Assessment Insurance
A HOMILY ON THE ROYAL ARCANUM
BY MICHAEL MORONEY
There is no real or true life insurance but the straight old line regular life, where the policy is payable only at death. Term life insurance, so called, is simply banking for the benefit of the company which takes the risk. In regular life insurance the insured has a certain expectancy at the time of taking out the policy. Payment for the amount he is to receive at death is spread out over his expectancy, less four per centum interest compounded, and he pays it in annual, semi-annual, or quarterly installments, as may be agreed upon. If he lives out his expectancy, he will have paid in all he is to receive at death, either directly, or by the interest carried on his premiums. Of course there is a certain amount of loading in the premiums he pays, but for the purposes of our illustration, that need not be considered. In this plan, the policy holder is really insuring himself, and when he dies his beneficiary, or estate, simply receives back the money he has paid in. The fact that there are so many life insurance companies and that they have become so wealthy and powerful, illustrates the power of interest, especially when it is compounded.
The Royal Arcanum professes to give life insurance at actual cost, which it does not and never did. It was organized from the top down. Fifteen persons met in Boston on June 23, 1877, and constituted themselves the Supreme Council. Twelve of them became officers, and three were incorporators simply. This body reserved to itself all the power of legislation and of receiving and paying out the moneys of the order. Provisions were made for the organization of subordinate and grand councils of the order, but they were simply wards of the Supreme Council. Members were received on medical examinations from 21 to 55 years of age and paid for $3,000 insurance, one dollar at 21 years, and up to four dollars at 55 years. The rise from year to year was from 4 to 20 cents. The assessments were to be paid when called for, after the death of a member. The order grew and prospered from year to year until 1898, when the management thought it saw the necessity of increasing the rates. It made 21 at the rate of $1.76 and 54 rate of $7.00. The rise each year was from 6 to 44 cents. At this time the order had 195,105 members, and the loss in membership in the order in the next six months was about 10,000.
However the order continued to prosper until after the annual meeting of the Supreme Council in 1905, when it adopted a new table of rates, which began at $1.89 at 21 and rose to $16.08 at 65, but from Oct. 1, 1905, all the members were to be assessed at attained ages, whereas before that all had been assessed at entrance ages. In other words, on Oct. 1, 1905, each old member was required to reënter the order as a new member, and pay at attained ages. New members after that date were to pay at entrance ages, but all were to pay $16.08 per month on $3,000 when they reached 65 years. At the time of the making of this new rate the order had over 300,000 members. Since then it has lost 50,000 members, and a majority of its members are opposed to the new rates.
There was no occasion for the new rates, as, under the laws of the order, additional assessments could have been made, at any time, to provide for excessive mortality, and the order could have been worked out on additional assessments until it failed, as it is bound to do.
An organization within the order has been formed to contest the new rates, and this has brought a suit in the Supreme Judicial Court of Massachusetts to have them declared invalid. The protestants claim that when each member entered the order he made a contract to pay assessments at age entrance, and that while the Supreme Council may call extra assessments, as mortality may require, it cannot increase the rates, or compel members to pay at attained ages. Also that the new rates are unreasonable and will create a surplus of $3,700,000 every year, which is contrary to the laws of the order and of the State of Massachusetts. The Supreme Council claims that each member when he entered the order surrendered all his rights to protest or object to any action of that body and agreed in advance to approve any action which it might take in regard to rates.
All of the old life insurance policies of every kind and character are based on contract, and it was supposed that the rates at entrance in a fraternal order constituted a contract between the member and the supreme body of the order. Many of the courts of the several states have so held, but it was for the Supreme Council of the Royal Arcanum to defy reason and common sense and to claim that they were the autocrats of the order. All insurance should be like a deposit in a savings bank, that can hardly be lost. The Royal Arcanum, however, has depended upon lapses. Thirty-five is the age usually taken for illustration in insurance. At that age the average of lapses per 1,000 lives is 37 per cent plus. In May, 1905, there were 305,083 members in the order. That would mean that out of 305,083 members if all were of the age of 36, in any year, 111,000 would lapse. The average policy in the Royal Arcanum is $2,231.67 and out of that there would be lost by lapse, $826.70. If all the members were 36 years of age, on the whole $680,848,000 insurance in force there would be lost by lapse, at thirty-six years, $251,923,760 annually. Now in honest insurance there should be no lapses or forfeitures and in the insurance of the future there will be nothing of the kind. But on this plan, no matter how long one has paid, or how much he has paid in, if he stops paying, he loses all. Misfortune or accident may compel him to stop paying, but no matter what may be the cause, he loses, and other persons dying quickly have had the benefit of the money he has paid in. A member who entered in 1879 at the age of 36 will have paid in on September 1, 1905, about $800, or $30.72 per year. A person insured at the sum of $3,000 would have to live to the age of 133 to pay that sum out at the rate for the first 26 years. But assume the insured has paid $800 to October 1, 1905, and remains in the order. He pays $97.20 the first year of the new rates, $103.68 the second year and $192.96 the third year and the same sum each year thereafter. His expectancy is 12.81 years at 63. If he lives out his expectancy, he will have paid into the order, $3,277.12, or $277.12 more than he will receive. But suppose he should live till 85 years of age, he will by that age pay in $5,205.72, or about $2,205.75 more than he can draw out.
Will any man join an order of that kind where he shall forfeit all by the failure to make a single payment? So long as he can get into a company which will give him paid-up insurance, extended insurance, or a cash-surrender value, he will not.
Every man insured in a fraternal association is in the condition of Damocles. The sword suspended over his head is likely to drop at any time. The moment confidence is lost the whole matter dissolves like a rope of sand, and the insurance is gone. Suppose the Royal Arcanum had ceased to do business on June 1, 1905, $680,648,000 of its insurance would have terminated at that time, which would have been a loss of about $2,231.67 to each member. That is, 305,083 persons would have lost $2,231.67 insurance each. These same persons and their predecessors had paid in $97,004,175.82 of which $94,790,627.86 had been paid out on death losses. Since the new rates have been published the order has lost 50,000 members carrying $111,583,500 insurance. Of the sum paid in, $36,090,650 has been paid in by men who have dropped out and the balance of loss is to be paid by the survivors. Thus it is ever with assessment companies. They must and will fail as soon as it is demonstrated that the adopted rates will not carry any organization for a generation. The new rates of the Royal Arcanum have simply demonstrated the utter worthlessness of assessment companies, and the value of regular life insurance where each policy holder contributes a fund to pay his own policy.
The Royal Arcanum is no better than a suicide club, for it is only the suicides and the weaklings who can have any benefit of the order. The new rates require the members to pay greater sums in premiums than in old line companies, and at the same time the company insists upon the old and exploded system of forfeitures, refuses any paid up or extended insurance, and any cash-surrender values. Who will sit down to a feast of this character? No one but an old member who has paid in too much to stop, and no new man will join the order. The whole scheme of the new rates was to drive the old members out so that the order would not be compelled to pay their death losses. The order is an autocracy. There are twelve life members in the Supreme Council who represent no one but themselves. Three of these are original charterers and nine are Supreme Past Regents. There are twenty-nine officers, who as such are members of the Supreme Council. These thirty-eight by the aid of twenty representatives can control the Supreme Council, and there is added a new life member every two years in a new Supreme Past Regent. No one should be a member of the Supreme Council but some one who represents a constituency. Yet John Haskell Butler, of 244 Washington Street, Boston, Mass., controls the entire Supreme body. In this he is ably supported by W. O. Robson, Supreme Secretary. How these two gentlemen of eminent talent could be imposed on in the adoption of the new rate, which in the case of the old member who entered at thirty-six years, compels him to pay a surcharge of $64.18 per annum more than necessary to carry his risk, or in his expectancy a total of $1,226.98 more than he should pay, or 70 per centum more than his equitable share, is more than we can understand.