Evening star. [volume] (Washington, D.C.) 1854-1972, 1905-07-15

There are tnnumerable other forms Of
policies. but these are representative, and
Soss. result :1Hr s aomBBuaon s. .:ed
Upon the mortality table aud the expenses
incident to the running Of I life Insurance.
company
The Reserve,
THE ressrvS IN life insurance Il simply
the insurance fund or mortality fund Of
the company. from which all death claims
art paid. The reserve II made up Of the
net annual premiums ana the money these
premiums will earn at 81 per cent oom-
pound interest. Neither net premiums nor
the interest thereon can be devoted under
the law to any other use than to tho pay
mept Of Death claims.
A life Insurance company has Just begun
business with s1.S22 members each at ago
thisty-fve, and each holding an ordinary
that the net annual premium for this slim
and kind of policy is 1891. This amount,
collected from each policy holders at the
beginning OF the first year. totals el.62S,-
brings the total to 81. 1856. ss1 GA. There will
be 732 deaths during the first year OF busi-
ness, calling for a total death claim pay
ment Of $I32, 900. Thus the balance at the
end of the first year will be 1858. S81. o.. The
sum on hand at the beginning of the year
is called the initial reserve, and the balance
at the end OF the year the terminal reserve.
In the first year of companys existence
the initial reserve consists OF the net pre-
miums only. After that the initial reserve
consists of the balance from the preceding
year, which includes the interest earned
that year. and the sum total of the net pre-
miums for the new year. Thus, the reserve
In this company, starting with 81 ,S22 men,
bers, will grow from year to year. until a
age sixty-four the terminal reserve will
reach the great total of s24 900, So IS Then
will pradnqllv N q
with the rate of mortality computed in the
mortality table until at the age of ninety
five the terminal reserve will be represented
by naught. The initial reserve will then
be 81 81. This sum plus the next years
interest will make just 50. 900; and this is
the amount necessary to pay the death
claims on the three policies whose owners
will die in the ninety-sixth year, according
to the table.
The Legal Reserve.
The legal reserve of life insurance Is the
reserve that the law requires the company
to have in order to be solvent. 1t is a fund
equal in amount to the excess OF the pres
ent value of benefits under outstanding pol
icies over the present value Of net pre-
miums to be paid on those policies.
A company starts out with 100000 poll
cies, aggregating 500 900 O0O life insurance.
Let it be assumed. for illustrative purposes.
accrue under these policies is found to be
S37, 055, 600. This is the sum that today, put
out at 31a per cent compound interest, Will
be sufficient TO pay every policy as it falls
due until the last three are paid in the
niGety-siXth year.
To pay these policies as they mature the
company has nothing but the net premiums.
plus the interest. Therefore If the present
worth of these premiums is found to equal
the present worth of the benefits to accrue
under the policies, that is, the face values OF
the policies, then the company is solvent,
credit and debit balancing.
But the company does business for sew
eral years During this period net annual
premiums have been collected. some poll
cies paid, some new business written and
some of the premiums collected have been
applied to meet death claims Consequently
the present worth of those premiums
naming to be collected will no longer equal
the present worth of the face values of pol
fcies still to be paid in the future. The
present worth of these benefits is now S5S,-
10000 since the time of earning interest
is shorter by several years, and the pres
ent worth of the net premiums is four mil
lions less than this amount. On the credit
side there is then deficit of four millions
The company is clearly insolvent under the
law. and this deficit represents the legal
reserve liability of the company.
But If the company. after meeting all its
obligations during these several years has
reserved from year to year the balance of
its net premium and interest income. as
illustrated in the exposition of the reserve
this fund will equal the amount of the COM
puted reserve liability. credit and debit Will
balance and the company is solvent in the
eyes of the law. This fund.- or reserve is
the legal reserve
Those companies required by law to main
tain such reserve are called legal reserve
companies, and sometimes old line compa-
MES, TO distinguish them from fraternal and
other companies which are not required by
a N a ITO i
whose premium rates and assessments are
not fixed in accordance with a mortality
table
Profits to Policy Holders.
In calculating the premiums to be paid
at various ages and on the various kinds
of policies life insurance company does
not assume that the death rate will be any
lower than the general death rate as shown
members are carefully selected body of
men. having had to pass severe medical
examination before being admitted into the
company. The company Is almost morally
certain that the actual death rate will be
lower than the tabular mortality, but how
much lower by reason of selection, it can
not tell. So the net single premium is
that which the mortality table shows 1t
should be at any certain age if the com
pany is to meet all claims they fall due.
At the same time the company enters into
an agreement with each member to dis
tribute as dividends among them what is
saved to the company by mortality lower
than that expected from the mortality la
BILE.
This IS one source of life insurance prof
its. In many companies this source OF
profit is very large, indeed, the death rate
among the members frequently being not.