The morning call., 1891-01-18
INSUR ANCE.
THE INVESTMENT FEATURE
LIFE INSURANCE POLICIES

policies to-day solely as a protection TO the
family, or dwell upon their adaptation 10
that purpose, or urge them for that motiVe:
The policies, or "bonds" or ''cOnsolS" OF
the eager great rivals are offered as an IN
vestment to the taker, upon figured esti-
mate of their future outcome, and are urged
for the personal profit OF the takor.
In legitimate mutual life insurance, the
yearly death losses, expenses, and interest
earnings are carefully adjusted, and the re-
suit apDortioncd to each policy, so that each
person is yearly charged with justine yearly
cost of carrying his risk, and the remainder
of bis premium is RENTED by way of divi-
dend He thus knows the exact cost OF his
Insurance from year to year, and pays that,
aud no more.
But the Investment policies" "bonds,
"cousolS," etc, adopt a contrary course
The entire annual premium or "installment
is to be paid in full, without any reduction,
for the entire Investment period, ten, nj
teen or twenty years. No adjustment or ap-
portionment OF losses. expenses. or earnings
is made during that period; no dividend de-
ciared or paid; no means OF aseertalnlng
what the cost of the operation is from year
to year; NJ means of knowing what the real
outcome of the speculation is likely TO be;
for no statement of account can be called tor
by any person, either during the invest,
ment period" or at its close. The holder OF
the policy or bond or "cOnsop has 10 bind
himself in advance in his application, to take
whatever is given him as the prohtS OIL MS
IS THIS INVESTMENT OR SPECULATION?
Investment, in the proper and conserva-
tive sense, means putting money into
scheme of use, the expenses, profits and
losses of which are well f0reseen, the tuctu-
ationS CAPABLE of reasonably safe predeter-
mination, and themselves, therefore, cap
able of being so weighed and balanced that
profitable result can be forecast within
safe margin.
Speculation means putting money into
scheme, the expenses, profits and losses OF
which are not well fOreSeeD, or are likely to
fuctuate so irregularly, widely and nncon-
trollably that they cannot be truly weighed
and balanced, nor the outcome brought lnto
any margin of safe calculation; scheme In
which gain and loss are alike possible, and
alike uncertain both as to the TACT and the
degree of either.
Investment knows and weighs the chances
and ascertains the balance to be safely on
the right side.
Speculation does not know and cannot
weigh the chances, but simply takes them.
HOW CAN a LIFE INSURANCE COMPANY
MAKE MONEY?
1t has two things to do, it has to pay
losses and expenses. 1t charges premium
calculated to cover the losses and the ex
penseS. 1t knows from It's mortality tables
what the losses will be, within safe mar
gin; it makes the expenses much or little as
1t chooses within certain limits. 1t esti-
mates percentage which they ought not to
exceed, and adds that to tue premiums
charged to cover death losses.
Out of these premiums the company pays
its yearly death losses, its expenses, and also
furnishes the reserve to provide for the
greater mortality when its risks get older
| and for the maturity of the endowments.
This reserve il can invest until it is needed;
and 1t is therefore calculated on the aSSump-
ton that it will earn some certain rate OF in
| tereSt while held.
If now the death losses ihave been less
! than the table called for, and the expenses
| have been less than was provided for so
| much of the premium Will have been saved,
| and can be returned to the insurer. But it
| is not profit to him. 1t is simply saving
| from the anticipated cost OF carrying his in
| surance. But his insurance is an expense
| to him Just as his fire insurance is. The
premium returned to him is reduction of
| the expense, not profit.
If the rate of interest earned is greater
| than that assumed the excess is in the ma
ture of a profit. For example, if the COM
| pany assumes that each mans reserve is
| going to earn per cent and it does earn 5
| per cent, then it puts the per cent into the
| reserve, and the extra l per cent Is surplus
| and can be turned back to him with the
! saw gs from losses and EXPENSES. This
! surplus interest is usually called profit,
| and is in the nature of profit, though its
| actual use is merely to reduce the cost of
| carrying the insurance. 1t is however the
| only profit there Is TO the insurer. All else
| Is cost Ol INSURANCE.. 6Ap6US6S anu
| helping pay other peoples losses until ones
own times comes when others will pay that
| loss
| How can this operation be converted into
| profitable investment tor the insurer him
| self?
| 1t protects his family, and is therefore in
| diSpensable; but how can he make money
out of it?
EXAMPLES.
Several of the great companies are Offer
ing under different names the same invest
| ment policy" bond" etc. For illustration
| OF the whole matter we will select what is
| in fact twenty-year endowment policy,
| with no dividends until the end of the
| twenty years.
THE ESTIMATED ADVANTAGE.
Take man aged so, inSuring for $4,000;
| be is to pay twenty premiums of 1896 each.
| The policy contract is to pay him $4,000 if
| lie lives and keeps up his policy through the
twenty years. But the companies "esti-
mate" that by leaving all his savings and in
tereSt earnings with them all the time thew
NAV pay him an additional $1,000; or a total
OF SlI,O6O, which would be equivalent to
compromising his payments at 4 90 per cent
HOW CAN THEY DO IT AND PAY EXPENSES?
This rate Of interest. 4.92 per cent, is more
than the average rate these companies are
now earning on their assets. But aside
from that fact the expenses of the business
and the death losses have first to be paid
In these particular companies the expense
ratio is about 20 per cent or one-fifth of
their entire income. Out of every dollar of
premium and every dollar of interest twenty
cents is taken for expenses, leaving only
eighty cents of each to pay losses and pro-
vide the final payment. That is, out of each
premium of 1896 these companies can use
for the fulfillment of their contract and
estimates " only 1896 so. This would have
to be compounded at 6.S3 per cent to produce
the estimated S17060 If no expenses came
out of the interest. But one-tifth of that
goes to expenses also, so that to realize the
1000 and pay expenses the premiums must
be compounded at S4 per cent, or greatly
more than the rate they are now earning.
HOW MUCH CAN THEY DO }?
These companies under present conditions
can hardly hope to decrease their expense
account or to earn more than per cent in
terest on their assets for the next twenty
years. Assuming that they are certain to
earn that much, and taking out 20 per cent
of premiums and of interest for expenses
and providing for expected losses, the result
at the end of the Investment period would
be just S10,S17 instead of the Estimated"
$4,000, shTinkage of S6243, a result not
equal to the premiums compounded at per
cent. In what sense can this be called
profitable Investment for ones self How
can any purely financial operation-one that
is not manufacturing, mining, or otherwise
productive business adventure-that has to
bear such an expense account be considered
as profitable investment?
HOW CAN THEY MAKE UP THE sHRINKAGE
OF S6243,
70 realize which would require them not
only to do business without any expense at
all, but also to earn for twenty years a
greater rate of interest than they have any
reasonable hope of doing?
THE EXACT EFFECT OF THE EXPENSE Ac-
COUNT OF THE INVESTMENT.
These companies, having to use one
NTH of every premium and interest payment
for expenses, and earning, say even per
cent interest, can be certain of producing no
more than Sl0,S17 in twenty years.
savings bank, paying its depositors per
cent interest, after paying its slight ex-
penses, could take the same premiums paw
the same losses and return at the end of
twenty years 1897, instead of S10,8I7.
A savings bank, paying only per cent in
terest, could take the same premiums paw
the same losses and return at tho and of