As competition is so largely concerned with the question of dividends, the tendency would be towards adopting (a). The agents may be afraid that the adoption of under-average plans would result in many cases being treated as sub-standard which were formerly accepted as standard. It is inevitable that this would be true in a small proportion of the cases. When there is no sub-standard class there is a natural tendency to be lenient with border-line and slightly impaired lives because the company has no alternative but to accept, or decline to issue a policy. Greater justice, however, is done when there is a means of handling these border-line or sub-standard cases according to their merits. While the agents may lose a small percentage of the business by reason of having treated as sub-standard a few types which were formerly accepted as standard, they have, on the other hand, a great advantage from receiving policies on many cases which were formerly declined. If they can place even one-half of the cases issued on under-average plans, the saving in commissions thus effected is very much greater than the loss resulting from placing in the sub-standard class the few borderline or sub-standard cases formerly accepted as standard. Furthermore, the field of operation is greatly enlarged because the agents can canvass actively among border-line or sub-standard risks, whereas they were formerly limited to cases which appeared to be standard and entailed no material hazard from occupation.

CONCLUSION

While many companies have the desire to extend the benefits of life insurance to sub-standard risks, and while many of their officers recognize that they are not doing their full duty to the public by refusing to grant policies to sub-standard lives, it is rather a dangerous experiment for new or small companies. Notwithstanding the large amount of data published in recent years, it is necessary to have considerable knowledge, skill and experience to handle sub-standard business successfully. The increasing knowledge with regard to mortality is resulting in greater justice being done to individual lives as the outcome of the ability to differentiate between the various grades, and to grant under-average risk policies which are fair to the applicants and equitable to the company.

THE PROBLEM OF CASH SURRENDER VALUES AND

CASH LOANS

BY JOHN B. LUNGER,

Vice-President, The Equitable Life Assurance Society.

SURRENDER VALUES

The granting of cash surrender values and loans from reserves is developing into a serious problem for life insurance companies.

Originally the surrender value of a lapsed or forfeited policy was granted in the form of paid-up or extended insurance. It was thus limited on the theory that the policy was not a banking contract, that the retiring policyholder having made a contract for insurance, his reserve should only be applied in the form of insurance.

In time the abandonment of this theory was forced by competition and the practice of paying surrender values in cash became common. In 1906 this privilege was made a statutory requirement in the new Insurance Law of the State of New York. For the ten years following 1905, the proportion of cash payments to the reserves on the policies surrendered increased 42 per cent.

The right of the deserting policyholder to withdraw the reserve on his policy minus a reasonable surrender charge cannot be questioned. The weakness of the present method of expressing this right lies in the fact that the privilege of taking cash instead of paid-up or extended insurance reverses the original purpose of the contract and often encourages needless lapsing. This privilege has tempted many policyholders to unnecessarily surrender their policies to secure ready cash which has resulted in the loss of a great volume of valuable insurance protection.

While the return to the original practice of giving paid-up or extended insurance in place of cash for surrendered policies may be classed among the impossibilities, there is a phase of the application of the present plan which demands, and it is hoped may receive, remedial action, namely, the question of the surrender charge.

The New York Laws of 1906, under which the bulk of American life insurance is written, and which have been copied in many states, provide that the entire reserve less one-fifth or the sum of two and

fifty one-hundredth dollars for each one hundred dollars of insurance shall, upon demand not later than three months after the date of lapse or surrender of the policy, be applied as a surrender value as agreed upon in the policy. While this law defines the minimum of the reserve which shall be paid or applied to surrender values, which consist of cash values, paid-up insurance or extended insurance, in practice this minimum is exceeded. Nearly every company allows the entire reserve as a surrender value in cash, or its equivalent in paid-up insurance, after the tenth year of insurance, and deducts less than the surrender charge allowed by the law in the early policy years. It is perhaps in the increase of cash surrender values and in reducing the intervals or periods at which they may be taken that the competitive concessions found their most questionable expression during the period between 1880 and 1905. In 1880 very few companies guaranteed cash values at all. Later certain companies adopted values payable at the end of each fifth year of insurance, but by degrees, under the force of competition, annual values became general and then the amounts of the values were gradually increased until guarantees equal to the full reserve were reached and competition could go no further. The effect of this was to emphasize the importance of the individual policy-displacing the principle which regarded the interests of the whole body of the insured to be paramount to those of the individual.

The old-fashioned notion was that each retiring policyholdereach deserter from the ranks as it were-should pay a proper surrender charge as a quid pro quo for the loss sustained by the whole body of policyholders through his retirement. While the 1906 law allows a surrender charge there is nothing in it forbidding the companies to waive such charge, hence we find that certain companies are paying the full reserve after the policy has been in force for only a few years; in two or three companies after only three years. In other words, the law protects the deserter by stipulating that he must be paid certain minimum values but fails utterly to act in the interests of the whole body of policyholders by prohibiting larger Dayments to the deserter than he is in equity entitled to receive.

Herein is the defect in the law. It should define a surrender charge adjusted to the kind and age of the policy; and then provide that no company shall guarantee in its policies, or pay in practice, a larger cash value than the reserve less such surrender charge.

If a surrender charge should be imposed in all cases when cash is taken, the amount of such charge could be used to replace the retiring policyholder without casting the burden of cost on the persistent policyholders. If need be it could be used as a compensation for a decline in values, unexpectedly high mortality, or other contingencies.

Undoubtedly the cash value privilege is a great help in times of emergency, and it must be conceded that sometimes it is very important to protect the insured and his family while the insured is living. But no policyholder should be permitted to retire and withdraw his entire equity in reserves, thereby transferring his share of any depreciation or other unfavorable contingency to those who remain.

POLICY LOANS

The policyholder's privilege of borrowing a portion of his reserves on the security of his insurance contract was also a development of competition, and like the giving of surrender values, the idea grew and the original privilege was extended until the plan became permanently fixed upon the business by being made a requirement of the law.

As originally intended, this privilege would have been a great service to the policyholder and to the companies as an attractive feature or inducement to insure, but, as in the case of surrender values, the loan privilege has been carried to extremes, the general practice now being to loan, as well as to pay as a cash value, the full reserve upon a policy after the tenth year of insurance.

The standard contract provisions required by Section 101 of the New York Laws requires in each contract a provision relating to policy loans which is described as follows:

A provision that after three full years' premiums have been paid, the company at any time, while the policy is in force, will advance, on proper assignment or pledge of the policy and on the sole security thereof, at a specified rate of interest, a sum equal to, or at the option of the owner of the policy less than the reserve at the end of the current policy year on the policy and on any dividend additions thereto, less a sum not more than 2 percentum of the amount insured by the policy and of any dividend additions thereto; and that the company will deduct from such loan value any existing indebtedness on the policy and any unpaid balance of the premium for the current policy year, and may collect interest in advance on the loan to the end of the current policy year; which provision may further provide

that such loan may be deferred for not exceeding six months after the application therefor is made. A company may, in lieu of the provision hereinabove permitted for the deduction from a loan on the policy of a sum not more than 2 percentum of the amount insured by the policy and of any dividend additions thereto, insert in the policy a provision that one-fifth of the entire reserve may be deducted in case of a loan under the policy, or may provide therein that the deduction may be the said 2 percentum or the one-fifth of the said entire reserve at the option of the company.

The primary purpose of this law, which fastens a banking function upon life insurance, was to enable the policyholder to have the use of his reserves in time of financial stress. It was believed that this would be of great value in preventing lapses by permitting the insured to apply his reserves to the payment of premiums when short of cash, and that the plan in general would prove an attractive one as an inducement to the taking of insurance.

These advantages are freely conceded, but experience has demonstrated that they have been largely neutralized by the disadvantages and the abuses which have resulted from the expansion of this loan privilege. These loans operate directly against the beneficiary by reducing the protection, for only a small per cent of the loans are repaid by the borrowers and the rest must be deducted from the claims at death or from surrender values. They also encourage lapsing by the additional burden placed upon the policyholder. Many borrowers, finding their protection reduced, their premiums remaining the same and an annual interest charge to pay, become discouraged and lapse or abandon their policies. An injustice is also done the remaining policyholders by the low withdrawal charge and the possible danger of a "run" on reserves in time of panic. Broadly speaking, the policy loan privilege discourages saving and encourages spending. This fact is emphasized by the extraordinary increase in the diversion of policy reserves from their original purpose during recent years.

The magnitude of the problem which has resulted from this unwisely extended privilege may be appreciated by a study of the following table which shows the extent to which these reserve funds have been withdrawn from the American "old line" companies since 1890: