SURPLUS AND IlEsEuvE. If all insurance were pure insurance without any endowment element, and if it were always paid for on a natural premium plan. the question of lapses and sur renders would have comparatively little signifi cance. Under such conditions the premium for each year would pay for the insurance of that year, and if the insured allowed his policy to lapse he would already have received in the form of protection the equivalent of the premiums he had paid in. But even on the natural-premium method the premiums must contain an clement of loading intended to cover expenses and con tingencies. It is clearly neither practicable nor desirable to estimate the loading so closely that there shall never be any excess. When income from the loading is more than enough to meet the demands on it, the excess left in the hands of the company is known as surplus. If the com pany is a stock company, this surplus eon,titnte: the profit of the business and is clearly the prop erty of the stockholders. In a mutual company. on the other hand, where the insured are at the same time members of the company, the surplus belongs to the members, and each individual in sured has a claim to a part of it. The question then arises whether a person who withdraws from the company is entitled to take out any part of the surplus.
This question becomes still more important in connection with the reserve fund. Whenever level premiums are substituted for natural premiums, a reserve must be accumulated out of the excess of the early payments to make good the deficiency of the later payments. Whenever insurance is paid for more than a year in advance. as in case of single-payment or limited-payment life poli cies. a reserve must be accumulated to cover the cost of insurance for the years after the premi ums cease. For an endowment a reserve is necessary which at the end of the endowment pe riod shall be large enough to meet the maturing oblip_at ions.
The insured stands in his relation to the re serve in a position quite different from his rela tion to the surplus. Whether a person is insured in a mutual company or a stock company, he clearly has an equitable title to his reserve as long as the insurance is in force. When the pol icy terminates naturally. whether by death. by maturity. or by expiry, the reserve is used fur the benefit of the policy-holder according to the terms of the insurance contract. When the pulley is allowed to lapse. on the other hand. the ques tion arises as to what disposition shall lie made of the reserve on the policy.