41 per cent ("including all expenses in connection with pay ment of claims") and expended 40 per cent on actual ex penses of management.
§ 10. Purpose of life insurance. Of all forms of insur ance at present, the most important in the extent of its finan cial operation and as an agency of thrift is life insurance. The total receipts (about $1,800,000,000 in 1919) of life in surance organizations (fraternal, ordinary, and industrial) are almost twice those of all other forms of insurance, and the total assets more than twice as great ($6,800,000,000 in a total of $9,100,000,000 in 1919).
Life insurance is to provide partial indemnity for sur vivors against the financial loss incurred by the death of the insured. Usually the insured is the bread-winner of the family and the beneficiary is a member of his family; but the number and variety of other cases in which life insur ance is provided is now large. In an increasing number of cases the beneficiary is the surviving business partner, a creditor, or a business corporation with an insurable in terest in the life of one of its officers or employees. "Babe" Ruth is said to be insured for $200,000 in favor of the owners of the ball club for which he wields his mighty bat ; Mary Pickford, Charlie Chaplin, and Douglas Fairbanks are each insured for $1,000,000 in favor of the moving picture company, their "producer"; and one of the large motion picture corporations insured the life of its managing head in 1921 for $5,000,000. This is said to be the largest life insurance policy ever written, and it was divided among six or more insurance companies.
Life insurance has been much used by persons mainly dependent on labor salaries, professional fees, and active business profits, rather than from funded incomes. In essence and largely in origin it is a cooperative method of providing for survivors, by all in a group contributing a sum to be given to the families of those dying. Naturally, s See Vol. I, labor incomes, in Index.
the need is most urgent in families not having accumulated wealth. It has of late been extended rapidly, as "indus trial insurance" to wage-earners, in policies never exceeding $1000, but averaging very much less, often being for no more than enough to pay funeral expenses. The premiums on such policies are usually collected weekly and by agents making personal visits. The cost to the insured is, there fore, necessarily high in proportion to the amount of insur ance.
§ 11. Assessment life insurance. Life insurance plans may be distinguished, with reference to the time and method of collecting the premiums, as assessment and reserve insur ance.
In the simplest form of assessment insurance the losses are paid by contributions taken after the losses occurred, each member paying an equal share without regard to age. In a slightly modified plan the assessments are made at the beginning of the year, based upon the expected mortality for the year. Life insurance of this plan is essentially like the mutual fire insurance already described, the percentage of risk for each policy, whether on persons or houses, being assumed to be equal to that of every other policy. The great variation in the chance of loss in the case of various forms of urban property makes simple mutual assessment fire insurance unsuitable in such cases, and even in the case of farm buildings it has been increasingly seen that differ ences in location, grouping, structural materials, nature of uses, condition of water supply, and other means for fight ing fire, cause differences in risk which properly should be recognized. This can be done by classifying risks and in suring on a scale at lower or higher assessment rates. If some concession is not made to the better risks, some enter prising commercial companies will see a profit in giving them a lower rate. Mutual companies which ignore these differ ences feel the effects of "adverse selection" in that they are left with only the more hazardous property.
Now, in the case of life insurance the risk varies with great uniformity (considering the average mortality of large groups of men) according to the one factor of age. The cost of assessment life insurance, therefore, is closely related to the average age of the members composing the group of in sured. The rates are very low in a new organization with a membership of young men ; but each year the average age, and therefore the mortality of the membership, rises, and the annual assessments must be increased. By the constant addition of young members this rise of cost may be retarded. But when these members grow older, a still larger addition of young members is required to keep down the average. But other young men are averse to entering the organiza tion under these conditions; and the result is that the rate of assessment must be steadily increased. Finally failure results, or some form of "reorganization" that drives out the older members. The simple assessment plan carries with it the seeds of its own decay.