Having become a life insurance solicitor in February, 1921, and having spent the last six months practically altogether in soliciting naval officers, the author has written the following article with the view of showing naval officers how mortality in the Naval Service compares with that of civilians, with a few suggestions as to which is the best type of insurance and the reasons therefor.
Let us start with the American table of mortality which practically all companies and the U. S. Government use. Table I is made up from experience gained on insurable lives.
Now in working out Table II, which follows, I have applied Table I to each class of the U. S. Naval Academy beginning with the class of 1860, and ending with the class of 1916. In doing this, my data was taken from the U. S. Naval Academy Graduates Association's Register as of January 1921, which shows the members who are living; those who are dead; and those who are unaccounted for. The members "unaccounted for" have not been considered, and it was assumed that age upon graduation was 22.
A general summary of Table II shows that mortality varies widely between classes and that the per cent of actual mortality to expected mortality in some cases is exceedingly high with a general average of 95.8 per cent.
We will now compare this with the experience of ten of the larger insurance companies on civilian lives over the period of 1917-21 inclusive.
A summary of Table III shows civilian mortality rather uniform between companies; that it fluctuates from year to year and very widely in 1918 which was caused principally by the epidemic of influenza. However, the actual to expected mortality is 68 per cent over the period of five years for the ten companies.
A comparison of Tables II and III shows service mortality to
be 27 per cent higher than civilian mortality. Hence that is the reason why the majority of companies "rate up" naval officers $5.00 per $1,000, or 5 years in age. Those that do offer you insurance at the same rate as civilians, limit you in amount to about one-tenth allowed an individual civilian.
The thought will occur to some that as actual mortality is only 68 per cent of expected, life insurance companies are making considerable money. That assumption is erroneous in the case of Mutual Companies, (and the majority are mutual to-day) for surplus earnings are refunded to policy-holders in an annual dividend.
Three factors govern the dividend:
(1) Savings on mortality,
(2) Savings on expenses of operation,
(3) Excess earnings on investments.
The latter two do not vary much but in the case of the first, it does as shown in Table III. For instance, the large losses in 1918 due to "flu" caused a reduction in dividend later on for a period of one year by most companies.
In the case of Stock Companies, these surplus earnings go to the stockholders. In other words, they issue non-participating contracts in which you waive all your right to share in the savings from mortality, expense and interest.
The general deductions to be made from Tables I, II and III are:
(1) The need of Life Insurance is greater in the service than in civilian life.
(2) A life insurance policy (not rated up) is a better proposition for a naval officer than a civilian. In other words, the officer gets more for his money.
BEST TYPE OF POLICY
In discussing the best type of policies offered, it should be borne in mind that the primary function of Life Insurance is what is called "protection." There are numerous secondary functions but "protection" is its biggest asset. Therefore, the best policy is the one that carries the lowest premium and that one is the Straight Life policy.
Below are a few types arranged in order of preference. Figures are at age 25 per $1,000. per year, quoted by a mutual company.
Straight Life $18.28
30-Payment Life $21.50
Endowment at 60 24.64
20-Payment Life 26.48
30-Year Endowment 28.74
20-Year Endowment 44.84
Dividends will reduce above figures in later years, generally beginning at the end of second year.
The average life of a man 25 is 38.8 years. Therefore, when insured on Straight Life plan, we assume he will make 38.8 payments of $18.28 or $709.26 per $1,000, (reduced by future surplus earnings). Suppose he lives 38.8 years or to retirement age. He can then stop his payments and have a paid-up policy of $820 for each $1,000 face value. In fact he has a paid-up value option beginning the end of third year and increasing each year thereafter, and that paid-up value is in proportion to and always greater than the amount paid in.
Table II shows about 56.2 per cent each class should reach retirement age, excluding resignations, retirements, etc. Those that are fortunate enough to reach age 64 can stop payments and exercise above option; those that do not reach age 64 leave their estate better off by taking the Straight Life policy.
The 30-Payment Life plan is the next best, but it increases your protection costs by one-sixth.
The Endowment at 60 has the secondary function of providing a lump sum available about the time you retire. Is not your retired pay when you retire on account of age ample to take care of you and a fair size family? Therefore, that function is secondary and depends upon individual circumstances.
The 20-Payment Life comes next with a premium nearly 50 per cent higher than Straight Life.
The 20-Year and 30-Year Endowment provides the means for accumulating a sum for use at some remote date but the risk to the Company is lessened considerably owing to the large premium required to be charged to pay you in case you are living at the maturity of the policy.
Past experience shows that when a man 25 matures a 20-Year Endowment at 45, he usually renews his insurance on the Straight Life plan at age 45, which then will carry a premium of about $35 per $1,000. It would have been better had he taken Straight Life Insurance at 25 and invested the difference in premium in a saving fund.
A majority of older officers realize that Straight Life insurance is the best, but younger ones do not. It is to the agent's interest to sell you an Endowment or limited payment life policy in preference to Straight Life, but it is to your interest to buy the Straight Life whether married or single. The sale can frequently be made more easily on the first two than the last.
Another feature of Life Insurance policies that draws attention is the Disability Clause they now contain. Many sales have been made on this feature alone. It is well to include the provision in your policy for the cost is small, about $.65 per $1,000 per year at age 25, but it is a minor part of the contract. Average life after total and permanent disability is about 3 years.
Let us now discuss the biggest and best features of a Life Insurance contract and these are the various settlement options. What are called the non-forfeiture provisions such as Cash Values, Paid-Up Values and Extension, protect you, but the settlement options protect your beneficiary and that is your main object when buying a Life Insurance policy.
One is usually very eager to leave his insurance to his beneficiary in a lump sum. It is a mistake to do so. It is the equivalent of having $10,000 worth of Liberty Bonds, knowing you were going to die, then advising your beneficiary to sell them and invest the proceeds to the best of her or his ability. How many would do that? Not many. Your beneficiary is accustomed to receiving a monthly allotment from the Navy Department. Your insurance should be made payable in the same way.
Experience shows that the average beneficiary soon dissipates a "lump sum" by poor investments. It requires financial skill to invest a sum of money safely over a period of years. Life Insurance companies are equipped to do that better than your beneficiary. Furthermore, the income is guaranteed—more than a trust company will do when executing an estate. By guaranteed, I mean backed by the assets of the company, which in the larger ones approximate closely to a billion dollars each. The proceeds of your policy earn in general 4½ per cent interest while being paid off. It is far better to leave a sufficient monthly income for five or ten years than leave it in a lump sum. It can be made guaranteed for your beneficiary's life time. Any arrangement can be made to suit the most exacting situation.
In summing up, a great many officers can change their present types of policies to better ones that will react to their advantage. By that I do not mean giving up a policy to take one in another company, for that is a losing proposition, but I mean from one plan to a better plan in the same company.
A great many should change their method of settlement, converting all their present policies to a monthly income basis, or a small lump sum and balance on monthly income. That will react to the advantage of their beneficiary.
Many are inadequately insured and some do not carry any insurance. A reflection on service mortality, Table II, shows clearly the imperative need of it in the service. For when one does not insure he asks his beneficiary to take a chance on one single life that a company could not do, which is clearly shown in Table II—the wide fluctuations between classes. This is more pronounced when considered as an individual proposition.