Reinstatement of Original Policy

The most objectionable of all methods of dealing with recovery from disability is found in the contracts of sixteen companies. Differing in detail, they all subscribe to the general outline of a plan the most stringent form of which is as follows: The policy may be reinstated after recovery upon (1) the insured passing a medical examination to show his insurability; (2) the repayment to the company of (a) all installments received; (b) all arrears in premiums, and (c) compound interest on both at five or six per cent. In some instances the insured is given an option of letting this sum stand as a lien against his policy, with interest annually, and subject to all the loan requirements of the contract-a meager substitute indeed for one of the most unnecessary and unworthy features found in one hundred and twenty-seven disability contracts.

CHAPTER IX

PAYMENT OF DIVIDENDS AFTER DISABILITY

The fourth and last modification of the benefits paid for disability arises in connection with the payment of dividends on participating policies. The question of dividends may arise in connection with the waiver of premium benefit or where a policy is being paid in periodic installments.

Dividends after Waiver of Premiums

Eighty-seven companies out of one hundred and one which grant the waiver of premium benefit have made no mention of dividends. Some of these companies issue only non-participating policies, hence the question of dividends cannot arise, but the greater share of them write participating insurance. An illustration will clearly demonstrate the importance of this question. In the year 1910 the Mutual Benefit Life Insurance Company paid upon an ordinary life policy issued upon a risk thirty-five years of age in 1859 an annual dividend of $20.62. The annual premium which the insured was paying was $27.50 making the net cost to the insured for the year $6.88. If the Mutual Benefit Life Insurance Company were granting the disability clause on such a risk, the question of dividends might well be of more concern to the policyholder than the disability benefit itself. It is clearly apparent that the instance given is an unusual one but it was chosen in order to bring out the extreme significance of this consideration. The greater portion of disability by far occurs at an advanced age because of disease or general age disability and there are many policies with an initial annual premium of $20 to $25 on which dividends of six, eight and ten or more dollars are paid after the policies have been in force over twenty years. Will the company then be permitted to confiscate these dividends in case the insured becomes disabled? Eighty-seven companies make no mention of dividends and the failure of their contracts to make any provision constitutes a weakness and opens the way for misunderstandings in the future.

Any other procedure than that of granting dividends to the insured during the time while premiums are waived is unfair and should not be permitted by state insurance departments. The actuaries who have computed rates for the waiver of premium benefit have based their calculations on the assumption that the initial premium charged is to be waived. And they have demonstrated that the waiver of the entire premium does not require an unusually heavy extra premium. If that initial premium contains a sufficient margin for the company's safety and the company contracts to return the overcharge in the form of a dividend, then there is no justification for any plan whereby the company confiscates the overcharge after disability occurs. Four of the thirteen companies referring to dividends in their clauses explain that dividends are to be discontinued.

Only nine companies of the total 101 permitting waiver of premiums agree to pay dividends after the insured becomes disabled. The Columbus Mutual states that the policy becomes paid up for its full amount "participating in profits"; the policy of the Reliance Life "shall participate in any distribution of surplus"; the Mississippi Valley Life policy "will be credited with dividends in like manner as if the insured paid the premiums"; the policy of the Sun Life of Montreal "shall continue to participate in profits"; the Texas Life provides that "the policy will continue in full force towards maturity sharing in the profits of the company among policies of its class"; the contract of the North State Life is to continue in full force as a "paid-up participating policy for its value"; the Franklin Life stipulates that "waiver of premium payments shall have the effect of providing the same values and benefits as though premiums waived had been paid"; the waiver of premiums by the Home Life of New York, "shall not affect the right of the insured to any dividend or other benefit"; the Germania Life requires that dividends after disability "shall be paid in cash." Since the rate of mortality among disabled persons is so much greater than among active lives it is not equitable to the company, or to its other policyholders, to permit the disabled person to use his dividend to purchase a paid-up addition to the policy since this paid-up addition is computed on the American Experience table rate of mortality. The requirement of the Germania Life that dividends be paid in cash after disability is, therefore, one which might well be copied.

Dividends after Maturity of the Policy

Dividends on a policy after its maturity will not be computed on the same basis as before since two elements which are largely instrumental in producing the surplus fund from which dividends are paid, viz., savings in expense and lower mortality than expected, are in no way affected by a policy once matured. It is not surprising therefore to find that only one company makes any reference to the payment of dividends on deferred installments, this company stating that in case the twenty-installment benefit is chosen no dividends thereafter will be paid. There is, however, a further element, and a very important one, contributing toward the fund from which dividends are derived, viz., excess interest earned on the company's assets above the rate assumed in calculating premiums. Practically all the companies today compute premium rates on a three or three and one-half per cent interest basis, while many of them earn four, four and one-half or even five per cent on their assets. If a company has earned four and one-half per cent on its assets, but has computed its rates on a three and one-half per cent basis, this extra one per cent has been contributed by the assets as a whole, and a proportionate amount of it in justice belongs to every policyholder who has a claim on the company's funds. The disabled person, whose policy has matured for $1,000 payable in twenty installments is assumed by the company to have a policy worth $736 in cash, using a three and one-half per cent interest basis in discounting the installments. If the company, however, has earned four and one-half per cent interest the policyholder has a valid claim on the extra one per cent on that part of the $736 still in the company's possession and he is being treated unfairly if the company uses that income to swell the dividends on policies not yet matured. As stated above, the practice of so using surplus interest is followed by all the companies today in connection with their disability contracts in cases where "maturity" benefits are promised. The most equitable contracts issued today pay this excess interest where policies matured as death claims or endowments are being paid to beneficiaries in installments. This practice should be required of all companies and should be extended to cover installment payments under the disability contract.

CONCLUSION

The foregoing study makes possible a statement of some of the factors that should govern the future development of the disability clause. It has been found that the main motive back of its rapid rise to popular favor is commercial-a constant need of the solicitor for a new feature, a "talking point," and the keen appreciation on his part that the disability clause furnishes it. It has been further shown that the risk of total and permanent disability is a real and tangible one and that its occurrence may easily endanger the permanence of one's insurance. The idea of furnishing a real insurance feature has prompted the issue of the clause in many cases. These two motives, the altruistic and the commercial, have combined in bringing into existence a multitude of clauses, some good, some worthless, and some a curious admixture of the good and the bad. The business motive has led some companies to adopt clauses for no other purpose than to meet competition and the results are a disgrace to American life insurance; while other clauses show that they have had behind them the very best of careful and thoughtful consideration of the problems involved. It is plain that we have as yet no adequate knowledge of this risk in its relation to life insurance and we must permit the companies to go slowly in making the clause all that it should be, lest they make a mistake in the direction of too great liberality. Such a false step might only destroy the progress thus far made.

Three fundamental criticisms can be brought against the majority of disability clauses now issued: (1) the definition of disability; (2) the benefit given; and (3) restrictions under which the clause is granted. One way of meeting these criticisms is to frame a clause embodying in it all those features which are desired and which the present study has found to be safe. But this plan has inherent defects. In the first place, the same circumstances do not exist with every company-one writes participating insurance, another does not, the question of dividends being important in the first instance and never arising in the second; one company charges a premium for the clause, another pays the costs out of surplus, the first having need of a cancellation clause, the second not-and so in many instances the differences in method require a corresponding difference in the provisions of the disability clause. The