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Loans on Policies

LOANS ON POLICIES. Before the introduction of surrender values in the States, in cash or otherwise, at least one form of loan upon the security of a life insurance policy was known. It was the "loan-note" or "premium-note" plan, very much in vogue in the early history of mutual or participating life insurance in this country.

This plan consisted in taking the note of the insured for a part of each premium usually 4o per cent. in the early days, but sometimes as little as 33 per cent. and sometimes as high as 5o per cent. The notes bore inter est, payable with the cash portion of the premium; divi dends were applied usually upon the principal of the in debtedness, but frequently first to pay the interest and the remainder to reduce the indebtedness and occasionally, especially in later years, to pay interest and to reduce the cash part of the premium. Although the notes were often in such form as to be personal obligations, seldom was an attempt made to collect upon one; and, in practice, the mutual obligations were deemed to be canceled when, by failure to pay a premium, the insurance became void. Thus the notes became in effect advances against the poli cies and were secured solely by the values or reserves of the insurances.

This practice was criticised very severely by Elizur Wright in his reports as commissioner of insurance; be cause, while the same companies were declaring that it was dangerous and preposterous to allow surrender values in any form, under this "loan-note" plan they 'were per 127 mitting surrender values which were frequently equal to the entire reserves. The inconsistency is apparent, and, as has already been mentioned in connection with the dis cussion of surrender values, to grant loans is tantamount to giving cash surrender values; for if the insured de sires a cash surrender value, he has only to borrow to the limit of the loan value and then to cease paying premiums whereupon the insurance lapses, he remaining in posses sion of the proceeds of the loan.

The borrower does not usually sign a note which ren ders him liable personally; and, as stated, an attempt is not often made to enforce payment, except from proceeds of the policy, i. e., as an offset to its forfeited reserve.

Notwithstanding which, there was in those days, and there yet remains, this important distinction between cash loans and cash surrender values : loans are utilized in many cases as a means of continuing the insurance, and not as a means of surrendering it in order to obtain the cash value. This is plainly seen, both in the large propor tion of renewals of policies against which loans are made, and also in the large number of loans negotiated when the cash values were also available and by surrendering the policies might have been taken. It was also illus trated by the original "loan note plan"; for under it the loan was made an inducement to come in, instead of to go out.

In times of financial stress, the privilege of borrowing is very often availed of for the purpose of maintaining the insurance, and policies containing this privilege prove veritable "friends in need." At such times cash surren der privileges, unaccompanied by loan privileges, result in increased discontinuances an injury to the company, and to the insured as well. An experience of this sort in 1893 caused a prominent company, which granted cash values on surrender but refused loans, to change its policy and to 128 grant loan privileges also. That, except as a result of straitened finances, men are ordinarily tempted by the mere fact that cash values are available to surrender poli cies which can at any time be surrendered for cash, is not now credited; and it is well known that the privilege of a loan often enables the insured to keep up insurance which otherwise in hard times he would be compelled forthwith to abandon. Therefore, though loans may be made a means of securing cash values if they are not otherwise obtainable, this is not done in most cases.

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