A study of funeral insurance through an examination of two funeral insurance companies

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A STUDY OP FUNERAL INSURANCE THROUGH AN EXAMINATION OP TWO FUNERAL INSURANCE COMPANIES

A Thesis Presented to the Faculty of the School of Commerce The University of Southern California

In Partial Fulfillment of the Requirements for the Degree Master of Business Administration

by David Lloyd Sanders June 1950

UMI Number: EP43271

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Con* M&fi - 'so Ss.nr T h is thesis, w ritte n by

................. under the guidance o f

F a c u lty C om m ittee,

and approved by a ll its members, has been presented to and accepted by the C o u n cil on G rad u ate S tudy and Research in p a rtia l f u l f i l l ­ m ent o f the requirem ents f o r the degree of

MASTER OF BUSINESS ADMINISTRATION

Dean D ate.

June 1950 ______

Faculty Committee

TABLE OF CONTENTS CHAPTER I*

PACE

INTRODUCTION .. . . . ..................... The project

. . .

. . . . . . . .

1

• • • • • . • • • • • •

3

Sources of Information « • • • • • • • • • .

5

DEVELOPMENT OF FUNERALI N S U R M C E ............

8

Egypt, Greece, and Italy • • • • • • • • • «

8

Definition of terms

II.

Medieval Europe

.........

. . . . . . . .

12

Great Britain

. . .........

United States

• • • • • • • • • • • • • • .

14

• • • • • • • . • • • • • •

15

......................

IV

Southern States California III.

1

.

HISTORY OF THECOMPANIES............... Forest Lawn Life Insurance Company • . . • • Creation

................

21 21 25

Financial growth . • • • • • • • • • • • •

27

Pierce Insurance Company • • • • • • • • • •

27

Expansion

IV.

21

E x p a n s i o n ...........

Creation • .......

_

13

« • • • • • • • • . .

27

• • • • • • • • • • • • • • • .

31

Financial growth SALES ORGANIZATION .

32 ........

33

Field force

33

The agent

33

iii ............ . . . . . . . . . .

35

• • • • • • • • • • • • • • * . . •

38

Training License

The agent’s work • . . • ...........• . • •

39

Compensation of the A g e n t ............ . .

45

Organization of the field f o r c e Home office

• • • • • • • • . « . . •

47 52

THE POLICYHOLDERS..........

52

.

Selection of r isks..................

Underwriting . • • « • • • • • • • • . . « • Non-medical insurance

...........

52 .

55

Underwriter’s rating • • • • • • • • • • . •

56

Characteristics of policyholders • • • • • • •

58

Occupations

• • • • • . . • • ...... ....

Age

.••••

Sex

...

...........

.......

Income Levels

58

.. . . . . . .

58

• • • • • • • • • • • .

59

.........

59

Race . . • • • • • • • • • ............ VI.

46 46

The regional office V.

*

.

DESCRIPTION OP P O L I C I E S ........

62

Forest Lawn Life Insurance Company • * • • • • Funeral Insurance

• • • • • • ...

60

62

65

Funeral and Readjustment Insurance • . • • •

66

Special Family Croup Insurance . . . • • « •

67

Ordinary Insurance . • • • • • • • • • • * •

69

Juvenile Insurance • • • • • • • « • • • • •

69

iv General provisions « • • * • • • • • • « • • Pierce Insurance Company

73

Standard Funeral Service Policy

VII*

70

• ••••*

73

Family Group Insurance • * » « « • • • • » »

77

Ordinary Insurance • « . • • • • • « • • • •

77

CONTRACTUAL PROVISIONS OF THE POLICIES.......

78

Nature of the policy •

78

Beneficiaries

79

The Premium Grace

• « • • • • * • • • * • • « • * • • • • • • • • • • • • « • • • •

••••••

.........

. . . . . . . .

82 84

Reinstatement

•

85

Non-forfeiture

values;

86

Loan provisions Assignment • • • • • • • • . • •

......

89

...........

92

The Insurance application and contestability of .......... . . . . . . . .

of the policy Suicide

. • . . .........

92 95

Effective Date • • • • . • • • • • • • . . . •

95

VIII. ACTUARIAL ASPECTS OF THE P O L I C I E S ...........

96

The mortality table

• • « • • » . • • • » • •

Net Premiums . • . .............. Gross Premiums

• • • » • « . • • • • • • • • «

96 98 107

Quoting Premiums • • • • • • • • • • • • • • •

109

Reserves •

111

Non-forfeiture Values

117

V

IX.

SUMMARY AND CONCLUSION...................... Summary

•

121

Conclusion • • • • • » • • • •

BIBLIOGRAPHY

121

............

..........

• •

125

IWk

LIST OP TABLES TABLE I.

PAGE Commissioners 1941 Standard Ordinary Mortality Table . . ..............

II.

99

Determination of Net Single Premium for $1,000 of Insurance for Whole L i f e .........

III.

Determination of Present Value of Annual Payments of $1.00 for Five Years • • • • • • • • • •

IV.

105

Determination of the Reserves for $1,000 of Insurance for Whole Life

V.

104

• • • • • • • • •

113

Reserve Per Insured • • • • • • • • • • • • •

114

LIST OP FIGURES FIGURE

PAGE

1*

Agents* Commissions;.......................

44

2*

Non-medical Insurance Limits

• • • • • • • • • •

55

3.

Policy Payment Distribution

................

60

4*

Standard and Select Ra t e s....................

Ill

INTRODUCTION Very little has been written describing funeral Insurance, the type of companies which sell it, and*their operations*

For the most part writers in insurance ^mention

funeral insurance solely to establish the antiquity- pf insurance; they largely ignore its present aspects*

This

omission is not entirely illogical, because the sales^of funeral insurance are minute compared to the sales of mother forms of life insurance; also the companies which sell it are for the most part small and localized*

Furthermore,

only in recent years has funeral insurance advanced from the stage of fraternal and assessment associations to Where it is now conducted on regular life insurance lines# I.

THE PROJECT

The purpose of this study is to describe funeral insurance by examining its evolution, its present status, the types of companies that deal in it, and their operations In keeping with this object the second chapter lays the historical groundwork of funeral insurance which traces it from the burial societies of the early days of Egypt, Greece and Italy up to its development within the United States and particularly within California*

Since this study is made

through a comparison of two companies writing funeral insurance, the third chapter discusses the history of the

two companies, particularly their early development and relations with mortuaries and cemetaries*

The fourth

chapter develops the sales organizations of the companies and the acquis ition, training, and operations of funeral insurance agents*

In the fifth chapter there is a description

first of techniques used to select risks from the applicants for funeral insurance, and second of the characteristics of the policyholders as far as can be determined from the information available*

Funeral insurance is a generic

term which encompasses several specific types of funeral insurance, therefore, chapter six compares the distinctive provisions of each of the several, policy forms included in funeral insurance and the modes of payment that may be used# Chapter seven details the many contractual provisions commonly found in funeral insurance policies, since the heart of any form of insurance is embodied in the contract between the company and the policyholder*

The actuarial

principles under which funeral insurance is written are explained in chapter eight# Ho attempt has been made to collate funeral insurance with any other form of life insurance.

The sole purpose

here has been to make a descriptive examination of funeral insurance*

It must be remembered, however, that the

differentiating features are primarily derived from the aim which the funeral insurance policy seeks to achieve,,

3 that is, the pre-arrangement and pre-financing of funeral expenses along life insurance principles.

In achieving this

objective funeral insurance has adapted some techniques of operation from other fields of life insurance; this, however* should not lead to a cataloguing of funeral insurance as one of them* II.

DEFINITION OF TERMS

For the purpose of this thesis the following terms will be used in accordance with the stated definitions* Funeral Insurance. Funeral insurance is defined by the California Insurance Code In terms of its contract as follows: WA ‘funeral contract* is a life policy embodying an agreement, for a valuable consideration* to embalm or dispose of, or expressly to procure or pay or to provide funds for, in whole or in part, the embalming or disposal of the remains of any person living at the time of the issuance of such policy Life Insurance . Life insurance embodies a contract "between the insurer and Insured in which, broadly stated* the insurer undertakes to pay a stipulated sum upon the death

10240.

^ California Insurance Code. 1947 edition, section “

of the party insured, or at some designated time to a designated beneficiary Industrial Insurance.

Industrial insurance refers to

that form of life insurance in which the face amount of insurance is $1,000 or less and under which the premiums are usually payable weekly (although sometimes semi-monthly or monthly) and generally collected by an agent at the home of the insured*3 Ordinary Insurance * Ordinary insurance refers to that form of life insurance in which the face amount of insurance is $1,000 or more and under which the payment basis is the annual premium (although the premium may be paid in quarterly or semi-annual installments) and the premiums are generally remitted by mail to the insurer*s office*

A

Assessment Insurance ♦ Assessment insurance refers to that plan of insurance under which death claims are divided among the insured group, generally equally but sometimes in proportion to the death rate for different ages, as the

2 John H* Magee, General Insurance (3rd edition; Chicago: Richard D* Irwin, IncV, 1947), p* 703* 3 Malvin E* Davis, Industrial Life Insurance in the United States (New York: MeGraw-^ill kook Company, Inc*, ISiJTT PP* 3-8)* 4 Ibid.

5 claims arise*5 Insured* The person upon whose death the life insurance becomes payable is the insured* Insurer* The term insurer refers to the company that does the insuring* Stock Insurance Company* Stock insurance company refers to a company "organized by stockholders who subscribe the necessary funds to launch the business*

It is formed

primarily for the purpose of earning profits for the stock­ holders who own and control the company*115 Non-participating Policy* A non-participating policy - is one under which the policy does not share in the profits of the company issuing the policy# III.

SOURCES OP INFORMATION

Because of the paucity of written material on the topic of funeral insurance, most of the material was necessarily collected through interviews.

All of the people

in the funeral insurance field that I have interviewed

s Joseph B. Maclean, Life Insurance (6th edition; New York: McGraw-Hill Book Company, Inc*, 1945), p. 7* ® Ibid*, p. 18#

responded with gracious and friendly cooperation*

Particular

appreciation is extended to the following people who aided me so freely with their time and knowledge: Members of Forest Lawn Life Insurance Company Mr* W. W* Eaton, President* Mr* Lloyd Dreibelbis, Chief Underwriter* Mr* William Martindale, Actuary* Mr* L* E* Doyle, Vice President* Mr* John Croxall, Agency Assistant* Mr* R* B* Wellington, Assistant Manager of the Home Office Agency Members of Pierce Insurance Company Mr* Rufus C* Bailee, Actuary* Mr* Fred G. Dean, Member of the Board of Directors. Mr* Ralph H* Head, General Manager* Mr* Herbert S. Johnson, Underwriter and Agency Director• Further information about the operation of these two companies was obtained from their policies, application forms, agent contracts, rate books, and advertising material* In reply to a letter requesting information about funeral insurance in the South, Mr* V. S* Oulliber, Executive Vice-President of the Delta Life Insurance Company of New Orleans, Louisiana responded and furnished a considerable amount of useful material. Mr. George C. Highly, President of Los Angeles Glub 93,

7 whom I Interviewed by telephone, informed me of the history and operations of his organization, which provides funeral insurance on an assessment basis#

CHAPTER II DEVELOPMENT OP FUNERAL INSURANCE Egypt, Greece, and Italy, For the inhabitants of early civilizations the worship of various deities was an integral phase of society which was no less important at death than during life.

During life, however, an individual could make

his own ritualistic offerings to his deities, whereas after his death the deceased was dependent upon the living for the proper disposal of his remains.

To ensure the ceremonially

appropriate burial, people began to form groups dedicated to this purpose.

Although some of the groups were formed by

people in similar occupations, most were created by the combining of people of the same religion.

One of the first

groups whose _purpose was to provide for a decent funeral for its members appears to have been formed by Egyptian stone masons in the year 2500 B.C.

The basic aim of this mutual

benefit group was religious and there is no evidence that it developed insurance-like practices In early Greece2 the societies which furnished burial privileges to their members were confined to religious groups which “were established and carried on by mutual co-operation

•*• 0, F, Trenerry, The Origin and Early History of Insurance (London: P, S, King and Son, Limited, l$2o), p. 180. 2 Trenerry dates these societies only as “early Greece•“

9 and

s u b s c r i p t i o n s . ”3

Their operations appear quite insurance­

like from Trenerry* s description: The benefits provided by these societies included the burial of members, provided that these members had not been deprived of the right of burial on account of being in arrears with their subscriptions. This benefit was granted to all members irrespective of the length of their membership or of their age, and was, in short, mutual insurance of funeral expenses*4 Summing up, it may be stated that in the Greek: societies burial benefits were provided in return for a small monthly subscription, but only as a subsidiary object of the society, and that the raison d*etre of the Greek societies was always religious. *These societies cannot, therefore, be regarded as having been formed or carried on for the purposes of mutual insurance; such insurance as there was, was the outcome of a religious instinct or desire which manifested itself in a form which resembled that of mutual life insurance*5 Trenerry believes that the Roman burial societies which are of a later date than the Greek societies evolved from g them,, although their precise origin is uncertain. Because of the paucity of evidence regarding the Roman societies and of Trenerry*s scholarly study of them, his statement of their origin, objects, and finances is quoted at length as follows: In the early days of the Republic there were formed by persons who, being foreigners, freedmen, slaves, or expelled from their family, did not belong to any recognized gens, numerous societies, each with the object of carrying on the worship of a particular divinity in honour of whom festivals were held, to whom sacrifices

3 Ibid., p. 173. 4 Ibid.. pp. 174-175. 5 Ibid., p. 175. 6 Ibid.. p. 175.

10 were made, and for whom, in many cases, a temple or shrine was built and supported by the society# In order to provide the necessary money for the expenses incurred in carrying out this worship, the members of the society, following the practice of the earlier societies of the East, paid into a common fund subscriptions from time to time, to which were added donations from rich patrons, who were, generally, not members of the society* Later, these subscriptions became payable monthly* At first the money thus collected was expended only on the worship of the divinity in whose honour the society was founded, but ft soon became evident that the due worship of the divinity necessitated the possession of a common burial place for the members of the society and that each member should receive the funeral rites prescribed in such worship* Consequently, the attention of the society was turned to the provision of such a burial ground, etc*, and the funds of the society began to be shared between the two objects, namely, the worship of the divinity and the provision of the funeral expenses of, and burial ground for, the members* Subsequently, as the Romans gradually drifted away from the religious beliefs of the early days and became more or less indifferent to the performance of rites, these societies, while retaining the names of the various divinities, became almost purely burial societies, and new ones were fomed in large numbers which, although choosing divinities either as patrons or merely for purposes of avoiding legal restraints, confined themselves entirely to the provision of funeral expenses* At first, in the majority of such cases, each society provided for its members a common burial ground or columbarium, and carried out the burials of the members, thus insuring the correct observance of all the religious rites attaching thereto. When, however, the due performance of such rites became of little or no consequence, a later development which brings these societies more into line with mutual non-profit assurance companies was introduced, namely, the custom of paying to the relations of the deceased member a sum of money known as the funeraticlum, instead of providing him with a funeral# This method was first adopted when members died abroad, or under circumstances which rendered it impossible for the society to bury them in the common, burial ground, and each such payment was earmarked for the purpose of providing a funeral elsewhere. Subsequently, this method of payment appears to have become more general, and in the case of many societies, in the 2nd, 3rd and 4th centuries A* D*, to have been the only one employed; further, these payments do not appear to have been more than nominally, if that, for the purpose

11 of providing funeral expenses, but to have been made unconditionally to the representatives of the deceased member* A still further development was the custom of certain of the later societies of receiving subscriptions of different amounts from members and of making the payment depend, to a certain extent, on the amount of the subscription received from the individual member, Whether the amount depended on the age at which the member joined the society is undecided; the direct evidence on the point is too limited and too doubtful to support an authoritative statement .7 Another author gives a succinct description relating the operations of the Roman societies to life insurance: Archaeologists have brought to light an inscription dated A.D. 136 which describes the Collegia Tenuiorum a burial society for the lower classes, A member paid, at entrance, a sum of money equal to about $3,50 and 'good wine' to the measure of approximately six gallons. Each month thereafter the member was required to pay about five cents* Benefits promised were a fund for burial expenses of about $10*50, of which $1*75 was for distribution to the 'funeral train** Members of all ages paid the same fees; no payments were required for longer than fifty years; the funeral benefit was not paid if the monthly payments had not been made regularly up to a certain time before death, or if the member committed suicide* In purpose and provisions there appears much in the system of collegia which points forward to modem life insurance,8 In addition to these Roman societies which were for the civilian population, military societies which provided funeral benefits and additional financial benefits to the relatives of the deceased also existed about 100 and 200 A*X)*^

7 Ibid** pp* 176-178. 8 Mildred P. Stone, A Short History of Life Insurance (Indianapolis: The Insurance Research and Review Service, 1942), pp. 13-14. o Trenerry, op. cit*, pp. 178-179.

12 Medieval Europe* With the passage of the early Roman civilization, where correct observance of burial procedures was a religious necessity, the emphasis on funerals subsided and subsequently the mutual insurance­ like societies disintegrated*

During the medieval period

a form of mutual benefit, somewhat resembling the Roman societies in their insurance aspects, appeared among the inhabitants of the Low Countries and England*

11These gilds

or societies were in their earliest form merely collections of men who met more or less casually to discuss matters in ishich they were interested, such as their trade, handicraft, religion, etc*11^0

Although these guilds did not develop a

form of life insurance for providing funeral benefits, they did develop other forms of insurance on a mutual basis* These societies resembled in some ways the collegia of the Romans in that each was composed of men of muck the same rank of life, generally, if not entirely, belonging to the lower ranks, and interested in the same trade or work. A further point of resemblance is that in both cases periodic subscriptions were payable by the members* Here, however, the points of similarity end* They were dissimilar in their objects* The Roman collegia were largely devoted to the cults of the respective patron divinities and, apart from the societies providing funeraticia and military societies, provided no form of mutual insurance* The gilds of Flanders, etc*, were on the other hand but little interested in religious observances and did not, as far as is known, provide burial expenses for their members; their chief object being the promotion by combination

10 Ibid.. p. 247.

15 of the mutual welfare of their members and mutual insurance against certain risks . H Somewhat later guilds evolved a system for sick benefits, burial, and care of dependents of deceased members* Funds were maintained for supporting members fallen into misfortune, for educating orphans, for providing widows* allowances. At guild meetings, the sick man*s box and the dead man’s box were passed around for collections to care for the sick and provide for the burial of the dead. Through his guild, a member was protected during his life and his family was cared for after his death. There is much in the guilds which points forward to the fraternal insurance associations of modern times Great Britain. During the sixteenth and seventeenth centuries, “friendly societies,” which were associations of people with common social interests, rather than trade or occupational similarities, gradually replaced the guilds* functions in the area of sickness and burial benefits.

These

associations became particularly strong among the working classes in England and Scotland.

Almost from the beginning

they encountered numerous problems of mathematical and actuarial aspects of which the management knew little; in addition managerial defects were many.

To overcome these

weaknesses^JJew societies departed from the local character, organized on a national scope with centralized management, ■—

—

-T

- s r .i f e ,

■

11 Ibid., pp. 249-250. 12 stone, op. cit., p. 15.

14 dispensed with social features as the uniting bond, and operated on a business basis with regular collection of dues by agents*^5 Along with the increase in the size of the friendly societies, however, relationships between members became impersonal or non-existent*

This loss of

affinity between the members resulted in a loss of interest in the burial of an individual member*

No longer did the

death of a member herald a reverential meeting of members to honor the deceased; instead the society made a cash settle­ ment with the deceased member’s relatives who made their own provision for his burial*

At this point in history friendly

societies ceased to be burial societies in a fundamental sense, because the element of pre-arrangement of the funeral and burial was lost* United States* In the United States, during the nineteenth century a development similar to that of the friendly societies in England, but apparently independent, occurred among fraternal societies*^

Initially these

societies provided burial insurance in the sense that the ritual was planned before death by the societies and provided to members at their death.

As with the friendly societies,

^ The Encyclopedia Americana (New York: Americana Corporation, 1946 Edition) Vol* 12, p. 106* 14 Ibid., p. 23.

15 though, the fraternal societies gradually tended toward standard commercial insurance and the impersonal payment of a cash benefit to the deceased memberfs beneficiaries*^* Southern States# Thereafter the procedure of having a funeral and burial service planned in advance disappeared from the United States with the exception of the South and a few scattered localities#

In most of the Southern States,

informal clubs following the assessment insurance plan have existed especially among the most impoverished groups# Because of the haphazard method of making assessments, which were generally only levied at the death of a member, these burial clubs have been termed "'pass-the-hat clubs." Frequently combined with the assessment feature were loose organization and inadequate management which caused many club failures* The dissatisfaction with such clubs paved the way for well organized insurance companies*

About the year 1906

several companies organized in Louisiana and began selling industrial type insurance, which for a weekly premium of 5^, offered a "Funeral Benefit", of usually fl00#00 and a payment of #1*00 per week of , sick and accident benefit; the number of weeks benefits in most policies was limited to 10 or 12 in any one year# These policies were sold with maximum limits of ordinarily #125.00 to #150.00 "Funeral Benefit" and #5.00 to #7.00 per week "Relief" . . • The nature of the protection

Encyclopaedia Britannica (Chicago: Encyclopaedia Britannica, Incorporated, 1646) Vol. 9, p. 849#

16 offered was such that it was highly attractive to the negro prospect and since the companies of those days did not confine their solicitation to the white race, they soon found that the major portion, in some cases practically all, of their policy holders were negroes*16 At this time the white people of Louisiana had generally been by-passed as prospects for funeral insurance* This neglect was terminated when In about 1926 or 1927 a company known as wCommunity Burial Service11 made its appearance in Hew Orleans* Apparently with no legal reason for existing this Company began the sale of a weekly premium family group funeral service policy and aimed its activities specifically at the w!hite prospect. It would seem that it was successful in this venture since, according to reports, it at one time had built a weekly premium debit of appoximately $5,000*00• However, it was unable to withstand manage­ ment difficulties and later, with some reorganization, changed its name and became known as the "State national Insurance Company". Following an injunction suit by the State Insurance department in 1932 this company was dissolved and many of its former policyholders found themselves transferred to "Old Hickory Insurance Company"' which had been legally incorporated and.chartered* * . •The Community Burial Service Insurance Company . • • offered a funeral service insurance policy aimed at and apparently acceptable to the white risk. Despite the faet that this policy had little if any actuarial foundation it was seized upon by several other domestic funeral service insurance companies and was made their leading policy for sale to the ifdiite risk*17 The same source lists four defects of the policies of the funeral policies issued at that time which are Included so that comparison can later be made with the provisions of

3*6 Letter from Mr* V. S. Oulliber, Vice President, Delta Life Insurance Company. 17 Ibid.

17 policies of the two companies under consideration in this thesis: 1* No provision for a complete funeral service* This made imperative the purchase of “Extras11 from the Desig­ nated Funeral Director; this “Forced Purchase“ was highly undesirable* 2# No provision for any cash payment where some local funeral director, not designated by the insurance company, serviced and conducted the funeral of the Insured* Fre­ quently through lack of understanding or because of matters beyond their control this caused families to lose all money paid on funeral service policies* 3* No provision for any cash payment in event death and interment of the Insured occurred at a point where the Designated Funeral Director could not furnish the funeral* 4* Inadequate provisions in event death occurred at a distant point and interment was desired locally# California# California has had over a period of years sporadic funeral societies operated on the assessment principle, which in many respects are similar to the friendly societies, fraternal societies, and the Southern burial clubs; and which antedate the funeral insurance companies examined in this thesis*

Because of the persistence of these societies

throughout many parts of the country, their operations are explained in detail, using California experience as representa­ tive*

Frequently a society was guided by a single, dominant

person and then terminated soon after his death*

Because of

their localized nature and their lack of profit motive, they have been exempt from the state's insurance laws and con­ sequently the ’Insurance Commissioner's Office has little

18 Ibid.

18 information about them*

Their operation can best be displayed

by an example of such a society which now operates in Los Angeles.

This society which is known as the Los Angeles

Club 93 and which is an outgrowth of one of the Townsend Clubs* for the aged commenced its funeral operations on April 2, 1941.

Structurally this society is composed of

twelve units, each of which is supposed to contain 207 members.

Membership obligations require the payment of a

$2.00 initiations fee, $2.00 annual dues, and periodic $1.00 funeral assessments.

Whenever a member dies,

irrespective of which unit he belonged to, the funeral assessment is levied on a U the members of the last unit which has not had an assessment (which should yield $207; $200 for a funeral service and burial, and $7 for administrative costs).

This unit will not be assessed again until the other

eleven units have in turn been assessed.

The members, who

are all elderly (the youngest at this time is age 58), receive no contract for a funeral but only a Certificate of Membership11 which contains a “Funeral Agreement.11 By the terms of the “Funeral Agreement11-the member designates the director of the society as his agent at time of death to complete all arrangements regarding type of funeral and interment.

While the director states that he will procure

a $200 funeral for the deceased, since there is no con­ tractual guaranty, performance depends upon the good faith

19 of the director*

In the case of this society there has not

yet been any evidence of lack of good faith on the part of the director*^ Although a society may be fortunate enough to avoid unscrupulous managers, there are two fundamental dangers which beset the successful and continuing operation of this type of organization*

First, the society of this type has

nearly always been dependent on the motivating power of a single individual and thus tends to disintegrate rapidly when his association with the organization terminates*

This

occurrence leaves many members entirely without funeral protection and probably at a time when they are too old to obtain other funeral protection*

A second weakness which is

inherent in these societies and more pervasive than the first is that as the average age of the members increases the assessments irresistably increase as deaths occur more and more frequently*

At first the members may look upon the

greater assessment cost as extraordinary and temporary, but soon the inevitability of the greater cost is recognized* Thereafter, when younger members find the burden excessive and quit and when new people cease to join, the dissolution of the society is rapid*

George C* Highley, President of Los Angeles Club 93, telephone interview*

O'

/

Even though these societies continue to persist in many parts of the country, and at times with considerable vigor, they cannot be considered as more than anachronistic i♦

and pathological forms of insurance organi zations which must W individually and experientially learn the difficult lesson learned years before by.their progenitors, the friendly societies.

They do, however, point out the searching of the

aged and indigent for some inexpensive way to provide for themselves a decent burial* Perhaps the desires of these people c$n now be serviced by formal life insurance companies, for in California in recent years, but subsequent to their development in the Southern States, several companies have been formed as regular life insurance companies for the purpose of providing funeral insurance, which unlike other forms of life insurance is issued to very elderly applicants.

Today there is little

difference between the types of funeral policies issued in California and the Southern States, although the Southern companies predominantly issue funeral Insurance on the industrial insurance plan, whereas California companies use the ordinary insurance plan.

Also, irrespective of geographical

location, funeral insurance companies are commonly affiliated with, or owned by, mortuaries#

CHAPTER III HISTORY OP THE COMPANIES FOREST LAWN LIFE INSURANCE COMPANY Creation# Luring the 19301s the personnel of the Forest Lawn Memorial-Park Association, Incorporated became acutely aware of the difficulties many families experienced in financing the funeral and burial of a relative.

Since

the difficulties were financial and this company was a non-profit organization, the responsibility for their solution was transferred to its holding company, the Forest Lawn Company#

Examination disclosed that difficulties were

occasioned primarily by the suddenness of the financial burdens accompanying death, rather than by their aggregate size#

Some type of prior to death planning was indicated

as necessary#

Before this period the Forest Lawn Company

had sold cemetery lots to the public (which it still continues to do), so that arrangements could be made for burial prior \

to death#

Actually, however, this procedure benefited only

a small percentage of the population of this area because apparently few felt either the immediate necessity of buying a lot or the desire of paying the cost#

In 1936 to circumvent

this problem the Forest Lawn Company instituted a debenture bond plan (also still in use) to provide a system for funeral savings in denominations of $50, $100, $500, and $1,000 which

it was hoped would make the bonds available to most financial stratas of the local population*

Furthermore, the bonds

made possible before death planning for the funeral and burial, since they could be converted at any time at par plus accrued Interest into certain properties, commodities, or services offered for sale in the Forest Lawn Memorial Park* In spite of these programs a multitude of people continued to experience difficulties in meeting the-financial obligations incurred at the death of a relative * 'The question arose that perhaps both of these programs required too much savings before people could make use of them.

This seemed

to suggest an answer to the problem: perhaps people needed a program of very low cost #iich at time of death would furnish what people had hoped to save, rather than what they had actually saved. insurance.

This could be done through life

An examination of this possibility followed*

First it was learned that life insurance companies did not make an effort to coordinate insurance proceeds with funeral and burial expenses*

Secondly, observation showed that while

many who were buried at Forest Lawn Memorial Park left insurance to their relatives, the total proceeds generally were insufficient to meet the needs of dependent relatives; and when these proceeds were diminished by the funeral and burial expenses they became pitifully inadequate to aid

23 any dependents* Proceeding from the study of the existing situation and of the indicated need for a pre-arrangement plan|Jhe management of the Forest, Lawn Company determined tPc establish a legal reserve capital stock life insurance company which would specialize in funeral insurance.

i With the incorporation

of the Forest Lawn Life Insurance Corporation in April; 1939 this was accomplished*

The Forest Lawn Company purchased

all of the capital stock, except five shares which were acquired by the directors of the new insurance company* During the two years following incorporation efforts were made to put the company into operation*

"Towarduthe

latter part of 1941 preparation had been fully completed for the commencement of operation: however, because of the out­ break of World War II and the uncertainty of the economic future it was considered inadvisable to commence operations until such time as conditions became more favorable*

As a

result, the company postponed commencement of business until November 1, 1943•”2

Initially the company offered to the

public Funeral, Funeral and Readjustment, and Ordinary Life Insurance policies.

(The types of policies were further

^ California Insurance Code* Division 2, Part 2, Chapter 6: Incorporated Life Insurers Issuing Policies on a Reserve Basis.11 2 Hporest Lawn Life Line,11 Volume 3, Number 9, October, 1948, p. 3.

24 expanded by introducing a Family Group policy in September, 1944 and a Juvenile policy in April, 1946♦)

in the two

months of operations in 1943 a total of §81,700 of insurance had been written of which §69,394 remained in force at the end of the year*

Most of the insurance in effect was in the

form of Funeral policies, 11and the average size of all policies written during the first two months was §459*00**^ Originally the company had intended to have its own sales force consisting primarily of the cemetery lot salesmen working for the Forest Lawn Company who would be licensed as life insurance agents and then sell both the cemetery lots and the insurance*

This it had been hoped would give the new

insurance company a sizable and effective sales force immediately*

Actually many of the cemetery lot salesmen did

become licensed insurance agents; however, because the insurance sales yielded less immediate income than did the sale of cemetery lots, these salesmen did not put sufficient emphasis on insurance sales and hence did not produce the results that had been hoped for*

In addition to this

disappointment two other factors converged which caused the company to terminate its efforts to build its own sales force*

One was that the officers of the company were already

so busy with investment and insurance operations that they

3 Ibid., p. 4

had little time to devote to the problems of the sales force* The other was that the company did not have sufficient financial resources to conduct an advertising campaign on the scale considered necessary to introduce the insurance to the public.

For these reasons the Forest Lawn Company,

the parent company of the Forest Lawn Life Insurance Company, was appointed the state agent and delegated all responsibility for the sale of the funeral insurance in California. Subsequently the Forest Lawn Company began building an insurance sales force— hiring and training agents, establishing branch offices, and conducting promotional activities* The Forest Lawn Company’s first efforts were in building a strong sales force for the Los Angeles area, and since using the cemetery lot salesmen had not proved successful emphasis was placed on creating a separate sales unit solely for selling insurance.

Today this unit which ,

consists of 39 agents is the primary producing unit of the entire sales organization.

The cemetery lot salesmen,

however, have not been abandoned as insurance agents, for there are about 60 of them who are classified as the Pioneer Agency and sell insurance in addition to the cemetery lots* Moreover, in the last year their insurance sales have been rising steadily even though insurance is a sideline to them* Expansion* During 1944 the Forest Lawn Company

conducted an expansion program outside of the Los Angeles area, but still within California*

At first this expansion

amounted to little more than a few scattered agents operating throughout Southern California.

For purposes of coordination

these agents are classified as the Scattergood Agency which is under the direct control of the Home office of the Forest Lawn Company.

In April, 1944 a general agent was appointed

to represent the state agent in Bakersfield; in May of the following year a general agent was appointed for Stockton. Between these two dates, however, two branch offices were opened; one in San Francisco in June, 1944, the other in San Diego in July, 1944.

The success of the branch offices,

coupled with some dissatisfaction about the operations of the two general agencies soon resulted in the discontinuance of the general agencies*

At the present time there are 16

agents in the San Francisco office and seven in the San Diego office. Forest Lawn Life Insurance Company, while definitely Intending to expand its operations to other states, has not yet made an attempt to do so.

Because of the success of Its

state agent system in California, it Is likely that when expansion is made Into other states it will be conducted similarly by appointing in each state a state agent with exclusive responsibility for creating and controlling a sales organization for its state.

27 Financial Growth, The growth of the Forest Lawn Life Insurance Company, which has been rather prosaically successful, is illustrated by the increases in total admitted assets and the total insurance in force on December 31 at one year intervals: Total Admitted Assets

Total Insurance in Force

|

555,247

f 1,891,665

1945

829,582

6,101,258

1946

1,150,166

10,588,481

1947

1,514,915

12,689,863

1948

1,904,544

13,521,250

1944

PIERCE INSURANCE COMPANY Creation, In October, 1927 the Imperial Mutual Life Association, which commenced operations in March, 1929, was organized to transact insurance on the mutual benefit assessment plan.^

Experiencing financial difficulties,

the company began to flounder during the mid 1930*s, at which tims it had outstanding only about 800 policies. Seemingly unrelated except for the time element, the Pierce Brothers1 mortuary was encountering difficulties

* CalffyQift Insurance Code, Division 2, Part 2, Chapter 8: !*Life Insurance Upon tKe Mutual Benefit Assessment Plan.11

23

of a different order• This mortuary having unwantedly acquired a high price reputation, felt that it was un­ necessarily losing a large portion of the less expensive funeral business*

To overcome the general public’s mis­

conception of the cost of its funeral services, Pieree Brothers* commenced an advertising campaign, which invited the public to visit them and examine the actual cost of a funeral service*

While some success resulted, Pierce

Brothers* believed that even greater success could be achieved by a “pre-need“ plan through tfiich people could make funeral arrangements prior to their death*

At this

time some mortuaries, in violation of the law and because of the laxness of its enforcement, were accepting cash pre-payments for funeral services.

Strong competition

resulted from this illegal “pre-need1* plan.

Pierce Brothers*

had no desire to conduct an extra-legal “pre-need9 plan; however some form of pre-need plan was a necessity.

The

answer appeared to be some f o m of life insurance prograa. For a time Pierce Brothers* debated the wisdom of forming their own life insurance company or of having an established life insurance company formulate an insurance plan for them* tried.

The latter choice seemed easiest and was

Some conferences were held with Prudential Life

Insurance Company and later with Metropolitan Life Insurance Company.

The outcome of these conferences was unsuccessful

29 because neither company thought that there was sufficient business in a limited, local plan.

With the alternative of

establishing their own life insurance company now being foreed to the front, considerable thought was given to how best to accomplish this.

The year was 1956 and by a coincidence

the plight of the Imperial Mutual Life Association came to the attention of Pierce Brothers*• Here seemed to be a ready made answer to their question, for surely it would be far simpler to take over a going concern and alter its operations than to start from nothing and build a life insurance company.

With this thought in mind, some of the

officers of Pierce Brothers* obtained positions as officers; and directors of the Imperial Mutual Life Association and began to direct it into the funeral insurance field. Gradually demutualization of the association progressed. In December, 1956 the association* s name was changed to Imperial Mutual Life Insurance Company and its plan of operation was transformed from a purely assessment type plan to a stipulated premium plan, with provision for assessments.5

This transformation meant that at least the

policyholders would have a somewhat firmer idea of what their

5 California Insurance Code. Division 2, Part 2, Chapter 9: "Mutual Life and disability Insurance on the Stipulated Premium Plan, With Provisions for Assessments .tt

50 yearly premium cost would be#

Further transformation occurred

in October, 1944 when first, the name of the company was changed to Pierce Insurance Company and second, the company became a legal reserve capital stock company#6

Section

10951#5 of the chapter under which this transformation was accomplished, provides that:: The capital stock issued at the time of transformation as herein provided, shall be first offered to each policy­ holder of the insurer in the ratio that the total number of shares authorized for such issue bears to the total number of policyholders at the date of transformation# Any such stock not subscribed by any policyholder within 30 days from date of offering may be sold to the public# Such stock shell be sold for cash and for at least 150 per cent of par value# Since few of the existing policyholders were interested in purchasing the capital stock, most of it was acquired by the owners of Pierce Brothers *• Thus the demutualization of the company was completed, and in the process it came under the complete control of Pierce Brothers1• At the same time the possibility of issuing any more policies on an assessment basis was terminated.

Furthermore, hereafter all policies

issued for, the duration of the life of any insured person had to be on a level premium basis with a reserve, 7 equivalent to the excess of premium payments over actual insurance cost,

^ California Insurance Code, Division 2, Part 2, Chapter 9a: "Legal Reserve Capital' Stock Company.11 ^ The reserve system is discussed in detail in Chapter 7#

31 established for each policy*

Certain Inconveniences however,

such as having to have new policy forms approved and having to limit administrative expenses, inherent in the latest authorization dissatisfied the company*

Consequently in

October, 1946 a final transformation to another authorization was made which then put the company on the same operating Q

basis as Forest Lawn Insurance Company* Expansion* For nearly ten years the company confined its operation to the Los Angeles area, only writing insurance policies for its affiliate, Pierce Brothers*• In the summer of 1946 expansion began with the appointment of some agents in Northern California, 9 vfcere the operations were so successful that the company examined the possibilities of expanding into other states*

Because of a combination of

interested funeral directors and the legal ease of entry, Missouri9 was the first state selected for further expansion* Shortly thereafter an attempt-was made to enter Kentucky; here for some reason the company*s license was withheld (unjustly, according to the company) for fp proximately one year.

In this interval many of the mortuaries of that state

were organized into a domestic funeral insurance program*

^ California Insurance Code* Division 2, Part 2, Chapter 6: ^Incorporated Life Insurers Issuing Policies on a Reserve Basis*” 9 Outside of the Los Angeles area the insurance plan is written for, and under the name of, a local mortuary, or group of mortuaries, aL though the insurer is Pierce Insurance Company*

32 As a result of tills occurrence, although Pierce Insuraice Company is now authorized to operate in Kentucky, it has not yet done so.

The next area of expansion was the

Territory of Hawaii#

The most recent expansion occurred

in September, 1948 when Pierce Insurance Company introduced its insurance, as the Purple Cross Plan, into Washington with that state1s Funeral Directors* Association acting as the company*s state agent# As a result of the expansion program Pierce Insurance Company now has about 337 agents located as follows t California

250

Missouri

50

Washington

25

Territory of Hawaii

12

Financial growth. Financially the results of expansion are portrayed as follows for December 31 of the indicated years:**0 Total Assets 1936

|

Total Insurance in Force

16,741,51

#1,145,700.00

1940

164,333.18

2,916,793.00

1944

458,771.12

3,703,839.00

1946

1,056,533.95

5,511,825.00

1948

1,742,950.02

9,819,051.00

From 1936 to October 1944 the company* s name was the Imperial Mutual Life Insurance Company; in October 1944 the name was changed to Pierce Insurance Company.

CHAPTER FOUR SALES ORGANIZATION FIELD FORGE The agent* The person who sells funeral insurance is a wlife agent,M which f,means an insurance agent licensed to transact life insurance*

Since this agent is the represen­

tation of the insurer to the public, the manner in which he performs his task influences public opinion, the volume of insurance written, and to some extent the quality of the risks accepted*

As a result it is important to the insurer

that it obtains as high a caliber agent as possible* As an aid in the selection of agents, certain character* istics which appear to be common to most successful agents are looked for in the applicant* He should have a genuine liking for people and an ability to get on with them; a pleasing personality; the ability to express himself effectively; intelligence and a somewhat better than average educational background; enthusiasm for the work; a good reputation and sound personal spending habits * In addition to these characteristics Pierce" Insurance Company states a definite preference for an applicant who has had mortuary experience; former life insurance experience, on the

-*■ California Insurance -Code, 1947 Edition, section 32+ 2 Malvin E. Davis, Industrial Life Insurance (New York: McGraw-Hill, 1944), p* 6l« .

34 other hand, is not considered particularly desirable.

Forest

Lawn Company^ would rather obtain individuals without prior mortuary or life insurance experience# While.both companies desire additional agents the methods and effort used in their acquisition varies.

A

periodic (once a week) advertisement in newspapers is used by Forest Lawn Company; in addition a bonus is offered to every agent who brings in an individual who develops into a regular agent#

Occasional newspaper advertisements are used

by Fierce Insurance Company to attract applicants; however, most of its agents are secured from individuals who have heard about the company and come seeking to represent it. The formal procedure of selection differs between companies#

Two important selection features used by each

are the personal appearance of the applicant and his references.

If the individual does not present a neat

appearance at the first interview, rejection is almost automatic#

While the references that the applicant gives

are asked to supply information regarding.the applicant fs personal characteristics and working habits, the importance placed upon such answers is usually less than the judgment arrived at from examining the personal appearance of the

3 Forest Lawn Company, Forest Lawn Life Insurance Company1s parent company and state agent, is in charge of sales activities#

35 applicant*

Two additional selection aids which are regularly

used by Forest Lawn Company are a psychological test and an inspection report*

The former is referred to as the Aptitude

Index and its purpose is to rate individuals according to their potential ability to develop into successful agents* The Life Insurance Agency Management Association makes up this selection device, which is commonly used by many Life insurance companies.

The inspection report which is submitted

for a fee by an independent company (such as the Retail Credit Company or Informative Research) is used to obtain unprejudiced information about the applicant* Training* According to the California Insurance Code^ an insurer must conduct a course of study and training for prospective agents which will instruct them in the parts of the eode pertaining to life insurance in general and the particular foims of life insurance that will be transacted by the agents*

Usually much of this study is in the form of

homework with the company participating only to the extent of giving periodic examinations (progress checks) to determine what progress is being made* The training program of Forest Lawn Company, however, is quite elaborate and costs about $450 per trainee*

The

^ California Insurance Code, op* cit*, section 1706*85.

first week the trainee attends classes in which he is Instructed in the history of the company, life insurance, funeral insurance, the provisions of the insurance policies, the methods of calculating insurance premiums and filling out application blanks, mortuary terminology, and finally how to make a sales talk*

At the end of the week he is

examined over the week’s classwork*

If the test results

are not satisfactory, a trainee will be rejected* second week consists of field training*

The

The first morning

of the week the trainee goes out on what is termed a Hcold canvass1* which means that he takes a certain area of the city and rings doorbells, then engages the occupant of each house in a sales talk and attempts either to make an immediate sale or an arrangement to call back for a further discussion about funeral insurance*

The purpose of this introductory

cold canvass is to immediately focus the trainee’s attention on the problems of selling so that he will learn quicker when the supervisor joins him*

In the afternoon of the same day

the trainee is joined by a superviser who will accompany him on the canvass for the remainder of the week#.

Initial, ly the

supervisor will make the sales approaches while the trainee will observe his technique; later this is reversed with the trainee making the sales approaches*

After each attempt

the supervisor will coach the trainee in how to improve his presentation and make a more effective approach*

This

37 training period rarely extends beyond the one week period*

In

the third week the trainee is entirely on his own for the first three days in his canvassing and sales efforts*

For

the remainder of the week he returns to the company for an advanced training program* during which the sales approach and presentation are re-examined for improvement, and further instruction is given in policy provisions, planning work, and maintaining policies in force once they are placed*^ From the end of the third week up until his sixth week:with the company the new agent continues under general observance by the supervisor so far as his sales work is concerned* During the first two months of this period he also has to complete homework assignments which are designed to prepare him for the state examination for a life agent*s license* . At the end of his first six months with the company the new agent is considered fully trained and thereafter he is free to pursue the work as he desires* The training program of Pierce Insurance Company, Tshile not so formal or extensive as the above program covers much of the same material*

For a part of the first week the

trainee is tutored in the insurance code, life insurance in general, and funeral insurance in particular, and especially mortuary procedure* 5

Throughout this training period the

This later is referred to as conservation of insurance*

38

insurance aspects of the policies are minimized* and the trainees are taught to think of the policies as a "pre-need” funeral service*

Thus when they go into the field they are

prepared to sell a funeral service, more so than a form of insurance • For

sobb

time no sales training period was used by

Pierce Insurance Company; however, experience proved to the company that it was necessary*

To new agents the thought

of approaching strangers may be a little terrifying, and the actual results of trying to sell are discouraging*

Not

infrequently early failures so dishearten the new agents that they give up in disgust*

To ameliorate these experiences

and to reduce the loss of agents, which is expensive to the company, sales training was introduced*

This training

parallels that used by the Forest Lawn Company in technique, but it generally lasts two weeks rather than one; also, rather than having a specific supervisor whose duty is to train the new agents, any one of the successful agents may be used*

T8fhen a new agent feels competent to sell without

further guidance, his training program is complete* License * Before a trainee may legally transact insurance, he must receive authorization from the Insurance Commissioner*

So that he will not have to wait for the

actual license, he is first issued a certificate of

39 convenience, which is good for a period of six months, under which he may legally sell insurance.

This certificate is

applied for immediately upon the applicant*s selection, so that his sales training may commence quickly.

In order to

obtain the license the trainee has to display his fitness to perform the duties of an agent by a written examination* The insurer is also required to vouch for the reputation and business intention of the applicant*

The commissioner’s

office will call the license applicant in for an examination sometime within three months to six months after the certificate of convenience has been issued*

If the license applicant

fails the examination he may continue trying until he does pass; however, his authority under the certificate of convenience to act as an agent expires six months after its date of issue* The Agent *s Work.

Once the agent has completed

training and obtained a license, his work is rather routine. Simply stated his task is to procure applications for the issuance of funeral insurance.

Such an expression of the

task is not intended to minimize its difficulty.

One

agent remarked that the path to success In selling funeral insurance is threefold: ,f?see the people; see the people; see the people.” And this-is precisely the problem that confronts the funeral insurance agent.

He must see a

multitude of people and convince them of the necessity of funeral insurance, and then, most difficult of all, get them to sign the insurance application. The general technique used to 11see the people11 is to select a particular residential district and to work in it for a definite period of time.

Frequently the agent will

allot his time so as to conduct a canvass each morning, rest during the afternoon, and make interviews during the evening#

The canvass consists of calling at each residence,

and where there is a response telling about the need for funeral insurance.

The people met through such a canvass c

are referred to as “sales contacts.*1

It is estimated that

an agent can talk to about 70 to 80 sales contacts each week# Sometimes an agent can promptly obtain an application for insurance from a sales contact; however, it is more usual that an evening appointment will be made for a time when, relatives who may be concerned can be present#

,,

Anyone who

promises such an appointment the agent classifies as a “prospect.Appointments that are kept and in which the agent has an opportunity to present his sales talk are termed “sales interviews #“^

The experience of many agents

§ Throughout this section the terminology of the Forest Lawn Company is used, because it will be referred to in regard to the incentive plan discussed under the section, Compensation of the Agent#

431 indicates that approximately 20 per cent of the sales contacts will result in sales interviews, or about 14 to 16 sales interviews per week.

Estimates are that an agent will procure

applications from about 50 per cent of the sales interviews* While the canvass procedure describes the most common manner of securing business, the agent may obtain prospects from a ttreferred lead1* or a ,fcenter of influence •** A referred lead is one who has either requested information as a result of the company* s advertising campaign or who has been referred to the agent by a center of influence* The center of influence refers to a sales contact who has supplied the agent with names of people who are potential buyers of funeral insurance* It now appears evident that people are the raw material for the agent.

The primary tool that the agent has for

processing his raw material is a sales talk*

Upon the

effectiveness of his sales talk, depends the agent*s income. Further than this, the success of an insurance company depends upon the efficaciousness of the agent*

Consequently,

rather than merely hope that its agents will develop successful sales talks both Forest Lawn Company and Pierce Insurance Company have formulated what they consider skillful sales presentations.

These have beaa. contrived from the combined

experience of successful agents.

The eclectic result is

designed to be concise and harmonious, to arouse the interest

of a prospect, to make kirn agree with all statements, and to prevent him from introducing discordant attitudes*

To

enhance the effectiveness of the presentation, agents are encouraged to rehearse and modify the presentation until any aura of mechanical repetition is supplanted hy a natural delivery.

Although an agent caanot be forced to use the

recommended sales presentation, most do because more con­ sistent and successful results are obtained through its use* The agent’s job is not entirely completed when a prospect signs an application*

At the same time the agent

is expected to collect the first premium*

Since technically

the insurance doesn’t take effect until the applicant receives the insurance policy, he may refuse to pay the premium until that later time.

In either case, whether

the premium is collected when the application is signed or when the applicant receives the insurance policy, it is the agent’s responsibility to collect the first premium and remit it to the insurer. The agent is further required to deliver the issued policy to the applicant*

While Pierce Insurance Company

sometimes waives this requirement, Forest Lawn Company rarely does.

Both companies express the belief that this

additional contact of the agent with the applicant tends to keep the insurance policy in force longer.

In addition,

when a person is just newly insured, this seems to be the

43 most propitious time to ask him for references who may bo good prospects for insurance*

Indeed, a few agents do most

of their business in this fashion* Should an agent submit an application and later have the applicant re ject the insurance policy, the agent is subject to a penalty*

Actually, the insurer assesses the

penalty only in cases in which the agent has a number of non-accepted policies*

The purpose of the penalty is not

only to recover the costs** concomitant with the issuance of a policy, but also to instill in the agent a greater responsibility for procuring applications only from people who appear financially capable of paying the premiums and are firmly sold on funeral insurance* Compensation of the Agent* As an independent con­ tractor the agent works on a commission basis.

Consequently

his income is determined by his productivity as measured by the volume and type of insurance for ihich he can procure applications*

The agent’s commission accrues from both

current sales as first year commissions and from past sales as renewal commissions*

The commission is a percentage of

the premium, the percentage amount depending upon the form of policy and the plan of payment*

For the purpose of

illustration only the commission plan of the Forest Iiawn 6

Clerical, medical, and inspection costs*

44 Company for the funeral policy is displayed; the commission plan of Pierce Insurance Company follows the same pattern: AGENTS COMMISSIONS Funeral Policies Ages Through 65

Commission to Agent as Per Cent of Premiums 1st Year 2nd Year 5rd Year Additional Premiums- Renewal Renewal Renewal Premiums Premiums Premiums

Plan of Payment

*

%

%

%

:Years

Whole Life

60

15

10

5

2

20 Payment

60

12i

8

5

2

10 Payment

50

8

6

5

2B

5 Payment

35

5

3

2

2

6

o

m

0

0

Single Premium

Although this type of commission plan is generally applicable to all agents, Forest Lawn Company has introduced in lieu of it a different plan, termed the "incentive plan," under which new agents are compensated during their first two years with the company*

The reason for this is that

many new agents who are unable to earn sufficient on a commission basis become discouraged and quit*

So as to

avoid the expense of the turnover of such agents the incentive plan was Initiated to compensate new agents according to their activities, rather than solely on the basis of the number of ^plications they procure*

The

45 activities include sales contacts, prospects, interviews and applications*

The first two activities are assigned monetary

values, and each interview is assigned a monetary value which depends on the ratio of interviews to applications*

The

specific monetary values assigned to each activity, or combination of activities, varies initially on the number of weeks the agent has worked for the company, and after the ninth week according to the agent*s debit or credit balance* By debit balance is meant that amount which the company has advanced the agent in excess of an arbitrarily determined commission earnings of the agent*

While there is some degree

of arbitrariness in determining the latter, the assigned value is greater than what the agent would actually receive in commissions at that time.

When the assigned commission

earnings exceed the company* s advmces, the agent has a credit balance*

There are five classifications based on the

agent’s debit or credit balance.

The lowest category is

solely for debit balances; the subsequent four categories are for credit balances of increasing size.

The greater

the credit balance the larger will be the monetary value assigned to each activity* The following illustration of how the incentive plan is effectuated shows how simple it is in operation* Assume an agent who has a debit - credit classification in the third category (credit balance from $>250 to $499)

exhibits the following activities for his fifteenth week of sellings 70

Sales contacts

14

Prospects

9

Interviews

Ratio ofinterviews

3

Applications

applications equals 3*0

to

The values of each of these activities in the third category are: Sales contacts

$ .25 each;

70 x $ .25 = $17*50

Prospects

$ *65 each;

14 x $ .65 » $ 9*10

Interviews

$2.90 each;

9 x $2*90 • $26.60

Through these activities the agent would earn $53.20 under the incentive plan.

As the agents activities become more

numerous, the values assigned to each of them increases; as a result his income will increase proportionately more than his activities.

Since the agent keeps his own records

of activities, there is opportunity for him to falsify them; however, the company conducts frequent spot checks so as to minimize the possibility for falsification. ORGANIZATION OP THE PIEID FORCE Home Office. While the agent is the basic element in the sales organization, other elements are necessary to supervise and coordinate his activities.

Control of the

47 sales organization radiates usually from the home office of the insurance company, as it does with Pierce Insurance Company; however Forest Lawn Life Insurance Company has delegated control of its sales to its state agent, the Forest Lawn Company, which nevertheless for convenience is referred to as the home office*

The purpose of the home

office in regard to the sales organization is to obtain agents; to direct their efforts; to establish regional offices; and to conduct advertising campaigns* To carry out these duties the home office usually has a recruiting department and an education department which will obtain and train agents*

In addition, there is a department

for coordinating the activities of agents who work in the home office territory.

The Forest Lawn Company actually

has two departments for this purpose, one of which, termed the Home Office Agency, controls agents in the Los Angeles area who solely transact insurance; the other, termed the Pioneer Agency, controls agents in the Los Angeles area who primarily sell cemetery lots and secondarily insurance*

On

the other hand, since Pierce Insurance Company has no direct affiliation with a cemetery, it only has a Home Office Agency, which coordinates its insurance agents in the Los Angeles area* The Regional Office* The next most important link in

the control scheme is the regional office.

Once the home

office has determined the total area of operations and has subdivided it into operating areas, it establishes an office for each operating area.

A regional office may function

either as a general-agency or a branch-office.

The former

has been defined in the following terms? Under the general-agency system, a general agent is given the exclusive representation of the company in a specified territory. The general agent receives a contract from the company under which he is paid the maximum rates of commission on all business secured in his territory. He may, in addition, be paid collection fees or allowances* in respect of renewal business and possibly a contribution toward the expense of maintaining his office. He is entirely responsible for the "organization and remuneration of the agency forces in his territory, and the agents whom he appoints make their contract with him and not with the company.” Pierce Insurance Company uses the general-agency system in many operating areas in substantially the form described. a mortuary.

In all cases except one, the general agent is This unusual procedure results from the Pierce

Insurance Company’s technique of selling the insurance policy as a ‘♦pre-need11 funeral service which requires a close connection with a mortuary; and the policy is advertised not under the name of Pierce Insurance Company, but as a particular mortuary’s plan.

Because of this development

only one mortuary is selected in each city to represent

^ Joseph B. Maclean, Life Insurance.(McGraw-Hill Book Company, Inc., 1945), pp. 449-4&0.

49 the plan*

Vi/here the funeral director of the mortuary desires

to assume the responsibilities, the company will appoint his mortuary as the general agent*8

One modification of the

usual general-agency system introduced by Pierce Insurance Company in order to maintain greater field control is that the agents working under the general agent are appointed by and make their contract with the insurance company*

This

system is used throughout California, Missouri, and Hawaii, which together with Washington are the only areas that the company has entered* The one exception to having a mortuary as general agent exists in Washington where the Funeral Directors* Association, which represents over 90 per cent of the mortuaries of that state, is the general agent*

From this

experience the company now believes that this is the most satisfactory form of field organization* Pierce Insurance Company also uses what may be termed an extended home office system*

For those cases in which a

funeral director does not wish to assume the responsibilities of having his mortuary appointed a general agent, but never­ theless wishes to cooperate and to establish a t,pre-need,i

8 There appears the possibility that since the mortuary profits from performing funeral services more than from selling insurance, that it would select so far as possiblgr poor risks, i*e*, those most likely to die soon* Pierce Insurance Company watches closely for any indication of this and has not yet observed such an adverse selection of risks by the mortuaries acting as general agents*

funeral service plan, the home office will appoint an agent for that area.

The agent then uses the mortuary as his

working headquarters^. A few years ago the Forest Lawn Company experimented with two general agents (one in Bakersfield, the other in Stockton) but concluded that the experience was unfavorable and terminated the general-agencies* To overcome the inadequate control of the general-agency system the company now uses the branch office system exclusively.

Under the

branch-office system: of agency organization, the company*s representative in the field is a salaried manager who.acts in all matters and with all subsidiary employees and agents on behalf of the company. The manager* s salary usually consists of a base salary independent of production, with additional remuneration depending chiefly on the amount of new business produced and on the persistency of the business produced. In addition to salary he may receive commissions on personal production, although, as a rule, it is not intended that he shall compete with the regular agents. The contracts of the agents appointed by the manager are made with the company, and all Q expenses of the manager’s office are paid by the company. At the present time only two branch offices have been established, one in San Francisco, the other in San Diego* Each branch office is under the management of a Forest Lawn Company employee who receives a salary and a commission (called an override) based on his agents* production.

9 Maclean, op. cit., p. 451.

Agents

51 who work under one of the branch offices must receive at least their first week*s training at the company’s home office*

The branch manager as one of his regular duties

then conducts the further training of agents # In some outlying districts, primarily outside of Los Angeles, the company has some agents, but not in sufficient concentration to warrant opening another branchoffice.

For purposes of classification these agents are

said to be in the Scattergood Agency, a euphemism for a department under home office control* Any agent outside of the Los Angeles area may, and indeed is encouraged to, cooperate with a local mortuary* In this circumstance the company will provide the mortuary with advertising material (mailing cards with attached reply cards), which while mentioning the mortuary advertises the Forest Lawn Protection Plan*

All return cards from th3s

advert isL ng are turned over by the mortuary to the insurance agent who can then follow up the leads.

This type of

cooperation benefits the Forest Lawn Company in that it introduces it to the people of the area through a local mortuary and thus aids it in selling insurance , and: it benefits the mortuary in that it will usually be designated in the funeral insurance policy for the performance of the funeral service#

CHAPTER V THE POLICYHOLDERS SELECTION OF RISKS Underwriting» In the case of funeral insurance, as with other forms of life insurance, the life insured is the insurance risk.

The acceptance of a risk is called

^underwriting**1 The use of this term in regard to life insurance: dates back to the sixteenth century# At that time there were no life insurance companies, and coverage could be obtained only through groups of private individuals, and then only on a temporary basis# A contract was usually drawn up, showing the name of the insured, the premium rate, the period of protection and to whom the money was payable in case of death# Each man assuming parts of the risk would write his name under the contract, opposite the amount of insurance for which he was responsible. Such men came to be called underwriters of the contract, and the procedure of accepting life insurance risks became known as underwriting#’*Strictly interpreted, based on this origin, the term under­ writer would be limited to the company that issues the policy; however, it is also commonly used to refer to the home-office specialist whose work pertains to the acceptance and classification of applicants for insurance, and to the agent who arranges specific insurance programs for individual applicants#2

^ Malvin E* Davis, Industrial Life Insurance in the United States (McGraw-Hi11 Book Company, Inc., 1944), p# 99 2 Ibid.

53 As used in this chap ter underwriting refers to the techniques used in selecting risks for funeral insurance# Specifically these include the problems of deciding for which group of potential risks policies will be issued without medical examinations, and of how to accommodate risks whose life expectancy appears to be less than average# Non-Medical Insurance # Although the two companies under consideration write funeral policies on the ordinary insurance plan, they have adapted from the field of industrial Insurance the issuance of policies without medical examinations, as a standard procedure*

Insurance

Issued in this manner is referred to as non-medical insurance#® This does not mean no medical information is obtained about the applicant for insurance or that all policies are issued without a medical examination#

It means that the majority

of policies are issued without a medical examination#

The

purpose of non-medical insurance is that it facilitates doing business on a large scale with people in lower income groups, many of whom hesitate at having a medical examination; and it reduces the cost of Issuing insurance, at least initially#

Maclean has stated these gains as follows:

•z

Joseph B* Maclean, Life Insurance (Sixth Edition, New Yorks .McGraw-Hill Book Company, Inc., 1945), p* 252#

54 Prom the companies’ point of view the advantages of dispensing with a medical examination consist in the increased facility in handling business, particularly in country districts, in the extension of business generally, in the saving of expenses, and in the reaching of many of those eligible for insurance who otherwise would not be insured either because of their objection to medical examination or for other practical reasons* Prom a financial point of view, if the additional claims incurred through failure to detect impairments were to - equal in amount the expense saved, there would still be the advantage of substituting an expense which is spread over a number of years for a lump-sum expense payable in the first year of insurance— a desirable readjustment#^ The underwriters of each company have established very broad age limits within which the agents must submit applications on a non-medical basis.

Outside of these limits,

medical examinations are automatically required*

The limits

of non-medical insurant e for Forest Lawn Life Insurance Company are t up to $2,500 through age 45; up to $550 of insurance over age 45.

Within these limits, the company

reserves the right to require a medical examination, if the applicant’s medical history reveals any circumstances which appear to warrant further investigation. The limits of non-medical insurance for Pierce Insurance Company are in accordance with the following table:

4 Ibid., p. 254,

NON-MEDICAL INSURANCE LIMITS INSURANCE NOT IN EXCESS OP

AGE 0 61

66 71 76

60 65 70 75 80

§600 5> 4 0 0 51300 5> 2 5 0 5> 2 0 0

Regardless of these stipulations, however, a medical examination is required in any case where an applicant for any amount of insurance appears to have an adverse medical history* As observed, both companies require non-medical applications to be submitted within broad limits*

Nevertheless,

medical and occupational information is obtained, for Under non-medical the company makes no physical examination, and depends on the salesman rather than the doctor to obtain from the applicant a complete and accurate state­ ment of his history and physical condition as he knows it* The agent is expected to gain the prospect’s con­ fidence, uncover any unfavorable information, and pass it along to the Home Office even though he considers it im-_ material or may know it will probably cost him the sale* The agents’ medium for reporting this information is the application, which contains detailed questions regarding the medical history of the applicant and of hereditary diseases within his family, and also questions regarding

John M* Laird, f,A Cross-Section of Modern Life Under­ writing,11 Readings in Life Insurai ee (New York: Life Office Management Association, 1946), p* 216*

his occupation and habits.

Further information about the

applicant’s morals, habits, and living standard are obtained from an independent inspection report (this is the same type of report as obtained by Forest Lawn Life Insurance Company about prospective agents).

On the basis of this information

the underwriter calculates the desirability of accepting the particular applicant as a risk.

If he is unable to

achieve a definite decision from the information, he may request that the applicant have a medical examination, which will then further clarify the acceptability or non-aGceptibility of the applicant* Underwriter1s Rating. Dingman has stated that ** . . * these are the basic factors of insurability— personal history, family history, race, occupation, environment, habitat, morals, finances, physical ^condition^ . • • Each is measurable*

Home atfice underwriters do measure them . . .

The desirability of a risk depends on these factors.11 The details of ail the many factors that affect the selection of risks are numerous and complex, and because they are not peculiar to funeral insurance they are not enumerated here. Each detail, however, is considered measurable within limits and as a result can be calculated into the premium rate so

® Harry W. Dingman, Selection of Risks (Cincinnati: The National Underwriter Company, I93F7, p. 6.

as to achieve a rate commensurate with the daggers involved* It is the underwriter’s task to evaluate the details that come to him by way of the application form, the inspection report, and (where required) the medical report and to determine the final acceptability and premium rate for an applicant* In most cases the underwriter’s examination is routine and no adjustment is required in the premium rate, since the normal underwriting range is **sufficiently broad to permit accepting at standard premium rates the large majority of risks for whom the insurance is intended. J*7

For those

applicants who fall below this normal range the typical procedure is as follows:

Initially, the underwriter assigns

the applicant a numerical value of 100 per cent*

Since all

aberrations of the nbasic factors of insurability” csa be measured, each is assigned a percentage rating*

Aberrations

may be of such nature as to add to or detract from the applicants life expectancy, therefore, the percentage ratings may be positive or negative.

The algebraic sum of all the

positive and negative aberrations for the applicant are then added to the basic rating of 100 per cent.

The

underwriter compares the total sum of the ratings with a rating guide from which he determines how much should be

7 Davis, op* cit*, p. 100.

added to the standard premium rate to compensate for the aberrations.

It is possible that an applicant may have such

a combination of positive and negative aberrations that he will be allotted the standard premium rate* CHARACTERISTICS OP POLICYHOLDERS Occupations. No significant information has been collected by either Forest Lawn Life Insurance Company or Pierce Insurance Company on the major occupation groups of their policyholders. Age. The actuary of Pierce Insurance Company estimated that the average age of all policyholders is about age 55; and that the average age of the policyholders at the time they become insured falls within the age limits of 45 to 50*

The actuary further stated, as his personal opinion,

that most policies issued to Individuals under age 35 would be lost to the company within a few years sifter issue, because to such policyholders the chance of death seems so remote that they do not feel the urgency of maintaining an insurance program for that purpose.

Rather than diminishing the sales

efforts directed at the group under 35, however, the actuary believed that greater efforts should be made to awaken in them a strong feeling for the need of pre-planning of their funeral.

The actuary for Forest Lawn Life Insurance Company

did not believe that he had stafficient data about results achieved with policyholders under age 55 to express an opinion on this, or about the age levels of the policyholders* Sex* The estimated sex distribution among the policy­ holders of Pierce Insurance Company is 60 per cent female, and 40 per cent male*

For Forest Lawn Life Insurance Company

the distribution is believed to be divided equally between the sexes* Income Levels * The actuary of Pierce Insurance Company estimated that the average yearly income per policholder is about $1,000; he amplified this estimate by stating that the funeral policies have a ,fhigh appeal to old age pens ioners.tt The actuary of Forest Lawn Life Insurance Company reinforced the foregoing estimate by stating that the policyholders were ^largely of the marginal type,11 which he indicated to mean an income level of about $1,000 per year.

Approximately 400 to

500, out of over 13,000, of the policyholders of this latter company are on relief* To a certain extent the Income level of a policyholder determines over how long a period he will extend the insurance premium payments.

This is because the longer the payment

period, the smaller is each payment; consequently, those with the lowest incomes tend to choose the longer premium payment plans.

One other factor that enters into this is the age of

60 the policyholder, for both companies restrict the payment period permitted for an elderly applicant (this is further explained in chapter five)*

Therefore, the following

percentage distribution by period of payment supplements the estimates about income levels and ages of the policy­ holders#® POLICY PAYMENT DISTRIBUTION

I3II

LENGTH OP PAYMENT 20 'jffiARS 10 YEARS 5 YEARS

I YEA&

FOREST LAWN LIFE INS. CO.

27%

65%

5%

2%

2%

PIERCE INS. COMPANY

28%

46%

16%

7%

W%

Unfortunately, there is not sufficient comparative material available on policyholder income levels and ages between the two companies to yield a conclusion as to why Pierce Insurance Company has more policyholders making premium payments in shorter periods than has Forest Lawn Life Insurance Company# Race. Forest Lawn Life Insurance Company does not accept non-Caucasians as policyholders#

Pierce Insurance

accepts non-Caucasians under what is termed an age rating system; that is they are accepted at a premium rate equivalent

8 For total insurance in force as of December 31, 1948#

to an ag© five years higher than the actual age.

This

discrimination is said to be warranted by the higher death rate among non-Caucasians • Actually, non-Caucasians are a minority of the company1s* policyholders, primarily because the Golden State Life Insurance Company specializes in writing insurance among the Negro population*

CHAPTER SIX DESCRIPTION OP THE POLICIES Little inherent difference exists between funeral insurance and other forms of life insurance*

What variations

there are, are primarily in the use to which the proceeds of the policies are to be put*

This chapter illustrates the

characteristics of funeral insurance by examining the policies and the scope of operations of the two companies under consideration* FOREST LAWN LIFE INSURANCE COMPANY Forest Lawn Life Insurance Company issues four general, types of policies: Funeral Insurance, Funeral and Readjustment Insurance, Special Family Group Insurance, and Ordinary Insurance

Since only the first three may properly be

considered as funeral insurance the descriptive emphasis is upon them*

Within these three types there are many common

features, a large proportion of which are found in the first type of policy.

In its discussion they are described; the

additional, or differentiating features, of the others are discussed in the examination of them*

*** By ordinary insurance is not meant what is commonly termed ordinary life or whole life policies but rather the ordinary branch of the life insurance business (see definition in Chapter One) which Includes whole life and limited life policies*

Funeral Insurance. 53 per cent of the new business of the Forest Lawn Life Insurance Company in 1948 was accounted for by the Funeral Insurance policy, which is essentially a plan for pre-financing and pre-arranging the details of a funeral service.

The minimum amount of insurance

issued under this policy is $200.

The primary element of the

policy is the Funeral Service Benefit, under ih ich the insured can designate the type of funeral service he desires5 , and select any funeral director to render the services, or he may, rather than selecting a particular funeral director, merely designate that 11Any Licensed Funeral Director11 may be chosen.

Then a funeral director need not be selected until

the insured* s death.

Even if he makes an initial choice of

a funeral director, this does not preclude a future change, or changes from time to time, of the funeral director* When at the death of the insured the proper funeral director is notified that he is designated under the Funeral Service Benefit, the funeral director usually informs the insurance company promptly and asks for a statement of the status of the policy.

If the policy has lapsed, then rather

than the insurance company remitting funds to pay for the burial and coincidental costs, these costs will have to be paid in the same manner that they would have been if no insurance had existed.

If there is any indebtedness against

the policy, any of the additional benefits of the policy will

64 b© reduced before the amount for the funeral service will be reduced* Once the funeral director has determined the status of the policy he knows how to proceed with the service*

If the

policy is still in force, the funeral director, upon-completion of the service, must furnish to the insurance company an itemized statement of all services rendered under the terms: of the policy together with proof of the death of the in­ sured*

Then the insurance company will pay the funeral

director for the amount of services and expenses, but in no case will 'the payment exceed the amount of all allotted proceeds*

In the event that the funeral expenses are less

than the allotted proceeds the remainder is paid to any beneficiary named by the insured*

If no beneficiary*is

named, or the beneficiary does not survive the insured, the insurance company disposes of the remaining proceeds according to the Payments of Proceeds provision by first paying to the extent of services rendered to any person who appears to the company to be equitably entitled to reimbursement for ex­ penses incurred in rendering funeral services to the insured, and second by paying any remaining amounts either to the executors or administrators of the insured* s estate or to any relative who appears to be equitably entitled to such payment* A second element, termed Additional Benefit A, which

may be included in the policy provides for certain additional services, such as the minister^ honorarium, singer, flowers, interment and recording charge for interment space, crypt or niche, concrete burial box or vault, cremation, and a tablet, which are not included in the ordinary funeral service*

In

the choice of the special services as with the funeral service, the insured may designate which services he desires and the expense limit for eaeh one*

If the total expended

for these services is less than the total provided, the insurance company sifter verifying the proof of rendition of services will pay to the funeral director the lesser amount*

Any funds left over will be disposed of by the

insurance company in exactly the same way as in the ordinary funeral service.

Although so far no data has been obtained

on how frequently any funds are left over or how much, there seems to be an incentive for the funeral director to expand his expenses to the full amount provided in the insurance contract, since the amount of the benefits is not unknown to him*

Indeed the contract provides that? If any of the items in said Additional Benefit A cannot be procured with the amount allotted therefor or with the addition of any unused amounts of either this Supplement or the agreement supplemented hereby, then such amounts may be applied as a credit toward the defraying of the cost of such Additional Benefit A * • • In the event that the amounts provided for in Additional Benefit A set forth above are not entirely used, or in the event that the items shall not be prociared, the Company may pay the unpaid amount by alloting it to the Funeral Service Benefit and by

making paymen t thereof in like manner to that provided in the Payment of Proceeds provision of the agreement supplemented hereby* Throughout the policy the stress is on the financial problems contingent with death, for in addition to the two provisions above mentioned there is another optional provision, mfoich may also be included in the policy to provide for the payment to the beneficiary of a lump sum of cash.

Although this provision for a cash benefit is

made with emphasis on the fact that there may be certain additional expenses, such as the expense of a last illness, which caanot be accurately planned for ahead of time, the terns of the policy directs the beneficiary*s attention toward a specific expense by stating that this "sum may, at his option, be used for any purpose, including the purchase of interment property.11 Thus in spite of the numerous items mentioned in the Funeral Service and Additional Benefit A the cemetery lot is not included, and its purchase is an extra expense. Funeral and Readjustment Insurance. The second most favored policy from the standpoint of sales, accounting for 16 per cent of the new business in 1948, is the Funeral and Readjustment Insurance Policy.

This policy includes all of

the benefits described under the Funeral Insurance policy, as well as an additional face amount of insurance.

Such policies

67 are not issued for less than $1,000*

The ostensible purpose

of the extra benefit is to retire debts, a lien on a car, or an unpaid balance on household equipment, existing at the insured* s death*

This provision is designed to leave his

dependents free of such burdens and thus contribute to the ease of their financial readjustment. An additional element, which gives the policy the title of ‘‘Readjustment,1* places emphasis on the financial re­ orientation of the dependents in the period following the death of the insured*

It is pointed out that although the

dependents* needs go on as before, they may not be sufficiently well trained to obtain satisfactory employment without further training.

The object of this policy then is to provide a

monthly income for approximately one year in order that they may afford to take a training course to better prepare for a suitable occupation.

This is simply accomplished by including

an additional face amount of insurance which when paid out in monthly installments will provide the desired income for a stated period of time. Special Family Group Insurance, The Family Group policy enjoys approximately the same popularity that the Funeral and Readjustment policy does, since it accounted for 15 per cent of the new business in 194S*

Every member

of a family udio is insurable, under sixty years of age, and

who lives in the same home must be included in a single policy. There cannot be less than three in the group; the minimum amount of insurance that can be issued on any one life is #200; the minimum insurance for any one family group is #600.

Payments are made by a group premium which is some­

what lower than would be the sum of the premiums under separate policies for each member of the family for the same total amount of insurance.

This lower premium is used

in recognition of the lower expense of processing a single policy in the insurance company1s office.

Now, however, there

is some belief that this initially lower handling cost is offset by greater handling costs in the future, which arise, for example, when a daughter or son is married and consequently removed from the Family Group policy.

For this reason the

company no longer stresses the sale of this policy, but it has not discontinued the policy because many of the salesmen feel dependent upon it for their income* Since the principal element in this policy is the Funeral Service Benefit, it differs little from the above policies except in its s@ope.

Although supplements, such as

Additional Benefit A and Additional Benefit B are not included in this policy, additional cash benefits may be included for each member of the family. A new element found in the Family Group policy is the Additional Payor Benefit, under which the company agrees, for

a small additional premium, to pay all of the remaining premiums on the policy after the death of the principal insured, the payor*

The size of the addition to the total

premium is determined by the amount of the total premium less the payorfs share of the premium, and by the age of the payor#

Prom this it can be seen that the additional

amount is oily the premium for an extra amount of insurance on the life of the payor, the proceeds of which upon his death will revert to the company and be sufficient to absorb the cost of the remaining premiums. Ordinary Insurance*

Ordinary insurance, which is

only written for $1,000 or more, provides a cash benefit for a beneficiary without attempting to coordinate the insurance proceeds with any funeral expenses.

This form

of insurance accounted for approximately 14 per cent of the new business in 1948# Juvenile Insurance.

The company classifies insurance

issued on any individual from age 0 to 19 as Juvenile Insurance, hov/ever, no distinctive policy is used#

Actually,

a juvenile may be issued any of the above forms of insurance, subject of course to restrictions which do not apply to other age groups.

One restriction is that no insurance will

be issued on a juvenile for less than $1,000 face amount, except under a Family Group policy in which case the minimum

amount is §200*

Another restriction is that any policy for

a juvenile alone must be fully paid up in twenty years*

A

final restriction is that under any policy for children who are under six (6) months old at the time the policy is issued only- 25 per cent of the face amount of the insurance will be paid if they die within the first policy year.

No such

restriction on benefits applies if the child is over six (6) months old at the time of issue. The Additional. Payor Benefit, which was noticed with the Family Group policy, may also be used with any juvenile policy*

The purpose, the calculation of the additional

amount of premium, and the function of the proceeds are the same in this case as they are with the Family Group policy* General Provisions. This final section discusses some features which apply in general to all of the policies. These are the types of payment and double indemnity. Although the actuarial implications of different forms of premium payment are examined in another chapter, different ways of payment and requirements in regard to them are presented here so that a better understanding of the scope of the policies may be acquired.

The two general

plans for the payment for any of the policies described above are Whole Life and Limited Payments.^ Whole o

Regardless of the payment plan, the insurance is for the whole life period of the insured*

Life^ means that the insured, if he is to keep his insurmce in force, must pay the stipulated premiums until he is age 99, when the insurance becomes fully paid, or until his death, whichever is prior.

This method of payment is

permitted under all of the policies issued on lives insured between the ages of 20 and 65* Limited Payment plans can be made for 20 years, 10 years, 5 years, or one year.

This last form of payment is

referred to as a single premium payment even though the full amount may be paid in installments throughout the year. Since the present value of a given amount of insurance at a specified age is the same regardless of the period of pay­ ment, it is seen that any type of limited payment would necessarily require larger premiums than would whole life payment; and the shorter the period in nhich the limited payments are made the larger must be each premium* For the Funeral Insurance policy, if a juvenile is insured the only plan of payment available is for 20 years; if an individual is insured from age 20 to 65 he may select any of the plans of payment: from age 66 to 70 the 10 year, 5 year and single premium payment plans are available; from age 71 to 75 choice is limited to the 5 year and single premium payments plans; from age 76 to 95 only the single

® Also referred to as straight life or ordinary life*

72 premium payment plan is permitted.

Under the Family Group

policy 20 year and whole life payments are permitted for all ages oovered, including juveniles.

For all other policies

juveniles may be issued insurance only on a 20 payment plan; and those from age 20 to 65 may choose between the whole life, 20 and 10 payment plans.

These other policies are not issued

to anyone over age 65. In addition to the plans of payments delineated above, there are modes of payment, #iich refers to whether the premiums are paid on an annual, semi-annual, quarterly, or monthly basis.

If the insured is making a single premium

payment, or premium payments on a Family Group policy> he mey use any of the modes of payment*

In all other cases the

premiums must be paid annually, semi-annually, or quarterly. An initial choice of a mode of premium payment does not at any later time prevent the insured from making a change to one of the other permitted modes of payment.

The company

does not use a personal collection system; instead, it notifies the policyholders by mail just prior to the premium due date and the policyholder may make remittance either by mail or at the office of the company. One provision, udiich may be included in any of these policies, but in no case beyond the period of premium payment, is double indemnity.

The essence of a double indemnity

agreement is that for an additional premium the company

will pay to the beneficiary an extra amount equal to the face value of insurance, if the insured dies as a result of bodily injury incurred solely through external, violent, and accidental means*

Prom this short description it is observed

that double indemnity, rather than being a form of life insurance, is a form of accident insurance* PIERCE INSURANCE COMPANY Standard Funeral Service Policy* The primary type of insurance issued by Pierce Insurance Company, the Funeral Service Policy is composed of two elements: the Funeral Benefit Agreement and the Additional Benefit Agreement# The former element plans for the following services: First call to home or hospital Preservation and preparation Casket Use of reposing room Professional services Use of chapel Musical service Casket coach Automobile for family Newspaper notice The Additional Benefit Agreement provides for two amounts of insurance, the first amount to be paid to a beneficiary for such use as he may choose, and the second amount to be paid to the funeral director for additional services, such as concrete or metal vault, transportation of the deceased (if he is to be moved to aa other city), cremation,

74 urn, niche, cemetery plot, minister*s honorarium, marker or other incidental Timeral expenses.

Although this policy does

plan to include a cemetery lot, it is not otherwise as complete as the comparable policy of the Forest Lawn Life Insurance Company in that it does not separate the items and provide a space beside each for the insured to designate the amount to be spent for each item; however, the total amount to be spent for the aggregate can be stipulated. In this policy the details pertaining to the selection of a funeral director, changing him, his payment by the insurance company, and the disposition of any funds remaining from the funeral service are substantially the same as discussed above under the Forest Lawn Life Insurance Company* s Funeral Insurance policy and will therefore not be repeated. Juveniles are written in this same policy, but the percentage of the face amount of the policy that will be paid in benefits is restricted*

The restrictions state that::

If the death of the Insured should occur during any policy year at the commencement of ifoich policy year the age of the Insured shall be any age shown below, the amount payable shall be that percent of the Face Amount shown:: Age Age Age Age Age Age

6 1 2 3 4 5

months or less year nearest birthday years nearest birthday years nearest birthday years nearest birthday years nearestbirthday, or older

10$ 20$ 40$ 60$ 80$ 100$

Even though there is this diminution of benefits at the early

75 ages, premiums are paid on the basis of the full face amount of insurance* The mode of premium payments may be on an annual, semi-ainual, quarterly, or monthly basis.

In the majority

of cases the insured selects the amount of insurance that he wants and the mode of payment, and then the size of the premiums are determined from that and the characteristics of the insured.

But in the case of some of the monthly premium

business, especially that involving the lowest income groups, to facilitate payments the insurance is sold on the basis of even monthly premiums of from $1*00 to $5*00, and then from the amount of the premium together with the characteristics of the insured, the amount of insurance is determined.

The

company collects premiums by notifying the insured by mail and it is the insured’s responsibility to deliver the p^ment to the company, which may be accomplished by mail or a personal call to the company’s home office.

In some cases the insurance

salesman may make home collection, but this is not sponsored nor compensated by the company, and, if the salesman should fail to come for a collection, this does not relieve the insured of the responsibility of assuring that the company receives the payment. The premiums can further be paid on these plans: a whole life basis, 2D year payments, 10 year payments, 5 year payments, and a single premium payment.

While these parallel

76 the plans of Forest Lawn Life Insurance Company, the single premium plan is modified in that when an insured chooses to pay the premium in installments he must sign a ttpremium lien note” which formally declares the companyfs prior claim to the insurance proceeds to the extent of the unpaid balance if the insured dies before making full payment*

An additional

requirement for installment payments under the single premium plan is that the insured must make a downpayment of at least 20 per cent of the total premium and agree to pay the remainder, with interest, in monthly installments which can not exceed twelve months* The above enumerated payment plans are not permitted in every case, since for advanced ages the payment period is restricted.

For example, an individual between age 0 to

70 may select any of the plans*

However, an individual

between ages 71 to 75 can only select from the 10 year, 5 year, and single premium payment plans; an individual between the ages of 76 and 80 can only select from the 5 year and the single premium payment plans*

An individual over age 80

but under age 100 may purchase the policy under the single payment plan, but there is no insurance element involved since he must make a cash payment equal to the face amount of the policy.

Further, he receives no interest on the cash paid

into the policy* The maximum amount of insurance that Pierce Insurance

Company will issue on any individual under the Funeral Service policy is $1,000*

For advanced ages the amount of insurance

issued is restricted to 3e sser amounts as followst

age 66 to

70, a maximum of $400; age 71 to 75, $300; age 76 to 80, only $250.

The minimum amount of insurance that will be issued in

any case is $100* A double indemnity provision may also be included in these policies, but it is subject to the same considerations mentioned in regard to its use with the Forest Lawn Life Insurance Company’s policies* Family Group Insursn ce * This type of policy was discontinued in 1948 because the company believed that it involved too much expense in the years after it was issued* Ordinary Insurance* This is similar to the ordinary insurance of the Forest Lawn Life Insurance Company. only issued for amounts between $1,000 and §2,000*

It is

CHAPTER SEVEN

CONTRACTUAL PROVISIONS OP THE POLICIES In this chapter the contractual features common to burial insurance policies are discussed and related to the specific company using them ntfien it seems helpful or significant*

For the most part the features differ little

between companies* Nature of the Policy*

11The written instrument, in

which a contract of insurance is set forth, is the policy. Since the policy constitutes the sole relationship between the parties concerned, the wording is necessarily detailed* Fortunately, however, the wording is not esoterically technical and as a result can be comprehended with some effort*

The

fact that the policy of the present day constitutes the* entirety of the contract between the parties is beneficial to the Insured in that he can not be held responsible for ignorance of any other provisions, such as the company's charter or by-laws, as once was possible under most insurance policies*

The policy must specify the parties to the contract,

the life insured, the risks insured against, the insurance period, and the terms of the premium*

Usually the only

parties involved in the actual making of the contract are the company and the insured*

But when the insured is under

16 years of age the transaction must take place between the

^ California Insurance Code* 1947 Edition, section 380*

79 company and an adult who is a parent or guardian of the insured#

Once the contract is entered into no part of it

may be altered without the mutual consent of the parties concerned, nor can the company cancel the policy except in the case of a misrepresentation that is determined within a stated period of time# Beneficiaries# the contract there may

In addition to be one or more

the parties whomake beneficiaries# The

person who is selected as beneficiary of the funeral service element is designated solely as the ’’funeral director1*; the person who is named as recipient of any remaining or additional benefits is referred to as the ‘’beneficiary#** Once an initial choice of beneficiary has been made the insured may change the beneficiary at any time and from time to time, if the policy Is in force and not assigned# An insurance company might possibly be subject to two claims for the same proceeds,

if the insured should die and the

company pay the insurance

proceeds to the beneficiarynamed

in the policy and later find that the insured prior to his death had written a request that the beneficiary be changed# In anticipation of such a likelihood the Forest Lawn Life Insurance Company’s contract prevents the incurranee of a double liability by including a provision in regard to change of beneficiary which states::

80 Such change will take effect only when endorsed on this policy by the Company and shall then relate back to and take effect as of the date the Insured signed said written notice whether the Insured be living at the time of said endorsement or not, but vi thout prejudice to the Company on account of any payment made by it before such endorsement# It is possible, though rarely done, that the insured may irrevocably designate a beneficiary.

If this is done

the beneficiary has a vested interest in the policy can be effected without the consent of such beneficiary.

The Forest

Lawn Life Insurance Company’s contract stipulates, however, that if a designated beneficiary should die before the insured, any rights possessed by such beneficiary revert to the insured. An initial choice of a funeral director does not prevent any future change, or changes, in the designation of the funeral director even though a beneficiary might otherwise be irrevocably designated.

Hence the selection

of a funeral director and beneficiary are independent matta?s. Even though a funeral director is designated as a beneficiary for the funeral services, he does not have an absolute claim to any insurance proceeds upon the insured’s death.

And in no event will that insurance

company pay to a funeral director an amount greater than the cost of services rendered, and then not in excess of the amount designated In the policy.

The California Insurance

Code states in regard to such claim that:

before the Insurer may pay the proceeds of such policy or any portion thereof to any undertaker or funeral director designated in the policy for funeral services or miscellaneous expenses in connection therewith, the insurer shall require proof satisfactory to it that the services and expenses have been rendered and if proof is not furnished within 30 days after demand is made upon the insurer for such payment and in any event within one year from the date of the insured1s death, the insurer shall pay the proceeds of suet* insurance to the beneficiary designated in the policy • • • Consequently even if a funeral director is named in the policy but is unable to establish proof of having furnished services to the insured's remains, he has no claim to any part of the proceeds.

The proceeds then become available

for distribution to the beneficiary.

The beneficiary is

usually a close relative of the insured, and thus generally has charge of the disposition of the insured's remains* Should the beneficiary wish to obtain the funeral service from any other funeral director than the one named, he has a legal right so to do.

Under such circumstances the

beneficiary would have to reimburse the funeral director performing the service.

Since the beneficiary would receive

the insurance proceeds he could use the money from the policy to pay the director rendering the service.

Moreover, the

funeral director designated in the policy could not establish a valid claim to any part of the insurance proceeds.

Indeed

the beneficiary could go beyond this and have the insured’s

^ Ibid., section 10244 (6).

remains given to the proper authorities for a charitable burial, in which case no funeral director, whether named or not in the insurance contract, could establish proof of rendering the funeral service.

The beneficiary’s claim to

the insurance proceeds would not then be diminished by any prior claim by a funeral director# Such a procedure by a beneficiary may appear heartless and unconscionable, but it is possible, since the funeral director can only establish a claim by the rendition of services, whereas the beneficiary needs to establish no proof of services rendered to have a valid claim#

In spite

of the possibility it is rare that a beneficiary has refused the designated type of funeral service to a deceased in order to collect the full proceeds of the policy#

Somewhat more

frequently a beneficiary has requested, and obtained as he has a legal right to do, a less expensive service than the policy plans for, in order to enlarge his claim#

These

cases are exceptions, however, and by far the most frequent change is one in which the beneficiary supplements the proceeds of the Funeral Service element to obtain a better funeral for the deceased. The Premium# By the term, premium, is meant the payment for insurance which is the consideration for the contract#

The premium, nhich is determined for a particular

83 individual by his age, physical characteristics, occupation, amount of insurance, and plan of payment must be stated as to amount, interval, and period of payment in the policy# It is then fixed and unchangeable by the company*

The

premiums for all of the policies discussed are made on the level premium principle*

This means that for the duration

of payment on a given policy the periodic premium payments are of the same amount*

Since the cost of a given amount

of insurance protection increases as an individual grows older, because the certainty of death grows nearer, the level premium basis must take consideration of this*

The

level premium is accomplished by incorporating three parts in the premium, the first of which, the company’s expense component is irrelevant to the level premium principle. two pertinent components are pure risk and savings*

The

The

pure risk component takes cognizance of the actual insurance cost for each year*

Since, for the same amount of insurance

risk, this insurance cost would be increasing each year as the insured’s age increased, until in later years the cost would be exorbitant, the level premium principle provides for decreasing the amount of insurance each year*

This is

possible through the accumulation of savings in the policy* As the volume of savings increases the amount at risk decreases*

The accumulation of savings continues until at

a future time, if the insured is still alive, the amount of

84 savings equals the face value of the policy*

Xt is only

through this scheme of requiring the insured to accumulate a savings value behind his policy, and thus to continuously decrease the insurance risk and consequently the cost of the pure risk component in the premium, that an insurance company can offer an unchanging premium.

The savings component,

termed the reserve, is the basis of non-forfeiture values which are discussed in a subsequent section. To maintain a policy in force the insured must pay all premiums when they are due, which may be monthly, quarterly, semi-annually, or annually; and such payments must continue for the period stated in the policy.

Premiums are considered

to be paid when made at the company!s home office, although a valid payment can be made to an agent of the company if the insured obtains a company receipt, signed by an authorized officer and counter-signed by the agent.

Any home collection

by an agent, though, is purely a convenience for the insured, and is not encouraged by the company; nor does the failure of an agent to make a collection, even if he was in the habit of so doing, relieve the insured of his obligation to pay. Grace.

After the payment of the first premium, the

insured is granted a grace period following each premium payment date, during which time the policy continues in

85 force for the face amount less the amount of the overdue premium.

For example, if the insured neglected to make

his second premium payment and then died during the sub­ sequent grace period, the company would be obligated to pay the face amount of the policy from which would be deducted the amount of the premium due.

The length of the

grace period is 30 days for Pierce Insurance Company and 31 days for Forest Lawn Life Insurance Company. Reinstatement. When the insured fails to make his premium payment before the expiration of the grace period the policy terminates, or more technically is said to lapse* However, if the insured does not surrender the lapsed policy, by returning it to the company, for whatever cash value has been accumulated through the premiums* savings component, he has the right to reinstate the policy within a stated period of time if he pays all overdue premiums and meets other conditions stated in the contract.

The requirements

in the contract of Forest Lawn Life Insurance Company are that:: At any time within five (5) years after default in the payment of premiums this policy, if not previously surrendered for cash, may be reinstated upon written application and payment of overdue premiums to date of reinstatement with interest thereon at not more than six per cent (6%) per annum provided that evidence of the insurability of the Insured satisfactory to the Company Is furnished and that all indebtedness on account of or secured by this policy, together with interest is repaid or reinstated*

The provisions of the policy of Pierce Insurance Company differs little from this except that the reinstatement period is only one year and the interest rate on overdue premiums is five per cent per annum, Non-forfeiture Values. The level premium principle previously described illustrates how an insured accumulates savings in his policy.

In the early days of life insurance

in this country, although the premium included a savings component (where the level premium principle was used), the insured upon the lapse of his policy usually forfeited his right to any of the values accumulated in it.

Partly as a

result of competition and partly as a result of legislation insurance companies began to provide that a policyholder who surrendered his lapsed policy would not forfeit the values inherent in it.

Today these values created by the savings

component of the level premium are an essential part of the contract and are referred to as ”non-forfeiture values.” However, these values are not considered to exist until the policy has been in effect, and the premiums paid, for a stipulated minimum period of time, the length of which depends upon the plan of premium payments.

The shorter

the period over which the premium payments are to be completed, the greater will be the savings component, even during the incipient policy years, and hence the sooner

87 will the non-forfeiture values be acknowledged*

In the

policies here considered non-forfeiture values are generally recognized during the second policy year, and in no case is recognition of them delayed beyond the third year* There are detailed provisions in the contract regarding the computation of non-forfeiture values, the form in which they can be acquired and a table stating the exact dollar amount of the values in each form at the end of each policy year for a specified age at issue*

Because the table gives

only the non-forfeiture values at yearly intervals an insured who surrenders his policy sometime other than at the end of a policy year would have to obtain an adjustment in the stated values* The principal forms in Tflhich non-forfeiture values are available are cash, paid-up insurance, and extended term insurance*

Under the first option the insured by surrendering

his policy to the insurance company can obtain the net cash value, which refers to the total accumulation of savings less any indebtedness to the company, existing for the policy* The selection of this option does not assure the insured of immediate acquisition of the cash value, for the company has the right to defer the payment of this option, but not of any other option, for a period not exceeding six months after the application*

The purpose of this provision is to

mitigate the effect of runs on the company for cash and so

88 to protect the remaining policyholders# In the event the insured feels that he can not afford to keep up the premium payments but still desires the same type of insurance more than he desires the net cash value, he may choose the second option which will give him a fully paid policy of exactly the same type of insurance, but of course of a reduced amount.

The effect is the same as though •z

he took the net cash value and used it as a net^ single premium to obtain a certain amount of insurance.

The amount

of paid-up insurance available depends, in addition to the net cash value, upon the age of the insured* The third option, for extended term insurance, if selected provides the insured with insurance of the same total face value as the existing policy for a definite period of time*

The length of time that this insurance

will endure depends upon the net cash value at the time of surrendering the policy.

During this period the insured has

the full amount of insurance in force, just as though he had continued the premiums on the surrendered policy*

At

the end of the period, however, the policy is worthless. Another clause provides that in the event the insured

By net premium is meant the total premium less the company Vs expense component. When the premium includes all three components, expense, pure risk, and savings, it is sometimes differentiated by use of the adjective, gross*

89 does not select one of the above three options within a short period of time (30 days for the Pierce Insa ranee Company and 60 days for the Forest Lawn Life Insurance Company) after a premium default that an Automatic Non-forfeiture Option shall take effect.

This option then selects the extended term

insurance for the insured.

Only Pierce Insurance Company

permits the insured to alter this automatic selection once it goes into effect, and then a request to substitute one of the other options must be made in writing, within three months from the date of the premium default. All of these options are merely equivalents even though differing cash amounts are stated for each one.

Such

differences are due to the nature of the benefits graited and will be examined further in the chapter on actuarial aspects.

However, the equivalence of these benefits is

clearly indicated by a clause in the Pierce Insurance Company*s contract which states that: The amount of the Paid-Up Insurance or the period of Extended Term Insurance shall be such as the total net cash value will purchase at net single premium rates at the attained age of the insured* There is a basis of uniformity for these values as between the different policies and the two companies, since all non-forfeiture values are computed by use of the Commissioners* 1941 Standard Ordinary Mortality Table* Loan Provisions.

Concomitant with establishing non-

forfeiture values, the savings element of the level premium creates a loan value*

This is so because inherent within

the policy, which is personal property, is a definitely measurable cash value.

On the basis of the net cash value

of his policy an insured may obtain two types of loans; one is the Automatic Premium Loan, the other is a cash loan. Forest Lawn Life Insurance Company furnishes both types of loans, and Pierce Insurance Company neither type. In order for the Automatic Premium Loan provision to exist within a policy, the insured must definitely request it either at the time of application for the policy or some time prior, to any premium default*

The operation of this

provision is as follows: the Company will, at any time after cash loans have become available under this policy and without further action by the Insured, advance and charge as a loan upon the policy a sum sufficient to cover any premium there­ after becoming due hereon and remaining unpaid on the last day of grace • • « Such loans shall be made with interest at the rate of not more than six per cent (6%) per annum, in advance to the next anniversary date of the policy and in advance on that date and annually thereafter, if the cash value at the end of the period which such premium would cover is sufficient to cover all indebtedness hereon including such premium and interest. If the loan value is not sufficient to cover the premium to the next anniversary date of the policy, but is sufficient to cover one or more quarterly premiums, then such fractional premium will be charged as a loan, but in no case will less than one quarterly premium be charged under this provision. It is seen that although this provision is dependent upon the non-forfeiture cash value, it is not in itself a

non-forfeiture option*

This is so because non-forfeiture

options take effect upon the lapse of the policy, whereas this option maintains the policy in full force, subject to the indebtedness of the loan, and as such it is still operative in regard to all benefits encompassed by the policy*

Nevertheless, the amount of insurance coverage

steadily diminishes while the Automatic Premium Loan is in operation, for indebtedness against the policy constantly increases* The policy also provides for a cash loan at anytime that a cash value is recognized under the non-forfeiture benefits, and up to the full amount of the cash value, less the interest which is deducted in advance for one year*

The

company will make a loan to the insured on proper and lawful assignment of this policy and presentation of it for endorsement, . • • if the right to change the Beneficiary has been reserved, or to the Insured and any Beneficiary or Beneficiaries of record, if the right to change the Beneficiary has not been reserved, or to the assignee of record, if any, on the sole security thereof, any amount which, with interest, shall not exceed the cash surrender value available at the end of the policy year in which, spplication for the loan is made* The interest which cannot exceed six percent per annum is collected in advance because policy loans result in so many lapses that otherwise the company would rarely obtain the interest due on the loan*

Hence this would be the equivalent

of the company having given the insured the cash vaL ue of the

92 policy under tlie non-forfeiture provision and, then instead of terminating the policy, continuing it in force for an additional period of time* Assignment, Since an insurance policy is personal property of value it may be assigned to another by a transfer of the rights*

Such a procedure may be used to obtain a

loan from a source other than the insurance company*

In

the case of the Per est Lawn Life Insurance Company there seems to be little reason for a policyholder to assign his policy merely to obtain a loan from an outside source, because the company freely grants loans on inexpensive terms.

But Pierce Insurance Company makes no policy loans

and consequently an insured who desired to use his policy as the pledge for a loan would have to resort to an outside lender* Both companies stipulate in their contracts that assignments will not be “binding upon the company unless made by an instrument in writing of which a duplicate shall be furnished to the company, and receipt thereof acknowledged. “ Neither company accepts any responsibility in regard to the validity of an assignment and before a claim will be paid to an assignee the companies must have satisfactory proof of the assignment* The Insurance Application and Contestability of the

Policy. The application for insurance contains pertinent information regarding the age, occupation, medical history and other factors that affect the insurability of the applicant.

Since this application not only is a part of

the insurance contract but is also the basis for the issuance of the policy to the applicant, it is important that the information contained therein be accurate.

Other­

wise the insurance company may be induced to issue a policy to one who it either would not insure at all or else not for the terms granted*

Prior to the 1900*s many insurance

contracts held that an applicant’s statement were warranties, which meant that the applicant was unequivocally and absolutely guaranteeing the truth of all of his statements* Under this circumstance a company which wanted to contest and invalidate a policy had merely to prove that there was some falsity in the statements, and this, regardless of the inconsequentially of the item, effectively voided the contract.

In California today insurance contracts can

require of an applicant’s statements, in the absence of fraud, only that they are substantially true. To protect the insurance company against fraudulent statements used to obtain insurance, the contract generally contains a clause granting the company a definite period of time during which it can contest the policy.

Thereafter the

policy is incontestable except for nonpayment of premiums

94 or misstatement of age#

This latter, however, does not result

in the invalidation of the policy, but the company is permitted to adjust the benefits payable to an amount such as the premium paid would have purchased at the correct age* Although common law holds that fraud in a contract renders it void, the majority of the courts have held that where an insurance contains a clause definitely limiting the period of contestability, that;, even though it later can be proven that the contract was obtained through fraudulent statements, the terms of the policy can be enforced#^

*fIt

may therefore be contended, with considerable force, that the few companies which have no incontestable clause are better protected against fraud than those which do have such clauses •t*^

It is interesting to note in view of these

opinions that in regard to burial contracts the California Insurance Code requires: A provision that the policy shall be incontestable after it has been in force during the lifetime of the insured for a period of two years from its date of issue or from the date of any reinstatement thereof except for suicide, non-payment of premiums or the violation of the conditions of the policy relating to military or naval service in time of war.®

^ Joseph B. Maclean, Life Insurance (sixth edition; New York: McGraw-Hill Book Company, Inc., 1945), p. 197* 5 Maurice Taylor, The Social Cost of Industrial Insurance (New York: Alfrecl A. Knopf, 1933T* P# ^5. California Insurance Code, o£. eit*, section 10244 (&)•#

95 In the case of Pierce Insurance Company the clause becomes effective after eighteen months from date of issue, and in the case of Forest Lawn Life Insurance Company the clause becomes effective after two years. Suicide. The contracts of both companies provide for full insurance coverage if suicide occurs after the policy has been in effect for two years.

The only payment that is

made for a suicide that happens prior to the elapse of two years is a return of all premiums after which the policy becomes void* Effective Date. Under the provisions of the policies of both companies, no policy goes into effect until it is delivered to the policyholder*

CHAPTER EIGHT ACTUARIAL ASPECTS OP THE POLICIES; Actuarial principles are fundamental to all life insurance operations.

This chapter discusses briefly the

main actuarial aspectst the mortality table; the computation of gross and net premiums, for term and whole life insurance; and the manner of quoting premiums.

The determination of

reserves and the basis of non-forfeiture values are discussed both for the entire insured group and for the individual policyholder.

Since the actuarial principles discussed are

common to nearly all life insurance companies operating on a reserve basis, a comparison of the procedures used by Forest Lawn Life Insurance Company and Pierce Insurance Company is not included. The Mortality Table. To an individual one of the basic uncertainties about his death is when it will occur. The insurance company, which for a relatively small annual sum, undertakes the obligation of paying out a larger sum to a beneficiary at the insured1s death can not afford any uncertainties, in the aggregate, as to when death will occur. While the company can never tell when a particular individual will die, it can approximate how many individuals of the same age, or for that matter for any age, will die in each year. The insurance company must deal with a large number of

97 individuals, since for smaller groups the death experience may differ considerably, in one direction or the other, from the average• The fundamental tool relating to the costs of insurance, and removing insurance from the realm of gambling is the mortality table*

Because of the existence of this table

insurance companies can on a scientific basis let an individual shift to them the economic risk of the un­ certainty of when death will occur*

Such an important

tool is simple in appearance and use but complicated in its construction.

Thus it was not until about 1858 that

a fairly accurate table for insuring lives was developed by the Massachusetts Insurance Department*^

The most common

table in use for many years was the American Experience Table first published about 1870 from the experience of the Mutual Life Insurance Company of New York over a period o

of about 20 years*

Rapidly replacing the above table is

the Commissioners* 1941 Standard Ordinary Table, usually, abbreviated to the WfC.S*0.Table,n which is based on experience from 1930 to 1940*

Both Forest Lawn Life

*** Mildred F. Stone, A Short History of Life Insurance (Indianapolis: The Insurance Research and Review Service, 1942), p. 62* 2

Joseph B. Maclean, Life Insurance (6th edition, New Yorkt McGraw-Hill Book Company, Inc*, 1945), p. 75*

Insurance Company and Pierce Insurance Company in compliance with California law now use this latter table.

A mortality

table is simply the compiled mortality experience of a large number of known and selected lives from which can be obtained the number who die at each age*

The rate of mortality for a

specific age group, usually expressed as so many deaths per thousand (however, as will be noticed in subsequent calculations, it is sometimes more easily used in decimal form), is determined from the proportion of individuals of that age who die during a year to the number who were living at the beginning of the year. get Premiums. A simplified explanation of how the mortality table can be used Is given to establish the principle of operation, after which refinements will be introduced.

The table shows that for age 50 the expected

mortality rate is 12.32 deaths per thousand (or 0.01232). Thus for a selected group of 100,000 persons age 50 living at the beginning of a year, the expectation is that 1232 of them will have died by the end of that year*

If each of the

100,000 were insured for f1,000 for a one-year term based solely on the expected mortality rate a fund of $1,232,000 would have to be collected to meet the death claims*

It

is commonly assumed in computations of this type that the claims are paid at the end of the year, that the fund is

99 TABLE I COMMISSIONERS; 1941 STANDARD ORDINARY MORTALITY TABLE NUMBER LIVING AT BEGINNING AGE OF YEAR

NUMBER DYING DURING THE YEAR

DEATI RATE PER 1 ,00< AGE

1 1,000,000 2 994,230 3 990,114 986,767 4 983,817 5 6 981,102 7 968,541 8 976,124 9 973,869 10 971,804 11 969,890 968,038 12 966,179 13 14 964,266 15 962,270 16 960,201 17 958,098 18 955,942 19 953,743 20 951,483 21 949,171 22 946,789 944,337 23 24 941,806 25 939,197 26 936,492 27 933,692 28 930,788 29 927,765 30 924,609 921,317 31 32 917,880 914,282 33 34 910,515 35 906,554 36 902,393 37 898,007 38 893,382 39 888,504 40 883,342 41 877,883 42 872,098 865,967 43. 44 859,464 45 852,554 46 845,214 47 837,413 48 829,114 49 820,292

5,770 4,116 3,347 2,950 2,715 2,561 2,417 2,225 2,065 1,914 1,852 1,859 1,913 1,996 2,069 2,103 2,156 2,199 2,260 2,312 2,382 2,452 2 ,531 2,609 2,705 2,800 2,904 3,025 3,154 3,292; 3,437 3,598 3,767 3,961 4,161 4,386 4,625 4,878 5,162 5,459 5,785 6,131 6,503 6*910 7,340 7,801 8,299 8,822 9,392

S.T,f 50 4.14 3.88 2.99 2.76 2.61 2.47 2.31 2.12£

l09r

12.32 13.27 14.30 15.43 16.65 17.98 19.43 21.00 22.71 24.57 26.59 28*78 31.18 33.76 36.58 39.64 42.96 46.56 50.46 54.70 59.30 64.27 69.66 75.50 81.81 88.64 96.02 103.99 112*59 121.86 131.85 142.60 154f16 166.57 179.88 194.13 209.37 225.63 243.00 261.44 280.99 301.73 323.64 346.66 371.00 396.21 447.19 548.26 724.67

ipoo.oo

Source: Garland R. Upchurch and E. C. Harwood, Life Insurance and Annuities From the Buyerfs Point of View (Massachusetts: American Institute Tor Economic Research, 1949), p • 7*

100 collected at the beginning of the year, and that interest is earned on the fund at a specific rate.

Hence at the beginning

of the year not $1,232,000 is needed in this case, but only the present value of this amount which when accumulated at the assumed interest rate will provide a future value of $1,232,000.

Using an interest rate of 2^- per cent the

present value of $1.00 one year hence is $0.9756; that is this latter amount invested for one year at 2j per cent will accumulate to $1.00.

Consequently the present value of

$1,232,000 is $1,201,939.20 ($1,232,000 x ,9756).

The

actual insurance cost to each of the 100,000 individuals is the proportionate share of this present value, or $12).02 ($1,201,939

100,000).

More simply this actual insurance

cost can be derived from the mortality table by considering the rate per thousand to be the future cost (one year ahead) of $1,000 of insurance for a one-year term.

In this case

the present value of $12.32 at 2% per cent is $12.02? ($12.32 x ♦9756).

This calculated premium of $12.02 for

a one-year term of insurance is the resultant of two cost elements:: the mortality rate, and the interest rate.

It

is: called the net premium, because it does not include an amount for the expenses of operation of the company♦ After the one-year term has expired to renew the insurance for a second year another premium for the higher age must be paid.

There are nowccnly 98,768 individuals

101 remaining from the original group, and the mortality rate at age 51 is 13*27 per thousand*

The net premium for each

individual is derived by determining the proportionate share of the present value of the total fund needed to meet the expected death claims*

This is obtained from the simplified

calculation ($13*27 x *9756) which determines the individual cost as $12*95* ActuaL ly there is no need that all of the group be of the same age; the basic requirement is that the group be large*

For any age the net premium can be obtained as just

described, so that each insured, regardless of his age will contribute his proportionate share to the total insurance c6st*

Thus if at one extreme of the insured group there is

an individual of age 11 and at the other extreme an individual of age 90, the respective net premiums for one-year term insurance are $1*86 ($1*91 x *9756) and $274*13 ($280*99 x .9756)*

So long as the insurance is issued only for one-

year terms for a premium that just covers the net cost of a full risk of $1,000, this extreme increase in the premium cannot be avoided.

Not only is this variability of the net

premium from year to year inconvenient, but at advanced ages it is financially intolerable.

While it is not essential

that all forms of life insurance be carried for the entirety of life, the purposes of some life insurance, including funeral insurance, require this.

To overcome the impracticalities

102 of the constantly increasing net premium, where insurance is carried for the life span, the level premium principle was evolved.

This permits insurance to cover the whole life

period with an unvarying yearly net premium.

This net level

premium is achieved by considering in the premium, in addition to the mortality rate and the interest rate elements— a savings component.

Two components are discernible in the

net level premium: the actual cost of the insurance, derived from the mortality rate, and the savings both of which are modified by the obtainable interest rate.

For an individual

age 50 the net level premium, payable for whole life, for $1,000 of insurance is about $40.80.

Since the mortality

rate for age 50 is 12.32 per thousand, or stated differently, the present cost of $1,000 of insurance for a one-year term is $12.02 ($12.32 x .9756), approximately $28.78 ($40.80 • $12.02) constitutes the savings component at the beginning of the period.

Accumulated for one year at 2j per cent

this amounts to $29*50 ($28.78 x 1.025).

Actually then not

$1,000 of pure insurance is acquired at the beginning of the year but only $970.50 ($1,000 - $29.50), because it is assumed that the insurance claim is not paid until the end of the year.

The face amount of the policy for $1,000 is

thus composed of pure insurance of $970.50 and savings of $29.50. In the second year, and all subsequent years, the net

103 premium remains at $40*80, but the mortality rate has in­ creased to 13.27 per thousand, or an adjusted present cost of $12.95 ($13.27 x .9756) for $1,000 of insurance for a oneyear term, and only $12.57 ($12.95 x .97050) for $970.50 of insurance.

The spproximate amount of savings included in

this premium then is $28.23 ($40.80 - $12.57), which at the end of the year at 2i per cent interest will accumulate to $28.94 ($28.23 x 1.025).

There is in addition the savings

of the proceeding year of $29.50 which at the end of this second year will accumulate to $30.24 ($29.50 x 1.025). The total savings at the end of the year are therefore $59.18 ($28.65-f- $30.24), and consequently only $940.82 ($1,000 - $59.18) of pure insurance is involved. This process continues, with the pure insurance decreasing and the savings increasing, until at age 99, if the insured should live to that age, the pure insurance diminishes to zero and the savings equal the face amount of the policy.

This is true regardless of whether premium

payments are made on a whole life plan or a limited plan, providing of course that the insurance is for the whole life period.

In the limited payment plan the insured

increases the savings with its interest accumulation is sufficient over the remaining years to service the actual insurance until> if the insured should live to age 100 (one year beyond the end of the mortality table) the face amount

TABLE II DETERMINATION OF NET SINGLE PREMIUM FOR $1,000 OF INSURANCE. FOR WHOLE LIFE YEAR

AGE OF INSURED

NUMBER OF INSURED. LIVING AT FIRST OF YEAR

NUMBER OF INSURED DYING DURING YEAR

TOTAL DEATH PRESENT VALUE] PRESENT VALUE CLAIMS .AT.. OF $1.00 AT OF DEATH END.OF YEAR CLAIMS . END.OF YEAR .

1

95

S>,Oil

1,193

#1,193,000

$0.9756

$1,163,891

2

96

1,818

813>

813,000

0.9518

773.813

3

97

1,005

551

551*000

0.9286

511,659

4

98

454

329

329,000

0.9060

298,074

5

99

125

125

125,000

0.8838

110,475

TOTAL PRESENT VALUE OF DEATH CLAIMS;

$2,857,912

PER PERSON PRESENT VALUE OF DEATH CLAIMS * ($2,857,912 -r 3,011)

$

949.16

TABLE III DETERMINATION OP PRESENT VALUE OP ANNUAL PAYMENTS OP #1*00 FOR 5 YEARS YEAR

NUMBER OF AGE OP INSURED) INSURED LIVING AT FIRST OP YEAR

TOTAL OP #1.00 PAYMENTS AT FIRST OP YEAR

PRESENT 'VALUE PRESENT VALUE OP TOTAL OP #1*00 „ OP #1.00 AT FIRST OP YEAR PAYMENTS , #1.00

#3,011

1

95

3,011

#3,011

2

96

1,818

1,818

0.9756

1,774

3

97

1,005

1,055

0.9518

957

4

98

454

454

0.9286

422

5

99

125

125

0.9060

113

TOTAL PRESENT VALUE OP SUM OP #1.00 PAYMENTS =

#6,277

PER PERSON PRESENT VALUE OP SUE OP #1.00 PAYMENTS = (#6,277 *r-3,011)

#

2.08

106 of the policy would be represented solely by savings* While this explanation illustrates the operation of the level premium principle, it is not precise, because in the arithmetical examples $1,000 of insurance was assumed to exist initially and the cost of this was deducted from the premium to obtain the savings when actually a lesser amount of insurance, by the amount of the initial savings exists from the beginning• Further it depends upon an assumed net level premium when it is unexplained how the amount of the net level premium is obtained*

To answer this first must be

explained the net single premium, which is that premium which will obtain insurance coverage for the remainder of life with no additional payments« This net single premium can then be reduced to its equivalent value in yearly premiums. The net single premium can be explained most easily by limiting the discussion to the last few years of the mortality table, although insurance is not issued for such ages*

The

procedure is the same as that used for all ages but the computations are fewer and less complex*

By referring to

Table II the method of calculating it can be observed*

The

amount of death claims for each year are first obtained, and these are each reduced to their present value*

The sum of

these present values is divided by the number of the original group to obtain the proportionate net single premium per

107 individual, which is $949*16#

This net single premium must

now be converted into its equivalence in the f o m of annual premiums.

(Table III) First, the present value of a $1*00

annual payment by each individual in the group is determined* Then by reducing the net single premium by the per person present value of these payments the amount of the annual net level premium for each individual is acquired*

The

calculations show a total present value of $6,276*03 for the total of these payments, which is the equivalent of $2*08 per person.

Reducing the net single premium by this

value, it is converted into a net level premium of $455#37 ($949.16 -^$2.08) for $1,000 of insurance for whole life for an individual of age 95. Gross Premiums. The preceding section has examined net premiums for term insurance and whole life insurance* The former contained only the cost of the pure insurance; the latter included, in addition, an extra component for savings.

Heither, however, took cognizance of the costs

of operating an insurance company.

There are many operating

expenses, referred to as loading, which when added to a net premium forms the gross premium*

These expenses are, as far

as possible, added to the net premiums so as to reflect the manner in which they are incurred* Some expenses for an individual policy, such as state insurance taxes and commissions paid to agents, depend

108 directly on the amount of premium* Others, including much of the cost of conducting home-office operations, have no such direct relationship to the premium but are more closely related to the amount of insurance* Since the expenses fall fundamentally into these two divisions, the amount added to the basic ^net/ premium to determine the gross premium is often computed in two partst one as a percentage of the premiums, the other as a fixed amount per §1,000 of insurance*3 To use either a percentage factor, or a constant factor alone would produce serious errors. For example, on the ordinary-life /whole life/ plan, the net premium for insurance of $1,000 at age wenty is $14.41, and at age sixty it is $58*27 (American Experience Table, 3 per cent). If these net premiums were *loaded* by adding 30 per cent, the amount of the loading would be $4132 at age twenty and $17.48 at age sixty. Since only a part of the expenses depends on the amount of the premium, if the loading were on the basis stated and were sufficient at low ages it would be too great for policies taken at higher ages*^ Again, if the loading were a constant amount per $1,000 of insurance at all ages, it would have to be sufficient to cover the commission and other expenses depending on the premium at the highest age, and that amount would be much greater than the amount necessary at lower ages*5 Thus it is observed that to sp proximate accuracy in adding the expense component (loading) to the net premium a combination of the percentage factor and the constant factor must be used* A further consideration in the gross premium is that

3 Malvin E. Davis, Industrial Life Insurance in the United States (McGraw-Hill Book Company, Inc., 1944), p. '£'55* 4 Maclean, op. cit., p. 101* 5 Ibid., p. 101.

109 the insurance company may encounter adverse occurrences beyond its control♦

One such occurrence would be a higher mortality

experience than expected, perhaps as a result of an epidemic# Another unfavorable occurrence would be a decline in interest rates below what was anticipated#

Since the existing^

policies cannot be altered to reflect these changes ;as*they are encountered, the company, if it is to be prepared, must include a reasonable allowance for all mortality and interest contingencies.

This safety factor usually is included in the

gross premium by modifying the particular element concerned# Thus the mortality rate may be modified to include^ a Jsafety factor for a higher rate than expected, and the assumed interest rate may be reduced to anticipate any decline in it#

Companies issuing non-participating policies (such as

Forest Lawn Life Insurance Company and Pierce Insurance Company) are limited by competition in the amount of safety factor that can be added to the net premium, since their gross premium is the actual net cost to the policyholders. Quoting Premiums# The essential item required to quote a premium for an individual is his insurance age.

This

is not the age at the last birthday, but the age at the nearest birthday.

Thus the insurance age on July 5, 1949

of a person whose last actual birthday was January 1, 1949 would be his age as of January 1, 1950#

110 The basic premium is the annual premium for §1,000 of insurance; this is the premium rate per §1,000.

When the

premium is quoted other than annually it must be adjusted for loss of interest during the year on the unpaid part of the premium, since the basic premium is calculated on the basis that it will be paid in full at the beginning of the year.

The premium must further be adjusted for the

additional handling expenses, which are far more significant than the loss of interest.

One authority states in this

regard that: It is a common error to consider the addition to the annual premium for payment in instalments as being all Interest. Thus, if a company computes semiannual premiums by adding 3 per cent to the annual premium and dividing the result by 2, It is sometimes complained that the company Is, in effect, charging interest at the rate of 12 per cent— because the insured pays §3 extra for the privilege of. delaying payment of §50 (out of an annual premium of §100) for 6 months. The fact is that only a small |>art of the total extra charge is for interest; most of it is for additional expense Generally, the annual premium for sums of insurance ; other than §1,000 is determined relative to the annual premium for §1,000 of insurance.

For example, the annual

premium for §2,000 of Insurance is twice that for §1,000. Similarly the annual premium for §500 of insurance is onehalf that for §1,000.

Forest Lawn Life Insurance Company

adheres to this procedure but introduces a variation in that

6 Ibid.. p. 106.

Ill

tliere is one annual premium rate for insurance amounts of §1,000 and up, and another annual premium rate for insurance amounts of less than §1,000*

These are respectively termed

the select and standard rates*

(The standard rates also

apply for any amount of insurance issued to an individual over age 65j

These are illustrated by this excerpt from

the tablet STANDARD AND SELECT RATES Amount of Insurance

§1,000

§2,000

§500

Select Rate

§1-5*31

§30*62:

Not Applicable

Standard Rate

§21*15

Not Applicable

§10*58

Pierce Insurance Company does not quote premium rates on Funeral Service Insurance for amounts of insurance over §1,000.

However, the quoting of premium rates for lesser

amounts is similar to the manner of Forest Lawn Life Insurance Company. The justification of the higher rates for amounts of insurance of less than §1,000 is that there is considerable more expense to handling them than the larger size policies* This then is an Illustration of the loading factor as it applies to the smaller policies. Reserves. The savings component incorporated in the

112

premium under the level premium principle is technically 7 termed the reserve* Reserves are distinctly a liability of an insurance company.

If they are not sufficiently

maintained the company becomes insolvent.

This is so because

the level premium principle is based on a decreasing amount of insurance and an increasing reserve, and the sum of the two are essential to meet the death claims. by Table IV.

This is illustrated

Again for simplicity of computation, only the

last five years of the mortality table are used.

Since the

net level premium for age 95 has been determined as $455.37 that serves as the starting point.

The fund paid in at the

beginning of the first year by the insured group ia $1,371,119. This fund is accumulated at the assumed rate of interest, 2i per cent, to the end of the first year at which time the fund amounts to $1,405,397.

The resulting death claims of

the year are only $1,193,000, and therefore the remaining policyholders have tfsaved,f a reserve of $212,000. The same process continues in each subsequent year with the claims being met from a combination of pure Insurance and accumulated reserve, plus interest.

The total reserve

at first increases but soon decreases as the insured group diminishes, until in the last year the total reserve expires. 7

Maurice Taylor, The Social Cost of Industrial In­ durance (New Yorkt Alfred A. Knopf, 1933), p. 67.

TABLE IV DETERMINATION OF THE RESERVES FOR $1,000 OF INSURANCE FOR WHOLE LIFE YEAR

NUMBER OF INSURED LIVING AT FIRST OF YEAR

NUMBEROF INSURED DYING DURING YEAR

TOTAL NET PREMIUMS PAID AT FIRST OF EACH, YEAR

TOTAL FUND AT FIRST . OF EACH YEAR

FUND PLUS DEATH CLAIMS RESERVE AT INTEREST AT END OF EACH END OF END OF YEAR YEAR EACH YEAR (2| PERCENT)

1

3,011

1,193:

§1,371,119

§1,371,119

§1,405,397

193,000

§212,397

2

1,818

813

827,863>

1,040,260

1,066,267

813,000

253,267

3

1,005

551

457,647

710,914

728,687

551,000

177,687

4

454

329

206,738

384,425

394,036

329,000

65,036

5

125

125

56,921

121,957

125,006

125,000

6

The; reserve of §6.00 at the end of the fifth year results from the cumulative affect of a fractional error in the net level premium.

113

114 TABLE V RESERVE PER INSURED YEAR

NUMBER OP TOTAL RESERVE RESERVE PER INSURED AT END OP YEAR INSURED AT LIVING AT END OP YEAR _____ END OP YEAR_____________________ . 1

1,818

#212,397

#111

2

1,005

253,267

253

3

454

177,687

392

4

125

65,036

520

5

0

6

115 Conversely the reserve for an individual policyholder (Table V) continues to increase until the insured dies, while the amount of pure insurance per policyholder decreases• By the end of the fifth year, according to the assumption of the mortality table, every member of the insured group is dead*

Should a policyholder exceed

this expectation and live beyond this fifth year to age 100, he would no longer pay any premiums; the pure insursnce component would be zero; and the reserve would be $1,000, equal to the face value of the policy. designated as a matured policy*

The policy is then

8

It is now observed that when all death claims have been met, that the reserves have been entirely used*

Thus

although at times a large fund may be obtained from a particular insured group, this fund is dissolved with the termination of the group* Since the loading added to the net premium to meet expenses is an unchanging amount, and since the expenses vary considerably, some adjustment in the reserve is required to absorb this variation*

Approximately 60 to 70 per cent of

the first year*s premium are required to meet the high

Q

Comparison of this explanation of reserves with that given on pages 103, 104, 105 and 106 will show that both approaches attain the same result; however, this latter explanation is more precise#

116 initial expenses of the agent*s commission and the cost of setting up the records.

In later years the loading is more

than sufficient to cover the expenses then arising.

This

means that if the company is to adhere to the net level premium reserve, in the first year it will Incur a deficit, which can be accommodated by borrowing from the company* s surplus.

Since in future years the loading has an excess

over expenses, this can be used to cover the earlier deficit and to repay the surplus account* More commonly used than the net level premium reserve, however, is a modified reserve basis which recognizes that only a small reserve, if any, is established in the first year.

This legally precludes an initial reserve deficit

with the consequent reduction of surplus.

In later years

the reserve is built up to what it would have been if the net level premium reserve had been used. Many states have adopted the reserve valuation procedures proposed by the National Association of Insurance Commissioners.

Accordingly California uses a ^Standard

Valuation Saw** that requires For all ordinary policies of life insurance issued on the standard basis, excluding any disability and accidental death benefits in such policies— the Commissioners 1941 Standard Ordinary Mortality Table.

^California Insurance Code, 1947 edition, section 10489.2T&K

117 The minimum interest rate standard that can be used for purposes of reserve valuation is 3j per cent*

Contrary

to one’s first impression a rate numerically less than 3j per cent would be within the minimum limit and a numerically higher rate would be outside the limit.

This paradox is

clarified by the affect upon the reserve of the different interest rates*

For example, starting with the same premium,

the higher the interest rate used, the smaller would be the reserve initially established, because a greater interest accumulation would be assumed*

Thus by setting the interest

rate limit at 3t? per cent the code assures a certain minimum reserve.

The company may, however, provide.a larger reserve

by the choice of a numerically lower rate of interest, which means that the net premium is larger because of the larger reserve component* Non-Forfeiture Values *

In the event that an insured

terminates his policy, he has an accumulated value to which he is entitled.

At first thought it may appear that this

value is equivalent to the reserve that he has paid in, for surely this was created from payments in excess of the cost of pure insurance.

Some modification is expected, though,

when it is remembered that insurance is not possible on an individual basis, but only on a group basis.

Therefore the

reserve for a particular policy is not insulated from the

118 reserves of the remainder of the policies in the same group* All that the individual policyholder is entitled to is a pro rata share of the total reserve.

And this pro rata

share, if withdrawn, must not be so large as to increase the cost of insurance to those who remain insured. Thus non-forfeiture values are not the same as reserve values, because certain factors require a diminution of the pro rata reserve value.

One factor to consider is that the

withdrawal of a policy, in itself, causes certain expenses, such as the cost of changing company records or of issuing a check*

Secondly, termination, especially with a request for

the cash value, often comes during a depression.

At this

time, if the company liquidates securities to obtain cash it receives aJLow price. .If instead it uses incoming cash, it loses the opportunity for investment at a more favorable interest rate.

Thirdly, termination may result in an adverse

selection of risks for the company, since generally those who are in good health are more likely to terminate their policies than those who are in poor health.

Such an occurrence

raises the cost of insurance, and if this higher cost were not partly borne by policyholders who quit the group, the coverage of those who remained might be impaired

10 Davis, o£. cit., pp. 170-171.

119 The California Insurance Code assures minimum non­ forfeiture values, as it does reserve values.

Such non­

forfeiture values for ordinary insurance must be calculated according to the Commissioners 1941 Standard Ordinary Mortality Table, with an interest rate not in excess of 3|t per cent per annum.'*"*' As with reserves, the higher the interest rate used the lower will be the non-forfeiture values, since the interest accumulations will be more rapid, the initial amount set aside for non-forfeiture values will be less.

For

example, Forest Lawn Life Insurance Company uses 2% per cent interest rate to calculate reserve values and 3 per cent to calculate the non-forfeiture values.

Hence at any time during

the life of a policy, the non-forfeiture values will be less than the reserves.

On the other hand, Pierce Insurance

Company uses a 2i per cent interest rate for both.

In this

case, however, at the termination of a policy a charge is made ifihich reduces the obtainable values. Because in the early years of a policy the reserve is diminutive, non-forfeiture values may not be recognized until the policy has been in force for several years.

The shorter

the payment period and consequently the larger the reserve accumulations, the sooner will non-forfeiture values be

H 10163.

California Insurance Code, 1947 edition, section

120 granted*

In any event, in California, for this type of

insurance, recognition of non-forfeiture values cannot be postponed after premiums have been paid for three years*

CHAPTER IX

SUMMARY AND CONCLUSION Summary. The problem of burial ritual is as old as mankind.

As far back as 2500 B.C. there is record of Egyptian

stone-masons joining into groups in order to provide e§ch other the ceremonially appropriate burial*

No insurance­

like practices are observed in the records of these groups* Among later (about A.D. 136) Greek and Roman religious societies there is found evidence of a similar concern over the adequate provision of burial services.

These societies,

however, developed a form of mutual life insurance to provide for the financing of funerals.

When the uniting religious

theme disappeared from these societies, they gradually began to disintegrate, after which the record of insurance-like practices in their civilization becomes obliterated. Apparently not until the guilds of the medieval period in Europe was there an insurance-like development at all analogous to those of early Greece and Rome.

Prom these

guilds evolved during the sixteenth and seventeenth centuries the friendly societies of Great Britain which extensively used mutual life insurance principles to finance funeral services. During the nineteenth century, burial clubs, similar to the friendly societies of Great Britain, appeared in the United States and achieved their widest and most persistent

122 growth in the Southern States.

Out of the experiences in

the South appear to have come the first attempts to offer pre-arranged and pre-finaaced funeral services on a regular life insurance basis.

A few years later this development

spread to California with the offering of a funeral service insurance policy in 1936 by what is now the Pierce Insurance Company and in 1943 by the Forest Lawn Life Insurance Company. Both Forest Lawn Life Insurance Company and Pierce Insurance Company are capital stock companies which issue non-participating policies.

The former was organized in 1939,

as a subsidiary of the Forest Lawn Company, but because of the uncertainties caused by the war in Europe and the im­ pending involvement of the United States in the war it did not commence operations until late in 1943.

The latter

company was originally organized in 1927 as the Imperial Mutual Life Association; in 1936 the management of Pierce Brothers1 Mortuaries gained control of the association and commenced to reorganize it into a capital stock insurance company.

Today there is a noticeable difference in the

geographic scope of operations of the two companiesz Forest Lawn Life Insurance Company offers its policies only within the state of California.

Pierce Insurance Company offers

its policies in California, Missouri, Wadiington, Territory of Hawaii; and it is also licensed to issue insurance in Kentucky but has not yet done so.

Funeral insurance, as with any other form of life insurance, must be aggressively sold to the public, if volume sales are to be achieved,

The vehicle for these sales is

the agent, who is licensed as a life agent.

Each company

exercises considerable care in the selection and training of agents, for agents are the insurers* representation to the public and consequently affect public opinion, the volume of insurance written, and to some extent the quality of risks accepted*

The agents for each company generally follow the

same procedure in contacting the public: this is by house to house canvassing with follow-up interviews usually in the evenings.

Overall supervision of the agents of Pierce

Insurance Company resides in the home office; Forest Lawn Life Insurai ce Company has delegated this responsibility to its parent company, the Forest Lawn Company, which acts as its state agent.

The former company handles regional field

supervision through a system of general agencies, which in all cases except one are mortuaries.

The latter company,

because of a desire to maintain greater control over its field forces, uses a system of branch offices (of which there are only two at the present time), whose managers are on a regular salary. Once the agents have secured the applications for insurance, the applicants must be screened so that only suitable risks are issued policies.

This task of selection,

124 termed underwriting, is carried out by the underwriter• In the case of these two companies, the underwriters have set up broad limits within which the policies are issued on a non-medical basis, that is without a medical examination being required of the applicants.

Nevertheless, medical

information is obtained about the applicants by use of appropriate questions on the application forms.

By this

means the underwriters are able to cull out any applicants who appear to be unacceptable.

These applicants, along with

those who initially fall outside the broad limits, must then take a medical examination.

This examination results in

further elimination, until those who are finally selected are all deemed satisfactory risks.

In some cases, however,

the premium rates are adjusted on an individual basis to compensate for the greater medical risk adhering to some applicants.

The results of the selection have been such

that for the two companies there is little significant difference between the policyholders in regard to age, sex, and income levels.

One distinctive difference is noticeable

in regard to race— Pierce Insurance Company accepts nonCaucasians whereas Forest Lawn Life Insurance Company does not. One of the basic differences between funeral insurance and other forms of life insurance lies in the nature of the policies issued and principally in the characteristics

125 regarding the disposal of the proceeds.

Forest Lawn Life

Insurance Company issues three basic funeral insurance policies: Funeral Insurance, Funeral and Readjustment Insurance, and Special Family Group Insurance.

Pierce

Insurance Company issues the Standard Funeral Service Policy and Family Group Insurance.

All of these policies

have at least the fundamental funeral service element in common, which permits the insured to pre-arrange the details of his funeral service and to state his wish as to how the insurance proceeds shall be allocated between the various items in the funeral service* In regard to the contractual provisions of the policies, little difference is noted between the two companies.

This

is understandable, because the California Insurance Code closely delineates the nature of the provisions.

As a result

any differences that are found are largely in rega? d to insignificant details# The actuarial aspects of the funeral policies are necessarily similar to those used for other forms of life insurance.

Both companies now use the Commissioners1 1941

Standard Ordinary Table and issue policies only on the level premium principle# Conclusion* In considering the role of funeral insurance in our society no attempt is made to evaluate

126 the desirability or necessity of the present form of funerals and concomitant ceremonies.

Any suggestions regarding these

would be beyond the scope of this study; consequently they are accepted as part of society as it is now constituted# All conclusions then relate solely to how well funeral insurance does its job of financing a service which is widely and commonly accepted as a necessity in our time# Regardless of status of income or wealth individuals, especially the elderly, have a strong desire to have what they consider a fitting funeral#

Moreover, they like to have

a hand in deciding what sort of funeral service they will have, and insofar as possible to arrange to have the expenses paid so that these will not burden relatives or friends# Funeral insurance satisfies these underlying psychological urges in a way that cannot be accomplished otherwise.

First

of all it permits the individual to examine his funeral needs and to designate ¥hat type of service he wants.

Secondly,

and more importantly, the individual can by making a relatively small premium payment be sure that even if he should die shortly thereafter funds sufficient to provide a funeral will be available.

Thus the individual hasD

immediately created an estate for a specific purpose; the uncertainties of having to save a large fund and the possibility that there will not be time enough to save it is circumvented*

127 Funeral insurance does not entirely get away from savings however, for incorporated in the level premium plan which is used is a savings element*

While this is a necessity

if the level premium plan is to be used, it has the advantage, in addition to assuring no increase in premium, that should some circumstance arise for which the insured needs funds for living needs, he has accumulated a reserve behind the policy which he can get either by borrowing against, or canceling, the policy.

While such occurences would impair,

or even destroy, the funeral insurance program, the living need may justify such drastic action.

And it is more than

likely that if the savings element were not incorporated in the insurance policy that the individual would never have saved the money, for experience shows that a majority of people do not save without some form of compulsion.

Further­

more, even if the individual had the ability to save in­ dependently, mere savings do not provide the advantages of funeral insurance with its combination of insurance and saving®. One of the modem developments in life insurance is programming needs and providing insurance to cover specific contingencies.

This development has been applied extensively

to people in the medium and upper income brackets.

Among

the lower income groups it has not had a corresponding growth.

Instead many life agents high pressure people in

128 these groups into buying as much life insurance as they can afford, just on the basis that they probably need it and that at the time of the instared1s death the beneficiaries will find some use for the proceeds*

But in such transactions;

the principle motive appears to be that of the agentfs remuneration*

Undoubtedly uses can be found for the proceeds,

but such sales produce haphazard results*

There is no

certainty that the proceeds will be sufficient or in­ sufficient unless needs are considered as the basis of the insurance program.

The use of the funeral insurance contract

by no means minimizes the life agentfs desire to sell as much insurance as he can; but the design of the contract and the sales techniques used focus the use of the insursnce upon definite needs, such as funeral expenses, last illness expenses, and family readjustment problems*

To the extent

that real needs have been outlined and provided for, the use " of funeral insurance extends professional underwriting to a class of people that otherwise might not obtain such service. In opposition to funeral insurance it might be claimed that many of the people who bly it should not purchase insurance at all because of their low incomes; that the purchase of even funeral insurance involving low total, premiums is more than they can afford; that the money used for such insurance should in reality be used to purchase necessities of life.

Although no statistical data was

129 available to the writer in regard to the income distribution of the policyholders of the companies under study, the actuaries of each company stated that the estimated average income level of the policyholders was about $1,000 per year and that the funeral policies have a “high appeal to old age p e n s i o n e r s T h i s information seems to indicate that the policyholders in general have a greater longing to provide for their burial than to secure additional necessities for living.

The alternatives to providing their oun funeral

would be to depend for this service on charity or their relatives*

The desire to relieve relatives of any financial

obligations for their funerals is understandable*

But the

reluctance to accept a “relief*1 funeral at the time of death when many of them are accepting relief in the form of old age pensions while alive is less understandable* Not only does this deprive the policyholder of some of the essentials of earthly existence but it also amounts to the taxpayers indirectly paying for their funeral in a much more expensive way than if the funerals were simply provided by the responsible local governmental agency when the need arose*

Much can be said in praise of giving relief pensioners

wide freedom of choice in how they spend their allotments,

^ This refers particularly to those receiving charitable assistance*

130 but it is a dubious freedom to permit them to be sold an expensive insurance policy for financing an expensive funeral. Among many of the elderly and impoverished the emotional connotations of a relief funeral are so repugnant that there is little sales resistance to the funeral insurance*

That

funeral insurance purchased by those on old age pensions and other forms of relief may not be in the best public interest is a problem which the appropriate public authorities should examine,

A solution that did prohibit the purchase

of funeral insurance by this group could not equitably permit the purchase of other forms of life insurance by this group*

Furthermore, it would have to consider how

wisely this group purchases other commodities and what additional restrictions on purchases should be promulgated* All of this leads to the basic question of how much freedom of choice in the expenditure of funds shall those on relief be permitted?

This question cannot be answered here but can

only be pointed out as something that needs to be analyzed* There is a possibility that the problem of insurance sales to those on relief may be solved by the insurance companies through discontinuing such sales*

The basis of

this belief is that the actuaries of the companies in­ vestigated have said that the lapse rate is exceedingly high for this type of policyholder*

A high lapse rate means

unprofitable business, especially if the lapse occurs during

131 the first two years after issuance, for a policy does not yield a profit until its third year.

As far as an insurance

company is concerned a policy is misplaced unless there is a good chance that the insured can continue it at least beyond the second year. That many of the funeral insurance policies are mis­ placed in the sense that they are sold to people who cannot afford them and who should never have taken them out in the first place is hinted by the fact that neither company will release data on the lapse rate of policies.

Since the

actuaries of the companies do state that the rate is high, such reluctance is probably occassioned by embarrassingly high lapse rates.

Such misplacement of policies is poor

underwriting and is costly to the companies as well as to the insurance purchasers.

The principal area of correction

lies with better training of the life agents so that they will more effectively discriminate among potential buyers and select only those who appear to have ability to maintain the policy in force. Opposition to funeral insurance arises also from its high cost.

The door-to-door canvassing manner in which

funeral insurance is sold necessarily means high cost.

It

is well known that without an aggressive sales organization insurance cannot be sold in volume and thus will not be acquired by many who need it.

Unfortunately mere advertising

132 of the needs that insurance fulfills does not bring a high response from those who should have it.

It is only by a

sales organization that seeks out the public and persuades it that the insurance is beneficial that any volume of sales can be achieved.

And without a large loading factor to meet

the cost of haring agents canvassing in the field it would.be impossible to have a satisfactory funeral insurance sales force.

Thus, although the cost is high, it is felt that this

is justified by the service that is extended to the public. The annual premium on a whole life basis for $1,000 of funeral insurance and $1,000 of ordinary insurance is given for comparisons funeral insurance

$80.28

ordinary insurance

$56.42

Since funeral insurance (as written by the companies under consideration) uses the -same mortality table as ordinary insurance, the additional loading is for the greater cost of doing business.

Hot all of this additional cost is for

the support of a field force; some of it is for the greater amount of clerical overhead (bookkeeping, billing, etc.) per $1,000 of funeral insurance, for it is unusual to have a sale of more than $1,000 (usually they are about $500) in the case of funeral insurance, while it is common to have ordinary insurance sales that are multiples of $1,000. However, sufficient information is not available to support

133 an allocation of the extra cost of funeral insurance* The evident conclusion is that funeral insurance offers little to those who can buy ordinary insurance* However, for those who can afford to buy insurance only in amounts of less than §1,000 or who are too old to acquire ordinary insurance, funeral insurance serves a definite need.

And since the funeral insurance agents are trained

in the programming of the financial obligations immediately occasioned by death, purchasers of funeral insurance are assisted in understanding and providing for these needs*

BIBLIOGRAPHY A.

BOOKS

Davis, Malvin E., Industrial Life Insurance in the United States* New York: McGraw-Hill.Book Company, Inc., 1944. 399 pp. Dingman, Harry W., Selection of Risks * Cincinnati: The National Underwriter Company, 1935. Maclean, Joseph B., Life Insurance. 6th edition: New York: McGraw-Hill Book Company, Inc., 1945. 670 pp. Magee, John H., General Insurance. 3rd edition: Chicago: Richard D. Irwin, Inc., 1947. pp. 703-786. Stone, Mildred P., A Short History of Life Insuraa.ee. Indianapolis: TEe Insurance Research and Review Service 1942. Taylor, Main*ice, The Social Cost of Industrial Insurance. New York: Alfred A. Khopf, 1933. 421 pp. Trenerry, C. P., The Origin and Early History of Insurance. London: P. S. King and Son, Limited, 1926. Upchurch, Garland R. and E. C. Harwood, Life Insuraa ce and Annuities from the Buyer1s Point of View. 1949 edition Great Barrington, Massachusetts: American Institute fcr Economic Research. 142 pp. ______ , Readings in Life Insurance, a Compendium. New York: Life Office Management Association, 1946. 406 pp B.

ENCYCLOPEDIA ARTICLES

,fPriendly Societies,11 The Encyclopaedia Brittanica, 1949 edition, Volume DC, 843-849* f,Priendly Societies in America,1* The Encyclopedia Americana 1946 edition, Volume XII, 105^156. C.

GOVERNMENTAL PUBLICATIONS

California Insurance Code. 1947 edition: Sacramento, California: Premier Publications, Limited. 448 pp*