Protection v. Investment

Added in 1933 to the well-filled calendar of high-pressure promotion was Life Insurance Week. Why life insurance, of all industries, should have waited so long to institutionalize itself is a minor business mystery. Making up for the wasted years, the industry launched its fifth annual Life Insurance Week throughout the land last week with a series of "Early Birds Breakfasts" (8:15 a. m.). Local agents collected private and public bigwigs to tone up the breakfasts, put on broadcast after dull broadcast, dug up nonagenarian policyholders as living testimonials, prodded museums and universities to feature the memorabilia of insurance, inspired sermons on the "economic, moral and social values ,of life insurance to the individual and the nation," sponsored teas, dances, dinners, lectures, concerts, fashion shows.

No inconsiderable part of the publicity concerned the Depression record of life insurance. From 1930 to 1935, insurance company disbursements accounted for 6.6% of the average national income-- nearly $10,000,000 daily. Total assets of all U. S. life insurance companies climbed steadily to the present all-time high, nearly $25,000,000,000. Total insurance in force was below the boom peak but still at the incredible figure of $104,000,000,000. It was not precisely true that life insurance had weathered Depression without damage (more than 40 companies went into receivership) but the record was comparable only to that of mutual savings banks.

Yet life insurance today is under heavier fire than at any time since the days of the Armstrong investigation in New York State 30 years ago. Some of this criticism has been caused by the terrific lapse and surrender rate that followed the 1929 Crash. High-pressure salesmanship had foisted more insurance on the U. S. public than the U. S. public could carry. In the past seven years some $120,000,000,000 worth of policies lapsed or were surrendered, involving the forfeit of nearly $750,000,000. In 1934 alone 10,000,000 industrial policies disappeared from the books of New York life companies.

Some of the criticism has been caused by the fact that insurance companies took advantage of the 1933 bank moratorium to declare a moratorium of their own (on demands for cash). Of course, the insurance moratorium was theoretically imposed by State insurance superintendents but the legal grounds were so shaky that not a few policyholders got their cash in full by merely threatening to sue.

Favorite target of the insurance critic is the dual role assumed by the life companies. They are banks as well as insurance companies, selling an investment along with protection. Liberal eyebrows are occasionally lifted at the bulging concentration of savings entrusted to a handful of self-perpetuating managements but in general the arguments for the divorce of the insurance and banking functions have little political color.

Chief objection is that the usual life policy is made up of two indivisible parts, pure insurance and a mandatory savings account. This type of policy provides ''level premiums," a device to equalize payments throughout the life of the policy. (Actuarial tables call for premiums increasing with age.) In the usual policy the amount of pure insurance decreases each year by an amount just equal to the increase in cash value. Thus a $10,000 policy with a $5,000 cash value is really $5,000 worth of insurance plus $5,000 worth of savings. However, the savings cannot be withdrawn without surrendering the insurance. Even if the policyholder leaves the savings untouched, he cannot keep his insurance unless, he keeps on saving. This works a particular hardship on hard-pressed policyholders who need protection, can afford to pay for protection alone but are temporarily unable to spare the additional savings called for by the contract and no longer able to pass a physical examination for a new policy if the old is lapsed. To borrow on a policy to pay premiums amounts to borrowing at, say, 6% to invest at 3%.

One result of the Depression dilemma faced by policyholders was a large increase in the clientele of independent insurance counselors, who work for fees, not commissions. Life companies are inclined to regard all insurance counselors as "twisters," people who persuade a policyholder to cancel a contract in one company in order to reap the commission on the sale of a new contract in another. Calvin Coolidge learned that the term could not be applied indiscriminately after a St. Louis counselor sued him and New York Life for $100,000 damages. Mr. Coolidge, then a New York Life director, had denned the word too loosely in a broadcast warning against "twisting." New York Life settled out of court. Some self-styled insurance counselors are indeed "twisters," though even more are simply insurance agents using the title as a merchandising scheme. State statute books are crammed with what insurance men call anti-twisting laws, but, based as they are on provisions against fraud and misrepresentation, they are not much use in the companies' campaign against the genuine insurance counselor. Efforts to convict a Manhattan counselor not long ago under he New York anti-twisting law were soon thwarted by the State Supreme Court, a reversal which led to revision of the law to make things difficult for all counselors.

Best-publicized firm of counselors is the ilbert & Sullivan Organization with offices in Philadelphia and Manhattan. Gilbert & Sullivan have produced no Pirates of Penzance but they have penned a number of pamphlet contributions to the growing stack of insurance criticism. David Gilbert is an oldtime insurance counselor who joined forces with James P. Sullivan last November. Mr. Sullivan was an actuary who had been examiner for Congressman Sabath's ubiquitous investigating committee. In general Gilbert & Sullivan believe that it is smarter to buy cheap renewable term insurance, which has little or no cash value and permits the policyholder to arrange his saving and investment program to suit himself. But good term contracts are hard to find because the life companies do not like to sell them, and Messrs. Gilbert & Sullivan warn all policyholders to leave their insurance alone unless they have expert, unbiased advice.

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