Committee on Economic Security (CES)
Volume VI. Social Insurance
D. Insurance, Savings and Income
Ralph B. Harris
Survey of Report
To What Extent Does Life Insurance Function as a Savings Institution to
Meet Need for Security?
Ordinary Insurance - Year 1929 to 1933.
An average of 245,815 policies were paid each year as death claims with an average payment of $2,583 per policy. This amount, however, is quite materially more than the average policyholder received, due to the effect of the large policy claims on the average amount paid.
The companies paid maturing policies averaging 88,550 per year, for the period for an average amount of $1,066 each, which average amount is also affected by the policies for larger amounts.
Policies given up by policyholders during the period reflected the most meager results for the holders, these terminated policies averaging 4,198,944 per year for an average face value of $8,064,835,845 but on which the total realized value to the policyholder averaged only $562,576,026 per year, or a little less than 7%, with an average return per policy of only $171. The surrendering of insurance by large holders, in times of financial strain, to protect other investments undoubtedly makes the return per average policy appear larger than it really is. It also is a logical explanation for the average in 1929 of $151, being materially greater than it was for 1930 of $127.
Industrial Insurance - Years 1929 to 1933.
Results produced here show up as follows:
Average death claims paid probably not over $185.
Average matured policy claims paid probably not over $100.
Policies dropped and sold back to the companies constituted by far the largest item, from the standpoint of the number of policies involved and the least to the average policy holder.
An average of 19,033,002 policies given up during period for average face value of $4,327,536,978, on which companies paid an average face value of $375,659,474 per year or an average per policy of only $19. The average amount paid by the companies each year constituted only 8% of the fact value of the policies. However, whereas only about one-fourth of the policies in the Ordinary branch were of the higher premium endowment type, nearly seven-ninths of Industrial Insurance is of this type. This means that the industrial policyholder paid, much more in proportion to what he realized from the policies.
Policy Loans, 1929-1933.
Data on policy loans is more limited and less specific than any data covered. All companies keep their records by policies and not by individual policyholders. Facts concerning loans are reported in total volume, with no established reference to purpose and without reporting number of loans made each year of total outstanding.
A limited picture was obtained from the home offices of five companies--the facts submitted being confidential--and some trends are possible from this data.
The contractual right to borrow money on policies is contained only in the Ordinary branch of the business. Loans made during the period showed a steady increase each year until 1933 when a marked decrease occurred, the yearly increase averaging approximately $475,000,000 to 1933, when there was a decrease for the year in loans outstanding of $36,000.000.
Thirty percent or more of the loans are thought to have been for paying premiums. One reporting company showed a steady increase for surrendered policies in percentage of cash and loan values having been already borrowed before surrender, with only 8% paid in cash in 1933.
To What Extent Does Life Insurance Function as a Savings Institution to Meet Need for Security?
The question of the extent to which the institution of commercial life insurance meets the need for individual savings to provide personal and family security is one of which the public has little or no conception. The whole subject of life insurance, to say nothing of the true significance of the provisions of various types of policies, seems to have been one which the public has been unwilling to study and too indifferent to think about.
The two types of insurance, Ordinary and Industrial, need to be studied separately because of the differences in the contracts and also the methods of selling each.
In a previous report, entitled: "Trend of Savings Through Life Insurance," there was shown the extent to which the public is making new investments in insurance as well as continuing to carry insurance policies purchased in previous years. Here, covering the same period, will be considered the main results obtained by policyholders under the main contract provisions of their policies, namely: (1) The amounts paid to the estates or families of policyholders who die (death claims paid); (2) The amounts paid to the policyholders themselves under the policies that contract for such payments at the end of specific periods, (matured policies paid); and (3) The amounts paid to the policyholders themselves who, for various reasons, give up their policies, (policies lapsed, surrendered and purchased).
The matter of borrowing on policies will be treated separately from the points mentioned above because of several aspects of the problem of policy loans. In the first place, borrowing affects only the Ordinary Insurance field, as Industrial Insurance policies have no "Loan Provision," the policies being too small to make practicable amounts available for loans. Agin, a loan is merely an advance by the company of a portion (up to 100%, less interest) of what the policyholder could take in cash if desired. General practice, by companies, causes a duplication of figures in connection with surrenders as they treat the loan as repaid and the full value paid as a surrender. Since there is no compulsion on the policy holder to repay a policy loan, this type of borrowing is extremely slow in repayment and is one of the most important causes for subsequent dropping insurance.
Ordinary Insurance - Death Claims Paid.
Since no general figures are available showing the length of time policies had been in force when they were paid as death claims, or what type of policies they were, considerable conjecture is necessary. However, certain interesting facts are evidenced over the period 1929 to 1932, as shown by the accompanying Table II and by Table I in the report referred to above:
(a) Whereas the average size of new insurance purchased annually varied, during the period between a high of $2439 in 1929, to a low of $1678 in 1933 showing a steady decline throughout the period-the average death claim paid, during the same period, increased in amount through 1931 and then receded each year for the years 1932 and 1933. Year by year during the period, the average death claim paid, for both 1929 and 1930, was somewhat smaller than the average of new insurance purchased in corresponding year. In 1931, however, whereas the average size of new insurance was only $2160, the average death claim was the largest of any year, being $2827, showing a marked increase over the previous year.
(b) Two conclusions are justifiable, namely, a material increase in death claims among the buyers of larger policy amounts, and second, death claims among the policyholders who had purchased their policies more recently. Suicide, as is usually the case, undoubtedly played its usual part in this experience. The decline in size of the average policy in 1932 and 1933 can probably be explained by a return toward a more normal mortality experience although it remained materially above the average size of policies in force at the end of the respective years. This definitely indicates that the mortality experience was continuing heavy among the larger policyholders.
(c) After allowing for the distortion in the average amount of insurance protection carried --caused by the larger volume buyers, it is apparent that "death claims paid" by life insurance companies afford only very small support for those dependent upon the earnings of the deceased policyholders.
In considering security provided by this branch of payments, it is well to emphasize the fact that these payments arise from policies which offer the greatest percentage of the "savings" and the smallest percentage of the "protection" element, as, under the terms of these policies, the issuing company agrees "to pay the face of the policy to whom-so-ever the insured directs in case he should die before the end of a designated period, or to pay the vace value to the insured in case he is still living at the end of said period."
The increased cost of this "savings" feature is indicated by the smaller average payment by the companies when compared either to the average size of policies in force during the years shown or to the average size of death claims paid, which latter includes also whole life and term policies.
Here again, the average does not reflect the size of the average policy holder's benefit, due to the effect of the buyers of large policies. However, after due allowance for this fact, the inadequacy of this form of saving, in meeting need for security is apparent from the company payments during the years under consideration, as the average payment is, at best, sufficient to carry on for only a year or two.
When considered in connection with the total number of insurance policies carried, as indicated both by the number paid as death claims and the total in force at the end of each year, it will be realized that such endowment policies represent but a small portion of the total number in which the public is investing. The average amount of endowment insurance purchased varies, according to published figures, between one-fifth and one-third of the other types. In most cases, the cost of endowment insurance prohibits the average buyer from carrying any unreasonable amuont.
For the individual who fails to continue to carry the policies he has purchased, the results of life insurance buying shows the most discouraging picture. Small as the results are for the average of other policyholders, they loom large by comparison with results of this type of company payments.
Table I of the preceding report, refereed to above, shows the average annual payment into new insurance purchased is from$34 to $55. Under the terms of the policies, there is no cash value until the end of two or three years and even then it is negligible for several years thereafter--in comparison with the annual payment by the policyholder--because of surrender charges, as well as the basic principles on which life insurance is operated. Therefore, it is evident that the average paid by the companies on policies in this group represents a return of only a small part of what has been paid to them by the policyholders. From a "savings" standpoint, therefore, this huge number of "lost" policies represent negative savings to the buyers of these policies.
This loss is further illustrated by a comparison of the face value of these policies and the aggregate paid by the companies to the policyholders. In 1929 the aggregate paid was only 4% of the face value of the policies and in 1933 it was a little less than 10%. This would indicate two things: that the policies purchased most recently are the first to be sacrificed and that the respective loss to the insured is greatest thereby because he has not had time to receive a material period of protection but he has borne a heavy portion of the company's cost of putting this insurance on their books.
A study of this type of the insurance business discloses the operation of the same principles as those described for the ordinary type, except that the benefits to the policyholder are even smaller. This is due to the fact that this type of insurance involves overhead costs that are such greater in proportion to the volume of business produced and maintained by the companies.
Reliable figures are not available on numbers of policies and amounts paid by the companies for death claims and matured policies for the years 1929 and 1930. However, it is reasonable safe to assume that the average paid was not larger, if as large as for 1931. The presumption is that the average death claim for those years was $170 to $175 and the average matured policy was $95 to $100.
Death Claims and Matured Policies Paid.
During the years 1929 to 1933, the average annual payment for new industrial insurance purchased was approximately $5 and the average industrial policy in force ranged from $200 in 1929 to $208 in 1933, with the largest average policy purchased during these years being $208 in 1933.
For both death claims paid and matured policies paid, as shown by accompanying table III, the hopeless inadequacy of industrial insurance in providing any real security, either to the insureds' dependents or to himself is immediately apparent. The extra cost of the endowment policies is undoubtedly responsible for the smaller average size of the policies.
Policies Lapsed, Surrendered and Purchased.
It is in this aspect of the industrial insurance business that the results obtained by the policyholders subjects the companies to the gravest criticism. Industrial policies generally entitle the policyholder to no cash return, in case of termination, until they have been in force for ten years. The buyers of this class of insurance are woefully ignorant of the contract provisions and are peculiarly susceptible to "high pressure" salesmanship. It is little wonder that so much of what is bought fails to stay in force long enough to build any appreciable surrender values. As is the case with ordinary Insurance, only to an exaggerated extent, this portion of Industrial Insurance represents a negative method of savings. Because it carries no loan provisions, it does not offer even this very limited advantage to the buyer, who, he wants to realize any cash from his policy must "sell" it back to the issuing company. Thus he at once loses the protection value of the very wide margin between the face value and the cash value of the policy which he must have been paying on for many years.
As explained on pages 1 and 2 of this report, borrowing money on the security of policies is possible only in Ordinary insurance. The only possibility of placing a lien of any kind against an Industrial policy is as follows. In case a policyholder drops a policy and later wishes to reinstate it, but lacks the case necessary to pay the back premium, companies generally take care of it by means of a special lien note, signed by the policyholder, covering the amount required to reinstate the policy, but they will advance no cash. Even this is but a matter of practice and is not a provision of the policies. In table IV, such advances on industrial insurance are included with the reported figures under "companies writing both Ordinary and Industrial Business" but such advances are reported to constitute less than 1%. All of the balance in this column covers loans on Ordinary policies.
Loans to policyholders must be considered under two heads: (1) Premium notes and (2) loans to policyholders.
Under premium notes, various companies include different items so that table IV, showing aggregates for all companies, reflects mixed practice. Apparently the item may include: (a) Notes given in settlement for first year--or even subsequent --premiums but before the policies have a cash and loan value; (b) Notes given for premiums after policies have cash and loan values, but under which certain formalities of regular policy loans are dispersed with; (c) premium advances under an "automatic premium loan" provision contained in some companies' policies, but which require no separate note to be signed to cover the advance.
Item (a) has no security behind it--other than in case of death of the policyholder before the note is paid--to protect the companies accepting such notes, except the required endorsement of the selling agent or his general agent. It is a practice which is not general among companies and one which is very debatable from several practical standpoints. Probably most important, in the interest of the public, is the danger of such a practice stimulating sales to people who are not financially able to carry additional policies.
Items (b) and (c) both have policies as the direct security behind them. They are made available as both a convenience and an additional protection to policyholders. They are governed and limited by the same laws that regulate regular policy loans.
Prior to 1931 the figures for premium notes and loans to policyholders were not tabulated separately in aggregate tables. The figures for 1931-2 and -3 in table IV, however, show the general relationship as well as trend of the two headings.
Loans to policy holders, under which the policies themselves constitute the sole security for the loans, and which are carefully governed by state laws, are by far the most important loans to be considered. The bulk of such loans are made by means of specially worded loan agreements, which must be properly signed by the individual policyholder and any other parties holding a legal interest in the policy.
The aggregate service rendered by insurance companies, when measure by volume of loans made, is impressive. However, the average benefit to the individual can not be large because of the small average holdings and the low limit of available borrowing power within the policy as regulated by law. Legally no company "can loan on a policy amounts which in the aggregate, together with interest to the next anniversary of the policy, exceed the cash and loan value of the policy on such anniversary." The average amount paid per policy as shown in table II for policies lapsed, surrendered and purchased, indicates, as closely as available figures permit, the maximum loan privileges of the average policyholder.
The specific experience with policy loans of five large companies, chosen to secure a territorial sample, has been secured and studied. The detailed facts furnished by these companies were given confidentially so the names of the companies or their specific experiences can not be embodied in this report. However, certain definite trends are indicated and some specific conclusions can be drawn from this material.
Borrowing on policies showed a marked increase each year over the previous year, throughout the entire period, until 1933. In this year there was a decided curtailment in both number and amount of new loans as well as in total loans outstanding.
From the rather meager facts presented, only between 30% and 40% of all policyholders borrowed on their policies. Only one company's figures could be calculated year by year. In this case the percentage of policyholders who borrowed on their policies showed a steady increase each year throughout the entire period, increasing 13% from 1928 to 1933 inclusive.
Of those borrowing on their policies, it appears that from 40% to 60% of loans on policies are made to pay premiums. This can be but a very broad estimate, because there is no way of a company knowing the real purpose of many loans that are made as straight policy loans.
Only one company reported facts in connection with the extent to which policyholders had borrowed on their policies before surrendering them. This experience showed a steady increase over the period until in 1933 the surrenders showed that the policyholders had, prior to the time of giving up their policies, already borrowed up to 92% of their cash values. This would indicate that loans constitute a serious cause for ultimate surrender and lapsed policies. (Table II), is a very questionable means of savings.
The history of life insurance companies in the United States leaves no question of doubt as to their safety as a depository of funds and as a protection against premature death. The institution is rendering a valuable service to thousands who could not create equivalent estates in any other way. However, commercial companies have not reached sufficient people in sufficient volume to meet the need for real security. Many causes must be considered in explaining the limited results obtained up to the present time, and most of the causes which have been brought forward have been attacked vigorously as being both unsound in theory and ill-advised from a practical standpoint.
Table III. PRINCIPLE CONTRACT PAYMENTS TO POLICYHOLDERS ---ORDINARY INSURANCE
Death Claims Paid Matured Policies Paid Policies: Lapsed, Surrendered & Purchased
Paid-$ Average Paid per Policy-$ Number of
Policies Face Value of
Paid per Family
1929 230,189 508,940,981 2,211 72,460 55,644,476 768 2,315,386 8,540,001,525 8,540,001,52
1930 236,621 542,530,184 2,293 85,544 97,867,386 1,144 2,863,317 6,556,064,347 363,649,967 127
1931 253,520 732,127,630 2,827 90,744 106,835,526 1,177 3,253,232 7,656,853,359 504,130,709 155
1932 257,036 723,375,305 2,814 96,835 110,118,430 1,137 3,954,693 9,360,193,591 783,529,953 198
1933 251,712 697,532,406 2,771 97,149 107,501,709 1,106 3,608,092 8,211,066,406 81x,610,824 225
(1) Source - Letter from Spectator Co. with table.
Source: Spectator Year Books - Life Insurance
Table III. PRINCIPLE CONTRACT PAYMENTS TO POLICYHOLDERS ---INDUSTRIAL INSURANCE
Death Claims Paid Matured Policies Paid Policies: Lapsed, Surrendered & Purchased
Paid-$ Average Paid per Policy-$ Number of
Policies Face Value of
Paid per Family
1929 873,712 298,857,959 342 139,181 53,119,002 382 14,114,076 3,160,106,896 164,246,658 12
(1) (1) (1)
1930 892,911 157,571,803 176 131,202 12,080,688 97 17,677,688 4,101,178,843 250,573,036 14
1931 842,919 159,079,409 188 125,812 12,875,499 102 19,308,347 4,411,782,844 356,492,414 18
1932 803,474 153,775,277 191 130,768 13,058,611 99 23,885,812 5,449,609,724 562,583,289 24
1933 772,539 148,863,402 192 128,145 13,082,513 102 20,179,089 4,515,006,585 544,001,976 27
(1) Source - Letter from Spectator Co. with table.
Source: Spectator Year Books - Life Insurance 1930 to 1934
LOANS TO POLICYHOLDERS
Year Type of Advance Companies Writing only
(a) Companies Writing both
Ordinary and Industrial
1929 Premium Notes and Loans $1,873,970,141. $505,390,246. 2,379,360,387.
1930 " " " ‘ 2,197,041,156. 609,971,039. 2,807,012,195.
1931 Premium Notes 108,202,047. 8,653,788. 116,855,835.
Loans to Policyholders 2,524,768,270. 727,522,440. 3,252,290,710.
Total 2,632,970,317. 736,176,228. 3,369,146,545.
1932 Premium Notes 123,400,252 15,781,704. 139,181,956.
Loans to Policyholders 2,805,816.790. 860,753,217. 3,666,570,007.
Total 2,929,217,042. 876,534,921. 3,805,751,963.
1933 Premium Notes 142,393,842. 25,592,263. 167,986,105.
Loans to Policyholders 2,700,495,905. 900,874,177. 3,601,370,082.
Total 2,842,889,747. 926,446,440. 3,769,336,187.
Number of reporting companies in above figures, (a) and (b):
1929- (a) 285; (b) 68. 1930-(a) 283; (b) 69. 1931-(a) 274; (b) 69. 1932-(a) 260; (b) 68.
1933-(a) 252; (b) 66.
Source: Spectator Co. Year Books - Life Insurance, 1930 to 1934 inclusive.