To Loading $4.23 By Reserve 8th terminal $207.49 " Mortality, as per table.... 6.53 " Premium " Reserve 9th terminal 238.83 " Interest (4) 4 per cent.... 32.91 " Dividend 5.39 " Surplus interest (actual rate 5 per cent) 2.30 " Salvage on mortality 20 per cent L31 " Salvage on loading 1.78 8254.98 $264.98It will be observed that this account really duplicates entries, there being charged the full costs of insurance and the full loading, and there being credited the inter est required to make good the reserve, and then addi tional entries are made, rebating the margins of costs of insurance and of loading, and also crediting the ex cess interest. The account could be kept, of course, but it would look decidedly queer if one or more of these additional entries were minus instead of plus. This would surely be the case as to loading for the first year if a correct account were kept and the loading were on the level premium basis.
A simpler and more direct system of accounting, and therefore less puzzling to the insured, is as follows : II0 It will not escape notice that under this system only the actual expense and mortality costs are charged and the actual rate of interest earned is credited, thus avoid ing duplication. The charge for expense is determined by the loading, especially if the same is on the so-called scientific basis, being such percentage of it as the aggre gate expenses bear to the aggregate loading; the charge for cost of insurance is determined by the tabular cost, being such percentage of it as the aggregate net losses bear to the aggregate tabular costs of insurance; and the credit of interest upon the mean balance is at the rate realized on the mean assets.
In neither of these accounts are entries made for gains from forfeitures, but such entries offer no difficulties. If divided in proportion to reserves exposed to the risk of forfeiture, they can be converted into an increase in the rate of excess interest a simple device and approxi mately correct.
Very few companies keep such individual accounts; nearly all apportion surplus by formula. But when there is strict adherence to the contribution plan, the re sult will be the same. In order to prevent disturbing fluctuations in the dividends, however, almost all com panies employ average percentages instead of following the current experience accurately.
The bonuses of the Equitable of London, already re ferred to, were for a long time apportioned every seven III years, but now every five years, which is more common in Great Britain than either a shorter or a longer period. Annual bonuses are not unknown there, however. In the United States, the earliest apportionments were at the end of five-year periods, and in "script dividends," redeemable later bearing interest until redeemed in cash. Annual apportionment soon became the rule, how ever; and, precisely as later in regard to deferred divi dends, absurdly excessive estimates of the annual divi dends to be expected were indulged in, which, after a few years, made the plan unpopular.
About the year 1870 there was a reaction, both against annual dividends and surrender values, which brought into vogue forfeitable policies, with apportionment de ferred for ten, fifteen or twenty years, and with tontine provisions. So much had been said about the enormous gains from forfeitures during the agitation in favor of surrender values that it was easy to believe that the gains would be large. The lapsing of policies because of dis appointment as to annual dividends had been very great and was soon made much more widespread by reason of the panic of 1873 and the ensuing hard times. This con
firmed the notion that enormous gains would be realized from forfeitures; but many of the forfeited policies had no reserves to be forfeited, as they were burdened with premium loans, nearly or quite equal to the full reserves. Moreover, the period was one of failing companies and of failing confidence in them, so extraordinary that in about seven years the volume of life insurance in force in the regular companies dropped fully one-third.
Only three companies of importance, however, made any use of the full tontine plan, involving the forfeiture of the entire values. It was modified later so as to for feit the surplus only, which really made it merely a de ferred dividend plan of th6 ordinary type. In this form 112 it has been employed by nearly all the companies, only a very few resolutely clinging to annual dividends.
Owing to the system of loading most frequently adopted, viz. : on a net level premium basis, as to most policies there is not really accumulated out of the pre miums, after meeting the expenses incurred on account of them, as well as the mortality cost, enough to pro vide their reserves before the end of the third year at least. The application of the contribution formula, how ever, may show a surplus at the end of one year, because the policy may for dividend purposes be charged only with such percentage of its loading for expenses level each year as the aggregate expenses to the aggregate loading.
The advantages claimed for long dividend periods are : until required for distribution, this surplus is of the na ture of general surplus and acts as a safety fund; it is ' payable, as a reward for vitality and for persistency, only to persons who survive the period and have continued their insurance; and it has the effect to convert life poli cies into accumulating investments. Its disadvantages are : it tempts to extravagance and to larger commissions for new business, causes men to view life insurance as a speculation, and is invariably disappointing as to invest ment results.
The report of the New York Legislative Investigating Committee in 1906 exposed all these evils of the opera tion of the tontine' or deferred dividend system; and, in addition to laws limiting expense of new business and general expenses, recommended the enactment of laws prohibiting the issuance of participating policies with dividend periods of more than one year. Such laws were enacted, and there has been similar legislation, requiring dividends to be declared and paid annually, in several other States.
II3 It was at first expected that this would materially dimin ish the attractiveness of life insurance policies and that the volume of new insurance would be much diminished. The great diminution of new insurances during 1907 and 1908 is now ascribed to other causes, however, and it is admitted that there is a much larger production per agent and a complete recovery of former popularity, though dividends are annual.
The frequency of accounting, involved in annual dis tribution, has also resulted in the suppression of many extravagances and leaks which formerly passed un noticed, but now are seen to affect unfavorably the divi dend rate, which competition causes every company to bend every energy to maintain and even to increase.