Pittsburg dispatch. [volume] (Pittsburg [Pa.]) 1880-1923, 1891-01-15
THE
INVESTMENT FEATURE
OF
Life Insurance
Policies.

The policies or bonds or "consols" OF
the eager great rivals are offered as an in
vestment to the taker, upon a figured esti-
mate OF their future outcome, and are urged
for the personal profit of the taker.
In legitimate mutual lie insurance, the
yearly death losses, expenses, and interest
earnings are care ully adjusted, and the re-
suit apportioned 10 each policy, so that each
person is yearly charged with juft the yearly
cost of CARRYING his risk, and tie remainder
of his premium is remitted by way oil divi-
dend. He thus knows the exact cost OF mis-
insurance from year TO year and pays that,
and no more.
But the Investment policies, bonds"
''consols,' etc., adopt a contrary course.
The entire annual premium or INSTALL
ment' is to be paid in full without any re-
duction Tor the entire investment period"
ten, 10 or 20 wears. No adjustment or APP
portiOnment of losses, expenses or earnings
is made during that period; no dividend de-
clared or paid; no means of ascertaining
what the cost OF the operation is from year
TO year; no means of knowing what the real
outcome of the speculation is likely to be,
for no statement of account can be called for
bv any person either during the Investment
period" or at its close. The holder of the
policy or bond" or "consol'' has to bind
himself in advance in his application to
take whatever is given him as the profits OF
his venture without account or question.
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 toIeseen, the fluctuations
capable of reasonably safe predetermina-
tiOn, and themselves, therefore, capable OF
being so weighed and balanced that profit
able result can be forecast within a safe
margin.
Speculation means putting money into
scheme, the expenses, profits and losses of
which are not we'll foreseen, or are likely to
nCctuate so irregularlY, widely and uncon-
trollably that they cannot be truly weighed
and balanced, nor the outcome brought into
my margin of safe calculation, scheme In
which gain and loss are alike possible and
alike uncertain both as to fact 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 take them.
HOW CAN A LIFE INSURANCE COMPANY
MAKE MONEY?
1t has two things to do; it has to paw
losses and expenses. 1t charges premium
calculated TO cover the losses and the ex-
penSes. 1t knows from its mortality tables
what the losses will be within a safe margin;
il makes the expenses much or little, as it
chooses, within certain limits. 1t esti-
mates a percentage which they ought not to
exceed and adds that to the premiums
charged 10 cover death losses.
Out o: these premiums the company paws
its yearly death losses, its expenses, and
also furnishes the reserve to provide for the
greater mortality when its risks get older
and fur the maturity Of the endowments.
This reserve il can invest until it is needed
and it is, therefore, calculated on the as
sumption that it will earn some certain rate
Ui interest while held.
If now the death losses have been less
tEau the table called for, and the expenses
lave been less than was provided for, so
much o. the premium will have been saved,
aud can be returned to the insurer. But it
Is not a profit 10 him. 1t is simply
q saving from the anticipated cost of carry
ing his insurance. But mis- insurance is an
expense to him just as his fire insurance is
The premium returned to him is reduction
OF the expense, not profit.
Il the rate of interest earned is greater
than that assumed, the excess is in the
nature OF q profit. For example, if the COM
nany assumes that each mans reserve is
going to earn i per cent, and it does earn )
reserve, aud the extra per cent is surplus
and can be turned back to him with the saw
lngs rom losses and expenses. This surplus
interest is usually called profit, and is in
the nature Of a profit, though its actual use
IS merely TO reduce the cost of carving the
insurance. 1t is, however, the ONLY profit
there is to the insurer. All else is cost OF
insurance; paying expenses, and helping
pay other peoples losses until ones own
Al. II
How can this operation be converted into
profitable investment for the insurer HIM
self?
1t protects his family and is, therefore, in
aispensable; but how can he make money
cut Of it?
EXAMPLES.
Several of the great companies are offer
ing under different names the same ''inyest-
Iuent policy, bond" etc. For illustration
o; the whole matter we will select what is
in fact, 20-year endowment policy, with no
dividends until the end of the 20 wears.
THE ESTIMATED ADVANTAGE.
Take man aged 30, insurinc for $40, 600;
he is to pay 20 premiums of 1896 each. The
rOlIcy contract is to pay him SO, 900 if he
lives and keeps up his policy through the
20 wears. But the company estimate that
by leaving all his savings aud interest earn
lugs with them all that time, they NAV nav
him an additional s., ,060, or a total of
81, 900, which would be equivalent to COM
Founding his payments at 4.92 per cent.
HOwCAE THEY DO IT AND PAY EXPENSES?
This rate OF interest, 492 per cent, is more
than the average rate these companies are
now earning on their assets. But aside from
that tact, the expenses of the business and
lhe death losses have first to be paid.
In these particular companies the expense
ratio is about 20 per cent, or one-ffth of
their entire income. Out Of every dollar of
premium and every dollar of interest 20
cents is taken for expenses, leaving only so
cents of each 10 pay losses and provide the
nnaI payment That is out of each pre-.
MUM OF S496 these companies can use for
the lulhllment of their contract and ''esti-
mates" only S396.S0. This would have TO
be compounded at 6.S3 per cent to produce
the estimated Sl7, ,060, if no expenses came
out Of the interest, but one-finh of that
goes TO expenses also, so that to realize the
Sl7, ,O60 and pay expenses the premiums
must be compounded at S.54 per cent. or
greatly more than the rate they are now
earning.
HOW MUCH CAN THEY DO?
These companies, under present condl-
tions, can hardly hope to decrease their ex-
pense account or to earn more than per
cent interest on their assets for the next 20
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
tie Just Sl0,Sl7, instead of the estimated"