IN

American Life Insurance Contracts

THESIS

PRESENTED TO THE FACULTY OF THE GRADUATE SCHOOL OF THE UNIVERSITY

OF PENNSYLVANIA IN PARTIAL FULFILLMEnt of the ReQUIRE-

MENTS FOR The Degree of Doctor of PHILOSOPHY

BY

BRUCE D. MUDGETT

PHILADELPHIA, PENNSYLVANIA

PART I

DISABILITY INSURANCE-HISTORICAL AND STATISTICAL

CHAPTER I. HISTORICAL DEVELOPMENT OF DISABILITY INSURANCE.

Early experiments with disability insurance; the mutual aid societies

of Germany, p. 1; invalidity insurance laws, p. 1; British friendly societies,

p. 2; disability insurance in life insurance contracts: in Germany, p. 2; in

Russia, p. 2; in United States, p. 3.

CHAPTER II. REASONS FOR AND OBJECTIONS TO THE DISABILITY CLAUSE.

The company's and the agent's reason-competition, p. 5; attitude of

officials of the companies, p. 6; the policyholder's motive-protection, p. 7;

the risk of total and permanent disability, p. 8.

Objections to the disability clause: (1) the disability risk is not life

insurance, p. 10; (2) remoteness of probability of total and permanent dis-

ability and brief interval between disability and death, p. 11; (3) misrepre-

sentation of facts by agents, p. 11; (4) difficulty of defining disability, p. 11;

(5) the absence of any statistical basis for determining the risk, p. 11.

CHAPTER III. MEASUREMENT OF THE RISK OF DISABILITY.

German invalidity tables, p. 15; American rates based on German

experience, p. 16; English experience, p. 18; American experience, p. 19;

Sidney H. Pipe's rates, p. 20; Franklin B. Mead's rates, p. 21; rates by Lucius

McAdam, p. 28; by Arthur Hunter, p. 28; Hunter's "factors of safety": (1)

ultimate disability rates, p. 28; (2) special aggregate mortality rates, p. 29;

comparison of rates computed by different actuaries, p. 32.

PART II

THE DISABILITY CLAUSE AMONG AMERICAN LIFE INSURANCE

COMPANIES

CHAPTER IV. RESTRICTIONS ON THE USE OF THE DISABILITY CLAUSE AS RE-

GARDS POLICIES OR RISKS.

Term insurance, p. 42; endowment policies, p. 44; joint life policies, p. 45.

Women, p. 45; sub-standard lives, p. 46; hazardous occupations, p. 46; where

partial impairment exists, p. 46.

CHAPTER V. THE DEFINITION OF DISABILITY.

With reference to the occupation of the insured, p. 47; with reference to

the cause of disability: (1) disability due to disease or accident, p. 49; due

to deafness, dumbness, insanity, p. 49. Restricted definitions: (1) minor

restrictions, p. 50; (2) bodily injury excepted, p. 51; (3) assignments or loans

not permitted, p. 51; (4) bodily injury only covered, p. 52.

iii

CHAPTER VI. AGE AND TIME LIMITS TO THE APPLICATION OF THE CLAUSE.

Beginning of the risk, p. 53; effect of default in the payment of premiums,

p. 54; cancellation by the company permitted, p. 55; automatic cancellation

in relation to default in premium payments, p. 56; the limitation of benefits

to the period for paying premiums, p. 57; time limits for making proof of

disability, p. 57; age limits beyond which regular disability benefits will not

be granted, p. 58; benefits granted after this age reached, p. 59.

CHAPTER VII. BENEFITS GRANTED BY THE DISABILITY CLAUSE-KIND AND

AMOUNT OF BENEFITS..

Two classes of benefits, p. 61; (1) Waiver of premiums during disability,

p. 61; (2) maturity of the policy upon disability and its payment in some form

to the insured, p. 63. The amount of this "maturity" benefit in case the

policy is paid (a) in twenty installments, p. 63; (b) in ten installments, p. 64;

(c) as a continuous installment, p. 65; (d) in a single cash sum, p. 66; (e) as

an annuity, p. 68.

CHAPTER VIII. BENEFITS (cont.) EFFECT OF INDEBTEDNESS, DEATH OR RECOV-

ERY ON THE POLICY.

Indebtedness (1) deducted from face value, p. 71; (2) deducted from

commuted value of installments, p. 71; (3) reducing the number of install-

ments, p. 72. The New York Life method, maintaining the security back

of loans, p. 73. (4) Payment of indebtedness a prerequisite to receipt of

any benefits, p. 74. (5) Existence of indebtedness acts as forfeiture of

disability benefits, p. 74; (6) failure to provide for indebtedness in many

clauses, p. 74.

Effect of death upon disability benefits, p. 74; (1) installments continue,

p. 74; (2) commuted value of unpaid installments available, p. 75; (3)

insurance in force equals sum insured less any payments made. p. 75.

Effect of recovery from disability, p. 75; (1) resumption of premium

payments, p. 75; (2) premiums paid charged as a lien, p. 75. Where
installments have been paid: (1) insurance in force always equals sum
insured less any payments made, p. 76; premiums payable after recovery,
p. 76; (2) reinstatement of policy upon medical examination and payment of
all arrears in premiums and all installments paid with compound interest,
p. 77.

CHAPTER IX. PAYMENT OF DIVIDENDS AFTER DISABILITY-CONCLUSION.

Dividends after waiver of premiums, p. 78; payment in cash, p. 79.

Dividends after maturity of the policy, p. 80; excess interest earnings

should be returned. p. 80.

Conclusion, p. 81.

PART I

DISABILITY INSURANCE-HISTORICAL AND

STATISTICAL

CHAPTER I

HISTORICAL DEVELOPMENT OF DISABILITY INSURANCE

The practice of granting insurance against total and permanent disability represents one of the latest innovations of American life insurance companies in the liberalizing of their contracts. On October 16, 1896, the Fidelity Mutual Life Insurance Company of Philadelphia issued the first policy of this kind on the life of its president. The movement toward the incorporation of the disability clause in life insurance contracts has spread with such rapidity that by January 1, 1912, at least 135 companies out of the 239 doing business in the United States granted a disability clause in some form.

Early Experiments with Disability Insurance

It is of interest, in view of the importance which this feature has recently assumed, briefly to trace its development. The first experiments with insurance against total and permanent disability1 were made by mutual aid societies in connection with the insurance of miners in Germany and Austria in the eighteenth century. The need of such benefits was naturally manifested first among hazardous occupations such as mining. As Germany developed industrially during the nineteenth century the movement spread to other classes of workers and many funds were established, particularly among railway corporations. Out of these isolated attempts on the part of private associations to solve the problem grew the German invalidity insurance law of 1889. This law was incorporated in 1911 with the national sickness and accident insurance laws of that country into a complete scheme of insurance against

1 These historical notes have been taken largely from an article by Mr. Franklin B Mead in the Transactions of the Actuarial Society of America, 11:304.