Reinsuring Insurance

THE drift of the comment on my article, ‘Hamstringing Insurance,’ in the October Atlantic was that, if possible, it would be highly desirable for insurance companies to stabilize the purchasing power of the potential estates they create, by investing a reasonable portion of their policyholders’ money in good common stocks, but that it is financially unsound, if not morally wicked, for the policyholders themselves to attempt such stabilization by dedicating the loan value of their policies to the purchase of such stocks.

There is a sort of special sanctity surrounding the equity built into an insurance policy. Sentiment militates against the thought of this equity as a usable asset and makes the employment of it even in a worthy cause seem profane.

The efforts of the two policyholders mentioned in the article, merely as illustrative, met with some condemnation, and their plan for preserving the purchasing power of the potential estates represented by their insurance policies came in for criticism.

I

Now, what is the situation they or any other policyholders have to face? Well, this: —

1. Ninety per cent of all life insurance is paid in lump sums and the proceeds consumed within that Biblical period of seven years.

2. Owing to the fluctuating purchasing power of money, the cash payments when made may or may not provide the necessities, comforts, or luxuries which the policyholder expected to provide.

3. Less than one per cent of the assets of life-insurance companies chartered in the United States consists of common stocks.

4. Common stocks are the only form of security which can be counted on roughly and in the long run to vary in value directly with the general price level.

5. The insurance trust makes it possible, within limits, for a policyholder to preadminister his estate when it becomes actual, but it does not afford an opportunity of administering now his potential estate.

The policyholders whose plan is criticized are not speculating in the stock market; they are merely trying to insure their insurance.

II

Familiarity with the history of one of these cases makes it possible for me to give the substance of the things hoped for. This particular potential estate consists of seven life-insurance policies taken out at different times. The oldest, now paid up, was purchased for the protection of those who had advanced funds for educational purposes. From time to time the potential estate has been increased up to the maximum amount which the income of the policyholder justifies. Insurance premiums constitute the biggest single savings claim against that income.

Had the earliest of these policies become an actual estate shortly after taken out, its purchasing power would have been about twice as much as if the potential estate represented by it should become actual to-day. The total cash value of all the policies would scarcely offset the loss in purchasing power caused by the rise in prices. The policyholder has done a good deal of saving which has resulted in precious little real savings. About all he was getting from his insurance savings was protection, and that might have been had at less cost. Like Alice in Wonderland, it was taking all the running he could possibly do to stay under the same tree. Again like Alice, wanting to get somewhere else, he had to run twice that fast. Hence his plan. I am not advocating the plan, but cite it only as a means of self-defense.

III

The essence of the plan is that the policyholder attempts on the basis of the cash value of his policies to get in and stay in debt for good stocks, in an amount equal to the insurance he carries. The stocks as a group have been bought at such prices that the dividends received pay the interest charges.

No stock from the list has ever been sold. Paper profits are ignored. Real profits are considered enhancement in capital assets of the potential estate. When seeming profits have been tried as by fire, as they are being tried on this eventful Saturday morning of December 8, 1928, and the real have been separated from the paper, the policyholder arranges with his banker to buy for him additional stock which has been the subject of months of study. Gradually indebtedness is thus incurred equal to the face value of the policies.

IV

The holding consists of some twenty of the best seasoned stocks listed on the New York Stock Exchange. Most of these have more than a monetary value; they are members of the family, for whom there is real affection. To sell Sears Roebuck, bought at $55, would be like selling off the oldest boy because he got a little puffed up just as he reached maturity. To part with good old American Telephone and Telegraph common purchased so as to average $115 would be like giving away Doc, the children’s faithful watchdog. To let the latest acquisition, Consolidated Gas new, which cost $81, go for the sake of the $32 a share profit when it reached $113 in a crazy stock market would be like parting with a newborn baby.

V

Should this potential estate become actual, the administrator could take the proceeds of the policies, pay off the indebtedness, and have an estate as large as reasonable frugality can provide and as sound in character as the judgment of one who is a careful student of investments can select.

The policyholder has administered his potential estate. He has preadministered it when it becomes actual. He has hedged the general price level. He has out-insured his insurance companies.

Yes, a widow would be left with common stocks, and this is contrary to all the accepted canons of finance. But it is a little difficult to understand how a supposedly unfortunate widow possessed of a group of seasoned common stocks which have increased in value as time has passed would be any less unfortunate if paid an amount of cash fixed in the past, and available out of interest received on farm mortgages held by insurance companies.

‘But,’reply my critics, ‘few policyholders can select common stocks so carefully.’ True, and that’s why their insurance companies should do it for them.