase in the reserve value of policies during the same four years.

This alarming increase in the volume of policy loans furnishes ample evidence of the careless manner in which many mortgage the monetary value of their policies for purposes of speculation or needless expenditures. To again quote Mr. A. E. Childs: “The very people who are living up to and even beyond their incomes, depending upon their insurance for the future protection of their families, are the very people who are mortgaging their insurance just as soon as the deposits are large enough to satisfy some of their more expensive desires. They either forget the original purpose for which they took the insurance or they allow their selfish desires for temporary enjoyment to outweigh their appreciation

of the necessity for providing for the future." 8 Too frequently policyholders effect loans on their policies simply because they are so easily obtained, never appreciating at the time the vital relation of life insurance to the beneficiary and often neglecting some other available asset which should have been selected in preference to the cash value of the policy. It should again be stated that the fundamental purpose of life insurance is protection to the family. When once acquired, therefore, it is essential that life insurance be conserved, and in this connection it is highly important to bear in mind that the great majority of such loans are never repaid and that the policy lapses upon failure to make such repayment. As previously stated, "Life insurance should be regarded as a sacred possession to be mortgaged only in case of extreme necessity. Borrowing on the policy depreciates its value and defeats the original purpose it was intended to serve. If not actually necessary, borrowing on a policy is an act of flagrant injustice to the beneficiary."

Much has been written of late to stem the tide against increasing policy loans, and many companies have attempted in recent years to check the abuse by raising the interest rate from 5 to 6 per cent. and by reserving the right to defer such loans for sixty or ninety days. The difficulty involved, however, is a deeper one, namely, the failure on the part of the insuring public to understand the fundamental purpose of life insurance. It is therefore highly essential to impress upon the insured as well as the beneficiary the necessity of not allowing unnecessary loans to defeat the sacred purpose of life insurance in protecting the home or in providing for old age. If women—the beneficiaries in the great majority of instances understood that a policy loan usually means a lapse, that replacement becomes possible only upon a satisfactory medical examination, and that in any case the loan for the time being impairs the amount of protection, and if they

8

CHILDS, A. E., "The Ultimate Effect of an Unrestricted Right to Borrow on Life Insurance Policies," Proceedings of the Seventh Annual Meeting of Association of Life Insurance Presidents, 29.

were shown their right to keep themselves posted as to what the insured is doing with his policies, there is reason to believe that the number of policy loans would be greatly reduced and limited in the main to cases clearly justifiable. In this connection, also, the agent who originally negotiated the contract could, if again placed in touch with his client at the time a loan is contemplated, render a distinct service by forcibly emphasizing to him the reasons against needless policy loans. Such efforts are apt to prevail, especially if the agent renders the further service of helping to suggest the use of some other assets which the insured may possibly have available to meet his pressing financial needs.

BIBLIOGRAPHY

ALEXANDER, WILLIAM, The Insurance Company, chap. 7, 208214, on "Large vs. Small Surrender Values," New York,

1905. CHILDS, ARTHUR E., address on "Ultimate Effect of an Unrestricted Right to Borrow on Life Insurance Policies." Proceedings of the Seventh Annual Meeting of the Association of Life Insurance Presidents.

CLARK, J. R., "Policy Loans." Proceedings of the Fifth Annual Meeting of the Association of Life Insurance Presidents.

DAWSON, MILES M., Elements of Life Insurance, chaps. on "Surrender Values" and "Loans on Policies," New York. 1911.

FACKLER, EDWARD B., Notes on Life Insurance, 96-99. New York, 1907.

HUDNUT, JAMES M., Studies in Practical Life Insurance, 19-23. New York, 1911.

MOIR, HENRY, Life Assurance Primer, chap. 7, 130–134, on "Settlements and Surplus."

Report of the Joint Committee of the Senate and Assembly of Wisconsin on the Affairs of Life Insurance Companies, 134-142. Madison, 1907.

CHAPTER XIX

SURPLUS

Meaning of Surplus and Sources from Which Derived. -Life-insurance policies may be classified either as “nonparticipating or “participating.” Non-participating policies are those which definitely guarantee the premium and the sum insured and do not entitle the insured to receive any other benefits than those expressly set forth in the contract. Participating policies, on the contrary, usually require the payment of a premium considerably larger than necessary to meet the company's liability under the contract, and as a consequence the insured is allowed from time to time to "participate," i.e. to receive a portion of the surplus earnings of the company. This surplus may be defined as that sum which the company has on hand after deducting the reserve value of its policies and after paying its current expenses and annual death claims.

To understand the sources from which a company derives its surplus, it is necessary to recall the nature of life-insurance premiums. Net premiums, we saw, are calculated on the assumption that a certain rate of interest can be earned and that death claims will occur as indicated by a given mortality table. If, therefore, the rate of interest actually earned and the mortality actually experienced are just equal to the assumptions, and if all policies remain in force until maturity, net premiums will prove just sufficient to enable a company to meet the benefits guaranteed under its contracts. But to the net premiums the companies must add a loading to cover expenses and contingencies. It is thus clear that in the regular conduct of its business a life-insurance company might derive a surplus from three principal sources: (1) a higher return on investments than the rate assumed for premium and reserve