Settlement of claims.-Settlement of policy claims arises in four ways:

1. Surrender. This is when the insured surrenders his policy to the company for the cash value. All parties interested in the policy usually have to sign a form requesting the cash value."

2. Matured Endowments.-It is customary for the company to send notice to the insured at the maturity of the endowment, whereupon he files a statement to the effect that he is still living and the company pays the proceeds to him. With the exception of corporation and partnership insurance the beneficiary seldom has any interest in the endowment feature.

3. Death. When the insured dies it is necessary that the company be notified. Then with the assistance of a company representative the "Proofs of Death" are made out and filed with the company. As soon as approved the claim will be paid. It should be added that a notification or request for payment is not a claim until the proof of death has been received. Therefore, when a company says that all its claims are paid within one day, it means one day after receipt of proof of death and not one day after death.

4. Annuities. The payment of an annuity begins at a fixed date which may be, as previously stated, either immediate or deferred. The company may require, at the time of any periodical payment, evidence that the insured is still alive.

See Appendix XI.

'See Appendices XII and XIII.

CHAPTER X

SPECIAL FORMS OF LIFE INSURANCE

Fraternal insurance-History and description.-Fraternal insurance is possibly the oldest form of life insurance and its origin may be traced back many centuries to the time when organizations were first formed for mutual benefit. While these historic unions and guilds never applied the word "insurance" to their operations, they nevertheless performed the functions associated with the name. In the United States the

growth of fraternals for the purpose of insurance has been parallel with that of the old line (legal reserve) insurance companies and today, while they have not nearly so much insurance in force as the latter companies, they have enormous memberships. Most of this growth has taken place during the last half century, for it was not until after the Civil War that the really phenomenal increase took place. One of the chief reasons for this was the fact that the legal reserve companies had just entered upon their period of expansion, furnishing great stimulus to the fraternals. The fraternals supplied keen competition although their schemes were then often based on fallacious arguments. They maintained that the legal reserve companies were charging a high level premium, much larger than current mortality costs and including an element of reserve, but that since the average age of membership and average death rate did not change much, year after year, this reserve was unnecessary. Therefore all they would collect from their members was the average annual cost. At first sight this seemed quite a plausible argument because it was commonly observed that the average age was constant in a given community. While this was true of a particular locality because births and deaths balanced each other, it did not necessarily apply to individual groups and associations in the community. Consequently as the members grew older the probability of death increased rapidly. These increases in the rate of mortality soon had many of the societies in financial difficulty and they were then compelled to cut down their benefits and in many cases to dissolve.

The stronger of these associations, however, were able to pull through by increasing their rates, a measure made possible only by the nature of their organization. Having been founded on the basis of fraternal spirit, the members often felt that they were united by a bond stronger than one of mere financial relationship and stood by their brothers through financial difficulty. In this type the social feature was nearly as important as the benefits. Usually such fraternals were organized on the lodge principle, with local chapters acting under the supervision of a superior lodge or lodges which were State or national in character.

It was this better type of fraternals just described that was able to exist, and the sounder of them formed the National Fraternal Congress. This organization constructed a table of mortality from their combined experience and called it the National Fraternal Congress Table. Recognizing their deficiencies, they attempted to induce all similar societies to conform to a reserve basis as ascertained by this table. Opposition was met in the form of an association of the weaker fraternals, and no common agreement could be made to satisfy all. This agitation led to the so-called "Mobile Bill," formulated by the insurance commissioners at a convention in Mobile. The "New York Conference Bill," which is a modification of the "Mobile Bill," has been adopted by many States. These laws induce the fraternals to come over to the legal reserve basis. However, they do not use the American Experience Table as a basis for calculating the reserves required but allow the fraternals to use the table made from their own experience. An exception to this is where the American Table is specified by law as the measure of the reserve in order to determine whether a fraternal can grant loan and cash values.

Their combined experience as shown in the National Fraternal Congress Table does not coincide exactly with the American Experience Table and their reserves are smaller. Many are still confronted with the problem of bringing the reserves up to an adequate basis and under some recent State laws this must be accomplished in a given time. Until this is completed they may find it necessary to charge rather large premiums and it should be added that in the process of rectifying the errors of the past many have fallen by the wayside. The reason for this is more apparent when it is realized that

the old line companies hold approximately twelve times as much reserve per $1 of insurance in force as do the fraternals.

Differences between fraternal and old line insurance.-The idea that a reserve was necessary has always been the chief difference between the old-line companies and the fraternals, but on this point they are now a unit.1 Some other differences still exist, however, and should be mentioned. The fraternals grant a "benefit certificate" or "life certificate" in place of a policy, the latter being a long-term contract with a fixed premium wherein the company is bound but the insured is not. The certificate specifies that the benefits are dependent not only on payment of dues but upon compliance with the bylaws and constitution of the society, and members are not always assured that there will be no change in the premium. Other usual restrictions are that only relatives may be named as beneficiaries, and assignment to persons outside of this group is prohibited.

Nevertheless, there is nothing inherently wrong with fraternal insurance and its future possibilities are very great. This is true more especially since they have been reconciled to a scientific basis. Under intelligent and efficient management they have lower expenses than the regular commercial companies because there are no agents' commissions and, frequently, no medical examination. A further advantage is that a fraternal bond tends to hold the society together and thus reduce lapses. In view of these conditions we can expect the stronger organizations to grow and become larger and better than ever, and as long as the spirit of fraternalism is extant the old-line companies will meet with plenty of competition.

Assessment insurance.-Assessment insurance furnishes glaring illustrations of the fallacies which have been prevalent in regard to insurance. This form of insurance differs but slightly from the former fraternal system; in fact many fraternals have used it. But its most extensive use has been by organizations formed for the purpose, and by the so-called business assessment associations, which usually confine their membership to particular trades. The earliest assessment plan was where each and every member was assessed a flat amount, so that the total collected was just sufficient to meet the current costs, collections being made each time a member 1 See Appendix XIV.

1

died. If this be applied to any one group, it is equivalent to the one-year term policy on the increasing step-rate plan. The objection mentioned in a previous chapter (Chap. VI) concerning the one-year term with an increasing rate applies to assessment insurance with equal force, i.e., the rate at the older ages, because of the greater number of deaths, rises so rapidly and to such an amount that it is prohibitive. The. other and more important objection is that the members fail to live up to their agreements. This will be better understood by an explanation of how the method worked out.

Where organizations used the assessment scheme, the assumption was that the young members would counterbalance the older, which in fact did not occur. The discrepancy between similar premiums and dissimilar ages soon became obvious. The younger men would see the mounting costs caused by the older members and either not enter or drop out and join a group with younger lives and lower costs. So, frequently, all the young blood would disappear and there would be nothing left but numerous old members and, in consequence, a rapidly soaring mortality cost. Eventually this would become unbearable and the society would end.

A modification of the flat assessment was to scale it on the basis of the attained age at entry. While this was a slight improvement, it only postponed the inevitable. Another attempt to stave off the approaching difficulty was to collect the assessment in advance; but this merely delayed the imposition of extra charges. Although the plan is now in disfavor, it is by no means extinct. A number of fraternals still use the system in their local lodges, as do some of the business assessment societies.

Industrial insurance-Origin and purpose.-Industrial insurance was first introduced into the United States in 1875, having had its origin in the recommendations of a Parliamentary Committee investigating insurance for the working classes in England, about 1854. This Committee found that wageearners really were in greater need of insurance than the class of people who were already insured but, owing to the system of premium payments, the more humble working man was unable to take advantage of the existing plan. Trade guilds, burial clubs and some fraternals were available to him, but these were not managed on a scientific basis and their success depended largely on the ability and willingness of the