Rates Up

The 200,000 life insurance salesmen ferreting about the U. S. last week were using something new in sales talk--"Buy now before the price goes up." Mutual Life of New York, Northwestern Mutual Life, New York Life and Connecticut Mutual had announced that they would soon make important changes in their contracts and every other important life insurance company was expected to follow suit. Immediate reason: Into effect on January 1 goes a New York law reducing from 6% to 5% the interest that life insurance companies may charge for policy loans.

Interest on policy loans has long been a fulcrum for attacks on the investment feature of life insurance. Why, asked critics, should life insurance companies be allowed to charge 6% for lending customers' own funds back to them when open market and commercial-bank money rates range from 1% to 4%?

Year ago New York State Superintendent of Insurance Louis H. Pink started hearings on the matter, suggested a sliding interest scale based upon highest grade industrial bond yields plus 1% for expenses. The insurance companies at first opposed any reduction at all, insisting that it would increase the cost of all insurance by forcing investment in short-term securities and reducing interest earnings, would decrease dividends to policyholders (non-borrowers as well as borrowers), would encourage borrowing for speculation during prosperity, and during depression would tend to cause a run on life insurance companies.

When it became apparent that a reduction was coming despite these arguments, the companies unanimously asked for a flat rate because a sliding scale would greatly increase their work and actuarial complications. Though Mr. Pink warned that "any fixed rate ... is bound to be unfair over a long period of years," Governor Lehman last April signed the Piper-O'Brien Bill establishing a flat rate of 5% (4.8% to those who pay in advance). And since New Yorkers hold nearly a fifth of the $109,572,000,000 U. S. policies in force and since the companies obviously cannot charge different interest rates in different States, as New York goes so goes the nation.

About one third of policyholders now have loans of $3,399,000,000 against their policies, generally pay annual interest at 6% amounting to some $200,000,000. This interest will continue in force, but on all new loans after January 1 the companies will get only 5%--a drop in income for which the companies can compensate in only three ways: 1) finding improved investment opportunities elsewhere; 2) raising premiums; 3) cutting dividends. All forms of investment, however, are producing a smaller return these days as a result of the cramped U. S. capital market and the New Deal's cheap-money policies. The reduction in loan rates, therefore, is only one of several factors squeezing insurance company income. Under the circumstances the companies feel they have little choice.

For example Mutual Life of New York announced that on new policies its guaranteed interest rate to beneficiaries would be reduced from 3% to 2 1/2%, that dividends accumulating at interest will get 2 1/2% instead of 3%, that premiums on endowment annuity policies will increase. Last week Northwestern Mutual warned: "All life insurance companies are making important changes in their contracts. . . . These changes may mean an increase in price ... of insurance of 10 to 20%."

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