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Surplus How Applied

SURPLUS HOW APPLIED. The method of dealing with the surplus earnings of participating policies which the founders of the Equitable of London had in view, was, as we have seen, to divide the same among the policyholders in cash at frequent in tervals.

The method actually adopted by the company, as we have also seen, was to grant "reversionary bonuses," pay able with the principal sum upon the death of the in sured, and to make apportionment of the surplus every seven years only.

The application of surplus earnings to the purchase of reversionary bonuses, known in this country as "paid-up additions," "reversionary additions" or merely "dividend additions," was also introduced in the United States at an early date. One of the oldest and largest companies still declares its dividends in this form, permitting the cash value of the additions to be taken, however, if the policyholder prefers.

Dividends in the form of interest-bearing script came into use in the United States at quite as early a period.

At first, the fact that reversionary bonuses were not fairly apportioned, if the same percentage of the sums insured were added without regard to the attained ages of the insured, was not generally understood; though, of course, it was known by those in charge that the aggre gate net single premiums for these paid-up insurances, so declared as paid-up additions, must not exceed the total surplus earnings. To bring out an even percentage of additions, which would absorb the surplus earnings very nearly, often required very nice calculations.

This system of percentage bonus additions, thus in troduced by the Equitable of London in advance of all other methods, became and yet remains very popular in Great Britain. There are two varieties of it at least.

• One adds a percentage of the original sum insured and is known as the "simple reversionary bonus" system. The other adds a percentage of the sum insured, includ ing all bonuses, and is called the "compound reversionary bonus" system.

In the United States the practice of most of the life insurance companies is to declare and pay dividends in cash. A single exception has already been mentioned, a great company which declares its dividends as rever sionary additions, but permits their cash value to be taken, if desired.

On the other hand, companies which declare dividends in cash permit the same to be applied at the option of the insured to purchase paid-up additions. Proof of good health is sometimes but not usually required as a condi tion precedent; when required, if it is once given and a request for that form of application made, the surplus is so applied thereafter without demanding evidence of con tinued good health.

Cash surplus has also been applied to purchase in creases of the insurance for a single year, known as tem porary dividend additions. This, however, was never common, and no new policies of this character have been issued for many years.

Especially in connection with deferred dividend plans the option has also been given to apply the cash surplus to purchase a life annuity or a temporary life annuity in reduction of subsequent premiums or otherwise.

Another application of the surplus has been to cause the policy to mature as an endowment, or to accelerate its maturity, if it is already an endowment. This is clearly, in effect, only to permit the surplus to accumulate undis turbed, the same not to be paid in event of death, but not subject to forfeiture upon lapse or surrender because it is taken into account in fixing the surrender value.

Yet another form is to apply the surplus to purchase pure endowments payable at the end of a given period. This is, in effect, a deferred dividend plan, but the surplus vests definitely each year, though payable only at the end of the period, provided the insured survives. Under such a system, the surplus so apportioned is forfeited in event of death, lapse or surrender.

additions, cash, reversionary, insured and dividends