CHAPTER XXIV TYPES OF LEGAL-RESERVE COMPANIES Distinctive Characteristics of Each Type.-Life insurance on the legal-reserve plan is transacted by three types of companies, namely, mutual companies, stock companies, and mixed companies. Briefly outlined, the essential features characterizing each type of company are the following: Stock companies, using the term in its strict sense, are those which have capital stock and which do not issue policies under which the insured is allowed to participate in the profits of the company. A stock company is controlled by those who own the stock, and the liability of both company and insured is fixed definitely in the contract. While the policyholders possess an interest in the reserve accumulated on their contracts, they are not interested in the surplus of the company, all profits derived from the business belonging to the stockholders. Mutual companies, again using the strict meaning, are those which have no capital stock and therefore no stockholders. A mutual company is composed of the policyholders who own all its assets and who, theoretically at least, control its management through some system of voting. Although the well established mutuals now have no capital stock whatever, it is usual in organizing such companies to start them with a guaranty capital, providing for a fixed rate of return while the stock is outstanding and for its retirement when the assets of the company reach a certain prescribed standard. For competitive purposes mutual companies, until a few years ago, issued non-participating policies of all kinds at very low rates. In recent years, however, various states have undertaken to regulate this matter. Thus in the state of New York they are permitted by law to do a participating business only; while other companies organized in the state must elect to do all their business either on the participating or the nonparticipating plan. Outside companies doing business in the state are allowed to transact both classes of business, but are permitted to do so only if they file separate gain and loss exhibits for each class. Although non-participating policies may be issued by mutual companies, their business is almost entirely a participating one, the policyholders paying premiums considerably higher than necessary to meet the liability of the company and later receiving a refund (in the form of dividends) of such overcharges as the company may find it unnecessary to hold. Mixed companies combine certain features of both. of the other types. While organized as stock companies, they issue policies on the participating plan, usually limit the rate of dividend to stockholders to a definite amount, distribute all other surplus earnings to their policyholders, and also grant policyholders some voice in the management of the company. Sometimes no limitation is placed upon the amount that may be paid to stockholders, yet the issuance of participating contracts will call for some sort of distribution of surplus to policyholders. In most instances the existence of capital stock in these companies had its origin in the legal requirement for a guaranty capital in organizing the company, the law, however, not providing for the future retirement of the stock. In various states the law, besides fixing the maximum return that may be paid stockholders, also provides for the retirement of the stock when the company has become well established. Comparison of the Stock and Mutual Plans as Regards the Loading of Premiums. We may next pass to a discussion of the important differences between the stock and mutual plans as they manifest themselves in actual practice. In the first place it is to be noted that the gross premiums charged by mutual companies include a loading which not only amply covers all expenses, but also usually includes an additional amount to safeguard the company against any possible con tingencies. Then, if the premium proves to be redundant, as is nearly always the case, the overcharge is returned to the policyholders in the form of dividends, thus giving them protection at actual cost. Stock companies, likewise, usually load their net premiums, but the amount added does not as a rule even cover expenses, the company relying upon excess interest earnings and saving in mortality to cover its requirements for expenses and contingencies. In actual practice, therefore, the stock company charges a lower rate of premium on nonparticipating policies than does the mutual company on participating policies. The stock company says in effect, to quote one description, "keep the dividend [of the mutual company] in your pocket." It follows the plan of discounting the future—i.e. of paying its dividends in advance — by charging a guaranteed low premium; while the mutual company asks a higher premium to start with and subsequently refunds the overcharges. In actual practice, therefore, a comparison of the showing which stock companies make from the standpoint of ultimate cost of insurance to the policyholder and the showing made by a mutual company requires a comparison of the net annual cost of the policy in the two companies over a series of years. The practical difference in the matter of charging premiums by stock and mutual companies may be illustrated by the following example of a $10,000 policy issued by a certain. company some twelve years ago on the participating plan at a premium of $281.10, as compared with a $10,000 nonparticipating policy issued at the same time and under the same conditions at an annual premium of $227. As regards the non-participating policy, the annual cost of the insurance remains a constant, namely, $227. As regards the participating policy, however, owing mainly to the accumulating value of the reserve and the excess interest earned on that increasing value, the net cost of the policy shows a steady decrease. Thus, at the end of the first year the participating policy paid a dividend of $43.40, which, when deducted from the premium of $281.10, leaves a net cost of $237.70, as com |