A well-known American actuary urges a method of loading which takes no account of the incidence of the expense, but charges it as a percentage of the aggregate annual costs of insurance i. e., for each policy, of the net one-year term premium at the attained age for an in surance equal to the total sum insured, less the reserve or "self-insurance." This gives an increasing loading for a whole life premium. While no other American actuary goes so far, many urge that there is no occasion for adjusting the loading to meet the incidence of ex 78 penses, and that it should be the same amount each year. This means that expense of procuring insurances is met by borrowing from surplus accumulated from the earn ings upon other policies or paid in by stockholders for the purpose, and such borrowings are made good ultimately out of margins of future loading.
This, of course, is impossible for new companies, and results in very slow growth for small companies. The most eminent actuary of the United States is authority for the statement that under such conditions, rigidly en forced, to establish a new company is "a well-known im possibility, not challenged by a single instance to the contrary." A favorite mode of dealing with this matter, in the United States and other countries, has been to make the gross premiums level, as usual, and then to take for the first year's loading as large a proportion as may be re quired, up to the limit that enough is left of the gross premium to contribute the policy's share of the losses. The portion of the first year's premium remaining after such deduction for first year's expenses is made is the net premium for that year. The net premiums after the first year are increased by an amount equivalent to the de ficiency thus created in the first year's net premiums.
It has been the opinion of many that the use of such a system is not contemplated by the valuation laws of many of the States of this country. Accordingly, com panies that have desired to have a larger loading the first year have made use of what is known as the preliminary term plan; that is to say, the policies provide that the premium the first year shall be for a term insurance of one year only, and that the whole life, or limited payment life or endowment insurance, shall commence at the end of that year upon the payment of the premium due at the beginning of the second year.
79 The effect of this is to give a very much larger loading the first year. Usually all the premiums, including the
first, are for the same amount; and in this manner pre miums as large as the subsequent nine-year endowment premiums have been taken as premiums for a single year's insurance. In some cases, indeed, under certain endow ment schemes, as large a premium as $100 has been charged, ostensibly for $soo insurance for a single year or even for a less amount.
The net premiums under such a preliminary term plan are as follows : The first year, the net premium for one year term insurance; after the first year, the net level an nual premium for an insurance, maturing as promised in the policy, issued at an age one year higher, at a date one year later and for a term one year shorter.
The extravagance of the loading sometimes under the preliminary term plan, as described, has led certain com panies to make modifications first introduced in this coun try by the author of this book in 1897. Before consider ing these modifications, however, it may well be remarked that if sums so large as these are actually expended in pro curing the insurances, the extravagance is present, no matter how the loading is computed.
The modification consists in making but one rate for one-year preliminary term insurance for each age, which rate is equal to the whole life premium at the next age. This, of course, gives a level gross premium each year. The net premiums on the whole life plan are the net one year term premium the first year and the net whole life annual premium for an age one year higher the next year and all subsequent years. But net premiums for plans which involve the cessation of premium payment after ten, fifteen or twenty years are based upon these whole life preliminary term net rates, by adding each and every year, including the first, a net pure endowment premium 8o sufficient to produce a fund at the end of the payment period equivalent to the then present value of the sub sequent net ordinary life premiums, which are thus pre paid. Occasionally, companies have accumulated enough to prepay the gross premiums; but usually, as stated, merely enough to prepay the net premiums. For endow ment insurances this net additional premium is a pure en dowment annual premium, sufficient to produce an en dowment at the end of the period equal to the excess of the sum payable as an endowment over and above the then reserve on a whole life preliminary term policy issued at the same age.