When a policyholder withdraws from his contract with a life insurance office, the provision made for the future in respect of his particular insurance is no longer required, and out of it a surrender value may be allowed him for giving up his right to the policy. If there were no reasons to the contrary, the office might hand over the whole of this provision, which is in fact the reserve value of the policy. No more could be given without encroaching upon the provision necessary for the remaining policies. But the policyholder in withdrawing is exercising a power which circumstances give to him only and not to the other party in the contract. The office is bound by the policy so long as the premiums are duly paid and the other conditions of insurance are not infringed. It has no opportunity of reviewing its position and withdrawing from the bargain should that appear likely to be a losing one. The policyholder, however, is free to continue or to drop the insurance as he pleases, and it may fairly be presumed that he will take whichever course will best serve his own interest. The tendency obviously is that policies on deteriorated and unhealthy lives are kept in force, while those on lives having good prospects of longevity are more readily given up. Again, the retiring policyholder, by withdrawing his annual contribution, not only diminishes the fund from which expenses are met, but lessens the area over which these are spread, and so increases the burden for those who remain. Considerations like these point to the conclusion that, in fairness to the remaining constituents of the office, the surrender value to be allowed for a policy which is to be given up should be less than the reserve value. The common practice is to allow a proportion only of the reserve value. Some offices have adopted the plan of allowing a specified proportion of the amount of premiums paid. This plan is not defended on any ground of principle, but is followed for its simplicity and as a concession to a popular demand for fixed surrender values.
Another mode of securing to retiring policyholders the benefit of the reserve values of their insurances is that known as the non-forfeiture system. This system was first introduced in America, whence it found its way to the United Non-forfeiture system. Kingdom, where it was gradually adopted by a large proportion of the insurance companies. In its original form it was known as the “ten years non-forfeiture plan.” The policies were effected by premiums payable during ten years only, the rates being of course correspondingly high. If during those ten years the policyholder wished to discontinue his payments, he was entitled to a free “paid-up policy” for as many tenth parts of the original sum insured as he had paid premiums. The system, once introduced, was gradually extended first to insurances effected by premiums payable during longer fixed periods, and ultimately, by some offices, to insurances bearing annual premiums during the whole of life. The methods of fixing the amount of paid-up policy in the last-mentioned class of cases vary in different offices, but the principle underlying them all is that of applying the reserve value to the purchase of a new insurance of reduced amount.
An office, in entering on a contract of life insurance, does so in the faith that all circumstances material to be known in order to a proper estimate of the risk have been disclosed. These circumstances are beyond its own Conditions of insurance. knowledge, and as the office for the most part (except as regards the result of the medical examination, which may reveal features of the case unknown to the proposer himself) is dependent on the information furnished by the party seeking to effect the insurance, it is proper that the latter be made responsible for the correctness of such information. Accordingly it is made a stipulation, preliminary to the issue of every policy, that all the required information bearing upon the risk shall have been truly and fairly stated, and that in case of any misrepresentation, or any concealment of material facts, the insurance shall be forfeited. In practice, however, this forfeiture is rarely insisted on unless there has been an evident intention to deceive. Other systems and conditions of life insurance policies may be shortly noticed.
The usual division of policies is into “non-participating” and “participating.” Non-participating policies are contracts for the payment on death of a certain fixed sum in consideration of a given premium, and these amounts are not affected by the profit made by the company. Participating policies entitle the holders to a share in the profits of the company. These profits are applied in various ways, as described above. A policy may be a whole life one, that is, the policyholder may pay a periodical premium throughout life, or it may be a limited payment one (the holder paying a premium for a limited number of years), or an endowment policy, under which the insurer receives the amount he has insured for at a given age, say fifty-five or sixty; or if death occur previously, the sum is paid to his representatives. There are also endowment policies for children, under which parents or others receive a specified sum on a child attaining a given age, the premiums being returnable if the child dies before the specified age.
As to Payment of Premiums.—A certain period of grace is allowed, most commonly thirty days, after each premium falls due. If payment is not made within that time, the presumption is that the policyholder intends to drop the contract, and the risk of the office comes to an end. It may, however, be revived on certain conditions, usually the production of evidence of health and payment of a fine in addition to the premium. An impression used to prevail among the public that the offices were interested in encouraging the forfeiture of policies. If any such impression was ever shared by the offices themselves it must have long since passed away, every reasonable effort being now made on their part, not only to secure insurances but to retain them, and to afford all the facilities that can be extended to policyholders with that object.
As to Foreign Travel and Residence, and as to Hazardous Occupations.—When Babbage wrote his Comparative View of Assurance Institutions in 1826, voyaging abroad was scarcely permitted under a British life policy. The Elbe and the Garonne, Texel and Havre, Texel and Brest, the Elbe and Brest were the limits prescribed by most of the English offices. Even at a much later period the extra premiums charged for leave to travel or reside abroad were very heavy. But improved means of conveyance—in some places better sanitary appliances, and habits of living more suited to the climatic conditions—and, more than all perhaps, the knowledge that has been gained by experience as to the extent of the extra risks involved and the relative salubrity of foreign climates—have enabled the offices to modify their terms very considerably. The limits of free residence and travel have been greatly widened, and where extra premiums are still required these are, as a rule, much lower than formerly. The assured are now commonly permitted to reside anywhere within such limits as north of 35° N. lat. (except in Asia) or south of 30° S. lat., and to travel to and from any places within those limits, without extra premium.
Military men (when on active service) and seafaring men are usually charged extra rates, as are also persons following specially dangerous or unhealthy occupations at home.
As to Suicide.—The policies of most companies used to contain a proviso that the insurance shall be void in case the person whose life is insured dies by his own hand, but it is now seldom inserted. Some offices, acting on a sound principle, limit its operation to a fixed period, the extent of which varies in different offices from six months to seven years from the date of issue of the policy.
The practice of rendering policies indisputable and free from restriction as to foreign travel or residence, after a certain period, has tended greatly to simplify the contract between the office and the insured. A declaration of indisputability covers any inaccuracies in the original documents on which a policy was granted, unless these inaccuracies amount to fraud, which the law will not condone under any circumstances.
A remarkable difference in the development of life insurance between Great Britain and the United States is, that among the British companies only one-third of the insurances in force is in purely mutual institutions, while in America the proportion exceeds four-fifths. In both countries there are also “mixed” companies, in which policyholders receive a fixed percentage of the realized surplus, often from three-fourths to nine-tenths of the whole, but the control and management are in the hands of shareholders. These form the great majority of the proprietary offices in the United Kingdom, and the profits of the business have been large. The amount of capital paid in by shareholders of forty-one joint-stock companies was £5,931,000, but the capital authorized and subscribed was much more, and the subscriptions have often been paid, wholly or in part, by credits from surplus. The shares of these companies, at market prices, represent a value of at least £50,000,000, but the dividends upon these shares are drawn largely from other business, many of the largest and most prosperous corporations conducting also fire insurance, and some of them marine or casualty insurance.