puting the present value of the assumed savings due to medical selection is too complex to consider here.2

The table on page 227 shows select and ultimate reserves on an ordinary life and a twenty-year endowment policy. The difference from the full net premium standard is marked the first year, of course, but is very small thereafter and the two standards coincide for the fifth terminal reserve. In other words, the select and ultimate method permits the company to borrow from the full net premium reserve a sum of money which will never have to be repaid because the mortality which would require it will never occur. But at the end of five years the company must hold the full net premium reserve on the policy. Herein lies the great difference between the select and ultimate method and the two preliminary-term standards; for with the latter the reserve never reaches the full standard until the policy matures other than by death, or until all premiums have been paid. The select and ultimate standard recognizes the benefits to the company of getting new policyholders and permits the spending of the amount necessary to get them, but it does not allow this necessary expense to become a discredit by spreading itself over a long period of time.

In actual practice there are many modifications of the systems of reserve valuations that cannot be considered here. The laws of New Jersey, for instance, permit the use of modified preliminary-term valuation but require the deficiency in reserves to be made good in seven years. In Canada the straight modified preliminary term may be used but must be made good in five years.

The following table shows the actual reserves required to be held for twenty years according to the different standards herein explained, on an ordinary life policy and a twentyyear endowment insurance issued at age 35.

2 HUDNUT, JAMES M., Practical Studies in Life Insurance, 51-54. An excellent description of the method of computing these savings, in simple mathematical language. This book has much to commend it for the untechnical way in which it explains many of the complex problems of insurance mathematics.

TERMINAL RESERVES ON DIFFERENT VALUATION STANDARDS
American Experience 3 Per Cent., Age: 35

DAWSON, MILES M., Business of Life Insurance, chap. 17, 'Anomalies in Loading." Shows the glaring inequity in methods of loading practiced by American companies. Gibb, J. Burnett, "The Calculation of Life Office Premiums.” Annals American Academy of Political and Social Science, Sept., 1905, 59-62.

A brief discussion of methods of loading to obtain equity between different policies and different ages. Tables reducing results to a percentage basis show the advantages or defects of the different methods very clearly. HOLCOMBE, JOHN M., "Expenses for Agents." Yale Readings in Insurance, Life, chap. 18. Presents arguments by the

president of an American company justifying expenses in、 curred through agency systems on the ground that in、 surance cannot be written without agents.

MOIR, HENRY, Life Assurance Primer, chap. 9, to page 121. WHITING, Wm. D., "Provision for Expenses." Yale Readings in Insurance, Life, chap. 12; reprinted from The Transactions of the Actuarial Society of America, v. 214-19.

An excellent discussion, by an actuary, of a scientific and equitable method of assessing expenses. Contains a classification of expenses that affords an unusually good analysis of the problems of loading discussed in this chapter.

CHAPTER XVIII

SURRENDER VALUES AND POLICY LOANS

SURRENDER VALUES

Meaning of the Term Surrender Value." It was explained in Chapter XVI that the level-premium plan involves the charging during the early years of the policy of a net premium which is larger than necessary to pay for the insurance in those years, with a view to accumulating a fund sufficiently large to enable the company to meet the cost of insurance in the later years of the life of the insured when the net premium is insufficient to pay for the current cost of protection. These overcharges, we saw, are credited to the policy from year to year at an assumed rate of interest and constitute the reserve. The manner in which this reserve accumulates was illustrated (page 200) in connection with a $1,000 ordinary life policy at age 45, issued on the basis of the American Experience table and 3 per cent. interest. It was seen that the net annual premium of $29.67 on this policy results in a reserve of $19.61, at the end of the first year, and that thereafter the accumulation to the credit of the policy continues to increase until, at the end of the fiftyfirst year of the contract, or the extreme limit of the insured's life according to the mortality table, it equals the face value of the policy.

Now what shall be done with this fund in case the insured wishes to surrender his policy or fails to pay his premium when due? It is clear that under such circumstances the company, since its future liability under the policy ceases, no longer requires the reserve the accumulated overcharges in the net premium-for the purpose originally intended. Experience has shown that it is not necessary for

the protection of the company or the other policyholders to insist that the insured upon failing to continue his premium payments shall forfeit the entire reserve value of his policy. It has therefore become a universal practice of the companies to permit the insured, in case he surrenders or lapses his policy after it has been in force for several years, to receive all or a designated percentage of its reserve value. This allowance constitutes the so-called surrender value of the policy; while the portion of the reserve which the policyholder forfeits is known as the "surrender charge."

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Extent to which Policies Are Lapsed and Surrendered. -The importance of allowing surrender values and retaining surrender charges becomes clear when we observe the great extent to which life-insurance policies are terminated by lapse or surrender. Thus, during the year 1913, a typical year for illustrative purposes, the total number of policies issued by all the companies reporting to the Insurance Department of the State of New York amounted to 1,015,788 with an aggregate face value of $1,840,577,945, while the number of policies terminated during the year totaled 564,579 with a face value of $1,043,413,871. The various ways in which these policies were terminated are indicated in the following table:

An examination of the table shows that of the 564,579 policies terminated during 1913, 397,874 were lapsed or surrendered, and that the amount of insurance thus terminated equaled $703,467,768. In other words, the number of lapsed and surrendered policies during 1913 was equivalent to over