Every aviator with the responsibility of a dependent is confronted with the problem of insuring himself in such a way as to provide a decent living for that dependent in the event of his death. Many of us contentedly take out an average of $10,000 “straight life” and are blithely unconcerned that the interest on $10,000 will provide a monthly income of only $42 at best. In other words, our dependent must use up the principal of the insurance as well as the interest in order to maintain a decent standard of living.
What is the minimum monthly income necessary for our average dependent? Any figure named would, of course, be arbitrary, but let us assume $100 per month as a figure acceptable to the average dependent. A working plan should then provide for $100 per month.
As is well known, the premiums on a policy of $24,000 (yielding $100 monthly at 5 per cent) are prohibitively high, especially for a naval aviator. Our working plan should then cost us a lower figure.
Only a few life insurance policies have the desirable feature of a cost increasing with age with a view of lightening the financial load on young policyholders whose incomes are proportionately low. Our working plan should also have this increasing cost feature.
The plan given below will accomplish these three purposes: (1) provide a monthly income of $100 to the dependent, (2) provide this income at a minimum cost to the policyholder, and (3) make the cost to the policyholder increase with his age and incidentally in proportion to his income.
The plan is presented simply as a sample contract between Lieutenant John Doe and a fictitious bank, and it is believed that a careful reading of the contract will constitute the best explanation of the plan. It should be kept in mind that the contract as given is perhaps not technically correct, a matter immaterial to the present purpose.
Contract Between:
The First National Bank of Annapolis, Maryland, hereinafter called the “Bank” and
Lieutenant John Doe, U.S.N., a member of the Aviator’s Mutual Assistance Association, hereinafter called the “Member”
- Upon notice from the Bank of the occurrence of the death of a member, other than himself, of the Aviators’ Mutual Assistance Association, the Member agrees to pay to the Bank, by U. S. Government monthly allotment, a monthly sum in dollars and cents equal to 108 divided by the number of members remaining alive in the said Association at the time of the death.
- The Member further agrees to pay to the Bank by U. S. Government monthly allotment, a monthly sum of ten (10) cents.
- The Member agrees that the first of the monthly payments as provided for in paragraph (1) above shall be paid the first day of the second succeeding month after the month in which the death occurred.
- Upon receiving notice of the death of the Member, the Bank agrees to pay to Mrs. John Doe, described hereinafter as the beneficiary of the Member, a monthly sum equal to the total of the monthly sums collected from the remaining members of the Aviators’ Mutual Assistance Association by reason of and incidental to the death of the Member.
- The Bank agrees that the first of the monthly payments as provided for in paragraph (4) above shall be paid the first day of the second succeeding month after the month in which the death of the Member occurred. The bank further agrees that the last of the said monthly payments shall be paid: (a) On the first day of the month in which the beneficiary is married; or (b) on the first day of the month in which the beneficiary dies, except that in the event that the beneficiary is the wife of the Member and is survived by a child or children less than 21 years of age, the monthly payments shall be paid to the guardian of the said child or children until the youngest has reached the age of 21; or (c) on the first day of the month in which the beneficiary attains the age of 21 years, unless the beneficiary is the wife of the Member.
- The Bank agrees to deposit to the account of the Member all excess sums collected from the Member and not actually paid to the beneficiaries of Members of the Aviators’ Mutual Assistance Association whose death occurred while the Member was actually a member in good standing of the said Association. The Bank further agrees that the Member may withdraw at any time sums deposited to the said Member’s account as provided for above. The Bank and the Member jointly agree that the monthly sum of ten (10) cents as provided for in paragraph (2) above, is not subject to the provisions of the above but is the property of the Bank and is a payment for services rendered.
- The Bank and the Member jointly agree that in the event of the suicide of the Member within one year from date of execution of the contract, the contract shall be considered null and void and no sum shall be paid to the beneficiary of the Member.
- The Bank and the Member jointly agree that the official recognition by the United States of a state of war existing between the United States and a foreign power shall render this contract null and void except: (a) That the payment of monthly sums either from the Member to the Bank or from the Bank to the beneficiary of the Member shall continue as it existed at the time of voidance of the contract. (b) That the provisions in paragraph (5) above for termination of sums paid by the Bank to the beneficiaries shall remain in effect, (c) That the provisions of paragraph (6) shall remain in effect.
- The Bank agrees that upon the demand of the Member, this contract shall be null and void on the fourteenth (14th) day after the date of such demand. Provided further that the exceptions to the voidance of this contract shall be the same as in paragraph (8) above.
- The Bank and the Member jointly agree that if the number of members of the Aviators’ Mutual Assistance Association falls below twenty-five (25), this contract is null and void subject to the same exceptions as in paragraph (8) above.
- The Bank and the Member jointly agree that failure of the Member to carry out his legal obligations under this contract shall be considered a demand for voidance of the contract by the Member and the provisions of paragraph (9) above shall apply.
- The Bank agrees to change the beneficiary of the Member upon receiving written direction from the Member.
- The Bank recognizes: Mrs. John Doe, wife of the Member as the beneficiary of the Member.
- The Bank recognizes that Lieutenant John Doe is a member in good standing of the Aviators’ Mutual Assistance Association from the date of execution of this contract.
- The Bank and the Member jointly agree to abide by the By-Laws of the Aviators’ Mutual Assistance Association as given below.
- The Bank agrees that resignation of the Member from the U. S. Naval Service does not void this contract and that monthly sums due the Bank may be paid other than by U. S. Government allotment in case of such resignation.
By-Laws of the Aviators’ Mutual Assistance Association
- Any commissioned officer of the U. S. Navy is eligible for membership.
- The execution of this contract makes the officer named therein a member in good standing.
- The officer named therein ceases to be a member upon voidance of this contract.
Executed at the First National Bank of Annapolis, Maryland, the tenth day of January, 1937, which is the date this contract is effective.
W. D. Talbot
President
John Doe, Lieutenant, U. S. Navy
Member Aviators’ Mutual
Assistance Association
Let us now proceed with an analysis of the contract in order to see the why and wherefore of the various provisions.
It is apparent that considerable clerical work and bookkeeping are involved and it is assumed that no officer has the time available for such work. Therefore the plan is drawn up in the form of a contract between a Bank and the Member. Obviously the purpose of the monthly allotment of 10 cents (par. 2) is to compensate the Bank for services rendered. The figure of 10 cents is arbitrary. In case this plan were put into operation it would be necessary to get bids from several banks.
Paragraph 1.—The factor 108 is taken from the table above for an officer 34 years of age. This is the anticipated average age of all the members. Of course, the factor will be different in each case depending upon the entering age of the officer. The factors have been computed to give a sure benefit of something over $100 per month.
Paragraph 3.—The reason for the delay in first payment is to allow time for registering allotments.
Paragraph 4.—The wording of this paragraph is such as to make the Bank liable only for sums collected. Obviously the loss incidental to the failure of a member of the association to keep up his payments must be borne by the beneficiary. However losses of this sort should not exceed a fraction of a dollar in any case.
Paragraph 5.—The provisions for terminating monthly payments to beneficiaries because of marriage, etc., are to insure that only beneficiaries actually needing an income are provided for.
Paragraph 6.—The provisions of this paragraph prevent payments being made by the Member when the beneficiary concerned has forfeited his rights by reason of death, marriage, etc.
Paragraph 8.—The weakest point of this plan is a possible national calamity wherein over half of the members would be killed and the other half be obliged to support the resulting beneficiaries. Even in such an unheard of event, the cost to each member would be only something over $50 monthly. It is for this reason that voidance of the contract is provided for in the event of war. Furthermore, it is anticipated that U. S. Government insurance will be opened up to naval personnel at such a time.
It is to be noted that an officer need not be an aviator to become a member of the Association since a non-flying officer is considered to be a better risk than an aviator and his becoming a member would be to the advantage of the aviator. There is no reason why this plan cannot be applied to all officers of the Navy. The naval aviators were simply chosen as a group since their insurance problems are so acute.
The method of reasoning used in arriving at the table of factors may be of interest. The age of the average officer in our Navy is approximately 34. However, in order to insure an income of $100 per month let us assume the average age of members entering the Association to be 30 years. The factor then at age 30 will be 100.
Assume that each member will derive the same monetary benefit (eventually) no matter what his age at entrance. Therefore each member should pay the same total amount over the period of his membership. A member entering at an advanced age at the same time as a young member must pay more monthly than the young member since his life expectancy is shorter. Let us now compute a sample factor for age 39 using the American Experience Table of Mortality.
Factor = 100 x Expected life at age 30 / Expected life at age 39
F = 100 x 35.33/28.90 = 122
Every financial proposition boils down to: What do I get and how much does it cost me? We have already found what we shall get, but unfortunately we cannot tell exactly how much it will cost. However we can go back in the records and see what it would have cost Mr. Average Member had he joined in 1934 when there could have been 648 members.
The following figures are taken from the records of a representative group of 648 aviators. During the year 1935 ten deaths occurred. Therefore the average member would be paying a monthly sum of 100/648X10 or $1.54 at the end of the year. During the 10-year period from 1935 to 1945 a total of 100 deaths will occur which means that in 1945 the average member will be paying a monthly sum of $15.43. Let us assume that the death rate remains uniform for the next 20 years and that new members are being acquired by the Association as fast as deaths occur; both are reasonable assumptions. Then at the end of the year 1965 the average member would be paying a monthly sum of $46.29.
Now the following pertinent facts are apparent: (1) That over a period of 30 years (from age 30 to 60 for the average member) the average member has paid an average monthly sum of $23.15 + 10c = $23.25. (2) That over this period the monthly sum of $23.25 has paid for what is essentially a life-insurance policy of at least $25,000 capitalized value. (3) That the rate of $23.25 monthly will be decreased by the termination of payments to beneficiaries by reason of death, marriage, etc. (4) That the monthly payments will increase with the Member’s age and therefore with his ability to pay, a welcome convenience to the young member.