An Analysis of Government Life Insurance [Reprint 2016 ed.] 9781512817997

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T H E S. S. HUEBNER FOUNDATION FOR INSURANCE EDUCATION

Studies AN ANALYSIS OF GOVERNMENT LIFE INSURANCE

T H E S. S. H U E B N E R F O U N D A T I O N FOR I N S U R A N C E E D U C A T I O N David McCahan, Editor

Lectures LIFE INSURANCE: TRENDS AND PROBLEMS THE BENEFICIARY IN LIFE INSURANCE

Studies AN ANALYSIS OF GOVERNMENT LIFE INSURANCE

AN A N A L Y S I S OF

GOVERNMENT LIFE INSURANCE by

DAN MAYS McGILL, Ph.D. JULIAN PRICE ASSOCIATE PROFESSOR OF LIFE INSURANCE UNIVERSITY OF NORTH CAROLINA

Philadelphia UNIVERSITY OF PENNSYLVANIA PRESS LONDON: GEOFFREY CUMBERLEGE OXFORD UNIVERSITY PRESS 1949

Copyright

1949

UNIVERSITY OF PENNSYLVANIA PRESS Manufactured

in the United States of

By The Haddon

America

Craftsmen, Inc., Scranton,

Pa.

TO MY MOTHER AND FATHER

FOREWORD O n e of the primary objectives of T h e S. S. Huebner Foundation for Insurance Education is to publish research theses and other studies which constitute a distinct contribution directly or indirectly to insurance knowledge. In conformity with that objective, the Foundation has already undertaken the publication of volumes comprising lectures on related insurance topics, and with this book is initiating the publication of a series of special insurance studies, each presenting the results of thorough research in a specific area. It is hoped that the volumes in these two series, the former published under the general caption of "Huebner Foundation Lectures" and the latter under the general caption of " H u e b n e r Foundation Studies," may prove useful to teachers engaged in insurance educational work, particularly on the college level, as well as to all others who have at heart the progress and welfare of insurance. T h i s particular volume presents the doctoral dissertation of Dan Mays McGill. Dr. McGill received the B.A. degree from Maryville College in 1940, the M.A. degree from Vanderbilt University in 1941, and the Ph.D. degree from the University of Pennsylvania in August, 1947. He held a fellowship of the Foundation from September, 1941 to February, 1942 when he entered the Army Air Forces, where he attained the rank of Major. T h e fellowship was renewed when he returned to the University of Pennsylvania in March, 1946 and was continued until the work for the doctorate had been completed. Dr. McGill's first appointment after receiving his doctor's degree was with the University of Tennessee as Assistant Professor of Finance. In the Fall of 1948 he became the Julian Price Associate Professor of Life Insurance at the University of North Carolina. T h e very nature of the purposes for which the Foundation was created precludes it from taking an editorial position on controversial theories or practices relating to insurance. It should vii

viii

FOREWORD

therefore in no wise detract from the quality of such a volume as this to point out that findings of fact and interpretations based thereon are those of the author and not of the Foundation itself. DAVID

Philadelphia October, 1948

MCCAHAN

Executive Director The S. S. Huebrter Foundation for Insurance Education

T H E S. S. H U E B N E R F O U N D A T I O N INSURANCE

FOR

EDUCATION

T h e S. S. Huebner Foundation for Insurance Education was created in 1940, under the sponsorship of a Cooperating Committee representing the life insurance institution, to aid in strengthening insurance education on the collegiate level. It functions along three principal lines: 1. Providing fellowships and scholarships to aid teachers in accredited colleges and universities of the United States and Canada, or persons who are contemplating a teaching career in such colleges and universities, to secure preparation at the graduate level for insurance teaching and research. 2. Building up and maintaining a research service center in insurance books and other source material which will be available through circulating privileges to teachers in accredited colleges and universities desirous of conducting research in insurance subjects. 3. Publishing research theses and other studies which constitute a distinct contribution directly or indirectly to insurance knowledge. T h e activities of the Foundation are under the direction of an Administrative Board consisting of five officers and faculty members of the University of Pennsylvania and two faculty members of other universities.

COOPERATING COMMITTEE Representing T H E LIFE INSURANCE ASSOCIATION OF AMERICA Representing T H E AMERICAN LIFE CONVENTION O. J. Arnold M. Albert Linton John A. Stevenson

Representing T H E I N S T I T U T E OF LIFE INSURANCE

ADMINISTRATIVE BOARD S. S. Huebner, Honorary Chairman Harry J. Loman, Chairman David McCahan, Executive Director Edison L. Bowers C. Canbv Balderston Paul H. Musser Ralph H. Blanchard Edwin B. Williams

PREFACE One of the many complex problems faced by the United States following its entry into World War I was the providing of adequate financial security for the dependent relatives of military and naval personnel and equitable compensation for those persons incurring disabilities in the service. T h e historic method of dealing with this problem, dating from the early days of the Revolutionary War, was the pension system. Never wholly satisfactory, this system had been largely discredited by the political manipulations to which it had been subjected in the years following the War of Secession and the Spanish-American War. In an effort to provide a satisfactory substitute for the pension system, Congress passed the War Risk Insurance Act of October 6, 1917. This act embodied three separate but related provisions: allotments for the dependent relatives of enlisted service personnel, a schedule of compensation for all service personnel and their dependents for death or disability resulting from military or naval service, and a plan of government insurance for all service personnel. T h e insurance scheme, though a component of a comprehensive long-range plan to eliminate the necessity of pensions for veterans of World War I, had as its immediate purpose the restoration of the insurability of men entering the service by granting them the opportunity to secure temporary insurance protection at normal peacetime rates. Since, however, the act provided for ultimate conversion of the temporary forms of insurance into permanent forms, the government was committed to a long-term operation of its insurance system. Repeated extensions of the period during which the temporary insurance could be converted to permanent forms, and the broadening of the base of eligible insureds to include persons entering the service subsequent to the war combined to give permanency to the government plan. T h e enactment of the National Service Life Insurance Act of 1940 furnished the final proof that government life insurxi

xii

PREFACE

ance is to be a feature of the economy of this nation throughout the foreseeable future. T h e tremendous size of the governmental institution of life insurance and its apparent permanency would seem to warrant an analysis of its operations. Yet no analytical investigations of the program have been undertaken to the present, the literature consisting of mere recitals of the statutory provisions and résumés of operating statistics. The present volume is an attempt to present a comprehensive survey of the system. The purpose of the volume is to describe the principal policy provisions, with special emphasis on their historical development, to indicate and assess the governmental subsidies involved in the program, to point out some of the persistent problems that have been encountered, and to evaluate the insurance as an instrument of social policy. Attention is drawn to those features of government life insurance which differentiate it from commercial insurance, and these features are evaluated from the standpoint of the insured. The primary emphasis is on the permanent forms of insurance, but the discussion embraces the temporary insurance at many points. It is the author's pleasant duty to acknowledge his indebtedness to the many persons from whom he obtained data, technical assistance and inspiration while this volume was in process of preparation. The officials and employees of the Veterans' Administration were uniformly cooperative in providing needed information, but special recognition should be accorded Mrs. Kathleen D. Smith, Herman F. Brail, and Miss Gladys O. Murphy. Mrs. Smith was not only an unfailing source of inspiration but an oracle on the lore and operations of the Veterans' Administration. Mr. Brail generously shared his profound knowledge of the insurance program, acquired through long years of service, and was especially helpful in furnishing the historical background of policy provisions and operating practices. He reviewed the completed manuscript in an unofficial capacity in the interest of factual accuracy, but it goes without saying that he should be absolved from responsibility for any inaccuracies which remain. Miss Murphy rendered capable and faithful service as a research assistant. Valentine Howell, Vice-President and Actuary of the Prudential Insurance Company of America, graciously consented

PREFACE

xiii

to review the entire manuscript and offered many valuable suggestions. Dr. G. Wright Hoffman of the University of Pennsylvania, as faculty adviser to the author, was most generous with his time and efforts and greatly improved the volume through his scholarly criticisms. Editorial suggestions were received from Professors S. S. Huebner, David McCahan, Clyde M. Kahler, C. K. Knight, and C. A. Kulp, members of the Insurance staff of the University of Pennsylvania, all of whom read the completed manuscript. Miss Mary Drever, Secretary to the S. S. Huebner Foundation for Insurance Education, assisted in various details incident to publication of the manuscript. Finally, the author wishes to express his sincere gratitude to the S. S. Huebner Foundation for Insurance Education for extending financial assistance to him during his two years at the University of Pennsylvania and for assuming publication of this volume. D. M. M. Chapel Hill, North Carolina

CONTENTS CHAPTER

PACE

FOREWORD

vii

PREFACE

xi P A R T

O R I G I N AND G E N E R A L I

II

I CHARACTERISTICS

HISTORICAL BACKGROUND 1. Origin 2. Subsequent Developments 3. Schema

3 3 11 15

SELECTION 1. Eligibility Requirements

17 17

2. Medical Standards 3. O t h e r Aspects of Selection 4. Adverse Selection III

22 32 33

METHOD OF DISTRIBUTION 1. Distribution System

39 39

2. Administrative Procedure 3. Legal Aspects IV

44 47

A M O U N T AND PLANS OF INSURANCE

51

1. A m o u n t of Insurance Available

51

2. Plans of Insurance Permitted

53

P A R T

II

A N A L Y S I S O F P O L I C Y AND S T A T U T O R Y V

PROVISIONS

DESIGNATION OF BENEFICIARY 1. Restrictions on Designation of Beneficiary 2. Procedure for Effecting Beneficiary Designation

VI

SETTLEMENT OPTIONS 1. U n i t e d States Government L i f e Insurance 2. National Service L i f e Insurance 3. Significance of L i f e Income Options

VII

DISABILITY PROVISIONS

72 72 78 84 89

1. U n i t e d States Government L i f e Insurance

VIII

63 63 70

89

2 . National Service Life Insurance

104

O T H E R SIGNIFICANT PROVISIONS 1. Non-Forfeiture and Loan Options

114 114

XV

xvi

CONTENTS

CHAPTZX 2. S. 4. 5. 6.

PACE 119 126 128 130 132

Reinstatement Provisions Assignment Status of Proceeds Change of Plan Miscellaneous Provisions P A R T

III

I N C I D E N C E OF IX

X

XI

XII

COSTS

COST OF ADMINISTRATION 1. T h e Operating Structure of Government Life Insurance 2. Cost of Administration

139 139 144

INVESTMENT POLICY 1. U. S. Government Life Insurance Fund 2. National Service Life Insurance Fund 3. Extent of Investment Subsidy

152 152 165 167

EXCESS MORTALITY COSTS 1. Concept of Excess Mortality 2. Procedure for Determining Extra Hazards of Service 3. Methods of Indemnifying the Insurance Funds 4. Extent of Mortality Subsidization and Trends

171 171 174 179 182

DIVIDEND POLICY 1. General Survey 2. Apportionment of U.S.G.L.I. Dividends

189 189 199

P A R T

IV

F U R T H E R CONSIDERATIONS AND CONCLUSIONS XIII

CONSERVATION PROBLEM 1. United States Government Life Insurance 2. National Service Life Insurance

217 217 225

XIV

SIGNIFICANT ASPECTS OF ADMINISTRATION 1. Administering Agency 2. T r e n d Toward Decentralization 3. T h e Problem of Premium Remittance 4. Settlement of Claims

237 237 242 247 251

SUMMARY AND CRITIQUE 1. Significant Features of Government Life Insurance

254 254

XV

2. Other Methods of Approach

267

BIBLIOGRAPHY

277

INDEX

281

LIST OF TABLES NUMBER

1

TITLE

Total Rejections of Insurance Medical Examinations October 8, 1940, to March 28, 1946

Annual Premium Rates per $1,000 of United States Government Life Insurance at Selected Ages of Issue 3 Annual Premium Rates per $1,000 of Converted National Service Life Insurance at Selected Ages of Issue 4 Forfeiture of Proceeds of N.S.L.I. As a Result of Beneficiary Failures As of June 30, 1946 5 U.S.G.L.I. Settlement Option 2—Insurance Payable in Elected Installments 6 U.S.G.L.I. Settlement Option 3—Life Income, with 240 Certain Installments 7 U.S.G.L.I. Settlement Option 4—Life Income, with 120 Certain Installments 8 Options Used in the Distribution of U.S.G.L.I.—As of December 31, 1947 9 Selections of Options by Type of United States Government Life Insurance—As of April 30, 1946 10 Selection of Options by Type of United States Government Life Insurance Policy by Percentage—As of April 30, 1946 11 Ν .S.L.I. Settlement Option 2 Insurance Payable in Elected Installments

PACK

28

2

N.S.L.I. Settlement Option 3 Life Income with 120 Guaranteed Installments 13 N.S.L.I. Settlement Option 4 R e f u n d Life Income 14 Options Used in Distribution of N.S.L.I. Proceeds—As of December 31, 1947 15 Mortality Assumptions of the American Experience Table and the 1937 Standard Annuity-Male Table at Selected Ages 16 Monthly Benefits at Selected Ages per $1,000 of Insurance Provided by the American Experience Table and the 1937 Standard Annuity-Male T a b l e Under a Life Income Option with 120 Guaranteed Payments

58 60 69 74 75 75 76 77 77 82

12

17 Annual Level Premiums for Total Disability Provision at Selected Ages When Attached to a U.S.G.L.I. Life or Endowment Insurance Policy of $1,000 Bearing the Same Effective Date 18 Total Disability Contracts Issued Annually, 1929-1947 19 Annual Premium Income from Total Disability Contracts, 1929-1947 20 Rates of Becoming Disabled per 1,000 Derived from the Experience of the Six Standard Plans for the Years Indicated

82 83 84 85

86

99 101 102 103

xviii

LIST OF TABLES

NUMBE*

21 Face Amounts of New Disability Claims Awarded Each Year, 1920-1947 22 Basic Functions for Computing Premiums for Total Disability Clause in N.S.L.I. 23 Revised Rates of Becoming Disabled Used in Computing Premiums for Total Disability Clause of N.S.L.I. 24 Annual Premiums for Total Disability Clause Added to New Policies of N.S.L.I. at Selected Ages 25 Expense Ratios of Ten Large Life Insurance Companies for the Year Ending December 31, 1938 26 Adjusted Expense Ratios of Ten Large Life Insurance Companies for the Year Ending December 31, 1938 27 Composition of U.S.G.L.I. Fund as of December 31, 1920-1947 28 Status of N.S.L.I. Investment Account as of December 31, 1941-1947 29 Ledger Assets of N.S.L.I. Fund as of December 31, 1940-1947 30 Transfers From the Military and1921-1946 Naval Insurance Appropriation to the U.S.G.L.I. Fund, 31 Cases of U.S.G.L.I. Attributed to Extra Hazards of Service, 1920-1945 32 Percentage of U.S.G.L.I. Death and Disability Claims Attributed to the Extra Hazards of Service, 1921-1946 33 Transfers from N.S.L.I. Appropriation to N.S.L.I. Fund

PACE

104 108 110 111 148 150 164 166 166 184 185 186 188

34 Death Rates per 1,000 at Selected Ages According to Various Mortality Tables

190

35 Ratio of Actual to Expected Mortality of U.S.G.L.I. According to the American Experience Table, 1920-1947

191

36 Comparison Between Return on Ledger Assets of U.S.G.L.I. Fund and the Interest Factor in the Dividend Formula, 1920-1947

195

37 Disposition of U.S.G.L.I. Mortality Savings and Excess Interest Earnings for the Period 1920-1932

197

38 Mortality Factor of U.S.G.L.I. 1940 Dividend Formula

207

39 Ratios of Actual to Expected Mortality of the Six Principal Plans on Basis of the Derived Table

210

40

Ratios of Actual to Assumed Actual Mortality of the Six Principal Plans

211

41

Conservation of Yearly Renewable Term Insurance

222

42

Lapse and Surrender Ratios of U.S.G.L.I. as Compared with Commercial Life Insurance, 1924-47

224

PART I

ORIGIN AND GENERAL CHARACTERISTICS

CHAPTER I

HISTORICAL BACKGROUND 1.

ORIGIN

Government life insurance in the United States had its origin in legislation designed for the protection of American foreign trade. T h e sudden outbreak of hostilities in Europe in the summer of 1914 temporarily demoralized the marine insurance industry, creating a situation in which shipowners and merchants were unable to secure the amounts and kinds of insurance needed to protect their commercial interests. Faced with this impediment to foreign commerce at a time when such commerce had assumed vital importance, Congress created a government agency within the Treasury Department to supplement the inadequate facilities available in the commercial insurance market. 1 This agency, the Bureau of War Risk Insurance, was authorized to insure American vessels, freight, and cargo against loss or damage arising from the risks of war. Originally endowed with only temporary powers and a strictly circumscribed function, the agency had its tenure extended and its scope expanded until it became the largest insurance enterprise in the world. Its advent into the field of life insurance occurred after the passage of amendatory legislation, June 12, 1917, which directed that the Bureau make provision for the insurance of masters, officers, and crews of American merchant vessels against loss of life or personal injury arising from risks of war and for compensation during detention following capture by enemy forces. 2 This insurance was compulsory on the owner of the vessel, and, in the event of his failure to accomplish it, the Secretary of the Treasury was authorized to effect the proper insurance with the Bureau at the expense of the owner. A further extension of the 158 Stat. L. 711 (1914). 2 40 Stat. L. 102 (1917). 3

4

GOVERNMENT LIFE INSURANCE

scope of the Bureau was effected by an amendment, approved July 11, 1918, which provided that the Bureau could extend to the vessels and personnel of foreign friendly nations the same insurance protection available to American shipping interests whenever such vessels were chartered or operated by the U. S. Shipping Board or a citizen of the United States.3 a. Legislative

Origin.

Meanwhile, in the months following the entry of the United States into the war, there developed a public realization of the necessity of establishing a comprehensive scheme of financial assistance to the families of men called to the colors and indemnification of those individuals sustaining disabilities in the service. It was generally agreed that a pension system patterned after that of the post-Civil War period would be undesirable and inadequate. William G. McAdoo, then Secretary of the Treasury, who had conceived and fostered the idea of the original Bureau of War Risk Insurance, was instructed by the President to make a thorough study of the problem, including systems of war relief established by the Allied Nations. The Secretary enlisted the assistance of certain governmental officials, the Committee on Labor of the Advisory Commission of the Council of National Defense, and military representatives. Investigations into the problem were promptly initiated. 4 It was early concluded by the committee that the existence of adequate insurance on the lives of all men in the service would be a very important factor in any program of war relief. An obstacle was encountered, however, in the fact that persons entering military and naval service had virtually lost their insurability with commercial underwriters. Commercial insurance companies were either refusing to accept the risks, through the use of a war clause, or were charging prohibitive rates for waiver of the 40 Stat. L. 897 (1918). * Hearings on H. R . 5723, House Committee on Interstate and Foreign Commerce, 65th Cong., 1st Sess., August 17, 1917, p. 12. One of the members of the Committee on Labor, Judge Julian λν. Mack, of the United States Circuit Court of Appeals, was delegated the task of preparing the proposed bill. He coordinated the recommendations of the various advisory groups, drafted the bill, and then piloted it through legislative channels. T h e chairman of the Committee on Labor was Samuel Gompers. 8

HISTORICAL BACKGROUND

5

5

clause. T h e r e f o r e , representatives of the insurance industry were invited to participate in the deliberations.® b. Method

of Accomplishing

Objective.

Consideration was given to the plan of permitting military and naval personnel to insure with commercial insurance companies of their choice, with the government bearing the expense of the extra p r e m i u m . It was felt that since the government was responsible for placing the men in such hazardous circumstances that they were being charged an extra p r e m i u m for insurance protection, it should in all fairness assume that extra burden. T h e insurance companies were a m e n a b l e to the plan and even expressed their willingness to segregate the extra premiums and r e f u n d any sums not needed to meet their mortality costs for that class of insureds, provided the government would guarantee any deficiency in the f u n d . T h i s latter feature of the proposal was reasonable, because neither the government officials n o r the insurance representatives had any reliable data on expected mortality costs. 7 T h e plan was not favorably considered, however. T h e factors militating against its acceptance included the following: (1) Hesitancy of the government to lend its endorsement indiscriminately to all insurance companies. Approval of an insurance policy with a private company a n d payment of premiums to that company by the government might have been interpreted as an endorsement of the company and its operating policies. T o protect itself against such an assumption, the government would have had to make a thorough investigation of all companies writing contracts on the lives of servicemen. Such examinations would have been wholly impracticable because of the lack of time and personnel; moreover, the states would probably 6 T h e additional premiums which were being charged for waiver of the war clause ranged from $37.50 to $100 per $1,000 of insurance.—Bureau of War Risk Insurance, Bulletin No. 3, October 16, 1917, p. 15. (United States Veterans' Bureau, Regulations and Procedure, 1930, p. 1255.) 6 Hearings on H. R. 5723, House Committee on Interstate and Foreign Commerce, 65th Cong., 1st Sess., August 17, 1917, p. 12. 7 T h e casualty reports of the French, Canadians, and Germans were available to the group of actuaries studying the problem, but they were so fragmentary as to be unreliable.

6

GOVERNMENT LIFE INSURANCE

have viewed them as an encroachment on their prerogatives of insurance supervision. 8 (2) Problem created when a choice of companies was not indicated. It was conceivable that men entering the service would indicate a desire for insurance, but that they would have no convictions as to the best company. In that case, the selection of a company would devolve upon the government. Unless an exceptionally fair method of allocating such insurance was devised, charges of favoritism and discrimination would surely have followed. (3) Attitude toward insurance companies. Insurance companies had never been popular with legislative bodies or the courts. Moreover, memories of the Armstrong Investigation of 1906 were still vivid in the minds of the solons and the general populace. It would have been difficult to get a measure through Congress which appeared to favor insurance companies, even though no favorable treatment was involved. The government had never insured its physical property with commercial companies, and it was reluctant to establish a precedent by insuring the lives of members of its armed forces with private insurers. (4) Attractiveness of a plan of government insurance. The risk was ideally suited for assumption by the government. The men were a limited class, and but for the war they would have been very desirable risks. A favorable mortality experience, with the exception of the war hazard, could be expected. Furthermore, the government would not have a number of items of expense that private carriers must assume. There would be no commissions to agents, which bulk relatively large in the acquisition costs of commercial insurers, as the Army and Navy would use their organizations to sell the insurance. No fees to medical examiners would be necessary, since the men would undergo a rigid physical examination upon entry into service. There would be no special investment expenses, inasmuch as the funds would be invested in government securities. There would likewise be no taxes. T h e only expense which-remained for the government to incur was that of the actual administration of the insurance business, and that could be charged as a general governmental war expense. 8 This reasoning would not have such force today in view of the S. E. U. A. Case and the McCarran-Ferguson Act, although the states still retain supervisory functions.

HISTORICAL c. Theory

BACKGROUND

7

of the Plan.

T h e rejection of the offer of commercial insurance companies to participate in the insuring of military and naval personnel left a government plan of insurance as the only alternative. Such a plan, from the standpoint of its relationship to the individual, could be predicated on any one of three theories: gratuitous, compulsory, or contract. T h e simplest method, administratively and otherwise, would be to grant automatic coverage of a designated amount to each individual entering the service, the entire cost to be borne by the government. Many advantages would flow from such an arrangement. 9 T h e most obvious and the most important one would be the assurance that each individual in the service would be protected by the maximum amount of insurance available. If the insurance scheme were to contribute effectively to the predetermined objective of eliminating the necessity of pensions, it was vital that the protection be as diffused and complete as possible. In the absence of the gratuitous feature, many men would fail to avail themselves of the insurance, even at the low rates contemplated, because of limited financial resources. Gratuitous insurance would afford to each person in the service equal benefits regardless of his economic status or degree of foresight. Secondly, no special governmental agency would be needed to administer the plan. T h e Bureau of Pensions had had long and varied experience in dispensing gratuities, and it could assume the additional function of distributing insurance proceeds without unduly disrupting its organization. A third and related advantage would be a lessening of the burden on the Army and Navy. If it was to be their responsibility to convince the members of their command of the need for insurance, no small selling j o b would be required. Administrative machinery would have to be provided for the processing of applications, for the allotment of pay for the periodic payment of premiums, and for the notices of changes of beneficiary. Most of this could be avoided by a plan of automatic, gratuitous insurance. A final advantage, similar to the first, would be the elimination of bitterness and rancor among the dependents of personnel who had not seen " S e e p p . 267-75 f o r a f u l l e r s t a t e m e n t o f t h e a u t h o r ' s

view.

8

G O V E R N M E N T L I F E INSURANCE

fit to insure themselves and who were killed in the war. It might be interpolated that this issue led to numerous modifications of the theory of contract insurance finally adopted, as is pointed out in Chapter X V . Compulsory contributory insurance would accomplish many of the objectives of gratuitous insurance. T h e same degree of coverage, with its cognate virtues, could be achieved. T h e financial burden on the government would be lighter since the insureds would make some contribution. However, a special agency to administer the plan would probably be needed, and some administrative work would be required of the service departments. 10 Contract insurance would be the closest counterpart to commercial insurance. T h e individual would have the privilege of choosing or declining the insurance protection proffered by the government. T h e policy, once issued, would be a unilateral contract creating vested rights. Those vested rights would be enforceable in the manner provided by law. T h e converted policies would contain all the benefits and options ordinarily associated with commercial policies. Contract insurance was selected as the type of insurance protection to be offered by the government. 11 T h i s choice seems to have been dictated by a combination of social and economic considerations. It was felt that if the insured person had to make a monetary contribution for his insurance policy, he would be more conscious of his protection and would be more likely to retain it after the war. T h e contributions of the insured persons would also lighten the financial burden on the government, although this was of secondary importance. An unusual state1 0 A modified plan of compulsion was later suggested by Mr. Thomas B. Love, Assistant Secretary of the Treasury (Senate Report No. 428, 65th Cong., 2nd Sess., May 6, 1918, p. 2 4 ) . His plan would have automatically covered everyone to the full amount of insurance permitted for the first 120 days after entry into service, which insurance would be compulsory for that period. Thereafter, the full amount would continue in force unless the insured signed a statement indicating that he desired his insurance to be discontinued or reduced. T h e burden of avoiding insurance would thus be placed on the individual, which would probably have been an effective method of conserving the insurance in force. 1 1 Confirmation of this statement is contained in the Supreme Court decisions in the cases of Lynch vs. U. S. and Wilner vs. U. S., 292 U. S. 571, 54 S. Ct. 840, 78 L. Ed 1434 (1934) , in which government life insurance policies were described as contracts.

HISTORICAL

BACKGROUND

9

ment from General J o h n J . Pershing, Commander of the American Expeditionary Forces, had some bearing on the question. H e intimated strongly that no enlisted man in France should have more than $10 spending money per month, because reckless American spending was boosting prices and wrecking the French economy; 1 2 contributory insurance would help achieve this goal. Compulsory insurance would possess the same efficacy as contract insurance with respect to the foregoing factors, but it was foreign to the American ideal of free choice and determination. Only contract insurance could satisfy the ethical and ideological concepts of the "American way of life." d. Opposition

of Commercial

Companies.

T h e government plan of insurance was opposed by life insurance companies generally. T h e opposition was by no means unanimous, however, and many companies publicly supported the measure. 1 3 T h e Advisory Committee on Insurance, which had been asked by Secretary McAdoo to submit its recommendations on the proposed bill, approved the provisions for allotments and compensation, but opposed the insurance feature. 1 4 It argued that $10,000 was too much insurance to permit a serviceman to carry at the bargain rates being offered by the government.1·"' Since the average amount of insurance per insured person at that time was only $1,800, the servicemen were being placed in a more advantageous position, insurancewise, than they had occupied in peacetime. Moreover, the plan was inequitable, the Committee argued, in that it would permit a person with ample financial means to avail himself of more of the subsidized insurance than an impecunious individual. Finally, the difficulties of organizing and operating a governmental 1 2 Hearings on H. R . 5723, House Committee on Interstate and Foreign Commerce, 65th Cong., 1st Sess., August 17, 1917, p. 83. " S e e Cong. Record, 65th Cong., 1st Sess., Vol. 55, part 7, pp. 6905-07 for an endorsement of the plan by the Life Convention of Wisconsin. 1 1 Hearings on H. R . 5723, House Committee on Interstate and Foreign Commerce, 65th Cong., 1st Sess., August 17, 1917, pp. 23-29, 55-63. 15 All the discussions preceding the enactment of the War Risk Insurance Act assumed a mortality cost of $58 per $1,000 of insurance, while the government proposed to offer the insurance at an average premium of $8 pei thousand. T h e contemplated subsidy was, therefore, $50 per $1,000 of insurance.

10

GOVERNMENT LIFE INSURANCE

bureau equipped to write insurance on the scale contemplated were emphasized. T h e Committee countered with the proposal that $1,000 of insurance be furnished gratuitously to every member of the armed forces, with the contract insurance feature to be eliminated. 19 In other words, no one would be permitted to supplement the gratuitous coverage by obtaining more government insurance at his own expense. Such a scheme would augment the inadequate (in their opinion) compensation benefits, and it would obviate the necessity of establishing a special agency to write insurance. Most important, it would allay their unexpressed fears that wartime government insurance would be used as an entering wedge for eventual government operation of all insurance. e. Enactment

of the Law.

T h e recommendation of the Advisory Council of Insurance Representatives as to the exclusion of the contract insurance was not accepted, and a bill incorporating the insurance feature was approved by Congress on October 6, 1917.17 The act, an amendment to the War Risk Insurance Act of 1914, made provision for the payment of allotments from the pay of service men and allowances contributed by the government for dependent relatives of members of military and naval forces of the United States, the payment of compensation for death and disability in service of such members, and the writing of insurance by the government against their death or total disability. It conferred upon the Bureau of War Risk Insurance the duty of administering the provisions. T h e insurance section of the act permitted all officers and enlisted men in the service at that time and those entering subsequently to obtain yearly renewable term insurance in sums ranging from $1,000 to $10,000 in multiples of $500. T h e premiums were to be net premiums computed on the basis of the American Experience Table of Mortality and 3]/2 per cent interest. The government was to bear all the expense of admin18 Hearings on H. R. 5723, House Committee on Interstate and Foreign Commerce, 65th Cong., 1st Sess., August 17, 1917, p. 24. « 4 0 Stat. L. 408 (1917); 38 U. S. C. 422.

HISTORICAL BACKGROUND

II

istration and assume the excess mortality and disability costs arising from the hazards of war. Beneficiaries were restricted to members of the family, and the proceeds were to be paid in installments. Provision was made for conversion of the yearly renewable term insurance into the usual forms of permanent insurance within five years after termination of the war. 2. SUBSEQUENT

a. Success of the

DEVELOPMENTS

Program.

Strenuous and sustained efforts on the part of the Army and Navy to sell the insurance were so productive that 87 per cent of all persons in the armed forces applied for insurance, 80 per cent of the applications being for the full amount of $10,000. 18 Insurance in the aggregate of $40,000,000,000 was applied for, which sum exceeded the total amount of insurance in force with all the commercial life insurance companies in the United States at that time. 19 This amazing sum of insurance was applied for and carried because the men in the service realized their very great need for protection under the conditions in which they found themselves, and because compulsion was frequently applied by military and naval officials; in addition, a very convenient method of premium payment was provided for through the payroll deduction plan. T h e sudden termination of the war and the rapid demobilization of the military and naval forces removed from the minds of many of the men the need for insurance. T h i s factor, along with the inevitable financial handicaps that were encountered in the period of transition between discharge and ultimate reassimilation into normal civilian activities, the necessity of making direct remittance of premiums, the lack of thrift habits, and other factors, induced an enormous a m o u n t of lapsing. It was estimated that over 75 per cent of the men who carried term insurance in the service never paid a premium after discharge. 20 This impulsive lapsing of term insurance did not result in the government's discontinuing its insurance program. T h e Liaison Division of the Bureau of War Risk Insurance instituted a pro18

Veterans' Bureau, Annual Report, 1922, p. 487. «/bid., p. 25. »Ibid., p. 456.

12

G O V E R N M E N T LIFE I N S U R A N C E

gram of circularizing lapsed policyholders and educating them as to the benefits and advantages of insurance. It succeeded in reviving considerable interest in government life insurance and in securing the reinstatement of many lapsed policies. A considerable number of current and lapsed term policies were converted to permanent forms of insurance. T h e original act 21 was interpreted to permit men entering the armed forces at any time after its passage to secure the protection of government life insurance; this afforded a constant source of new entrants. In addition, periodic liberalizations of the reinstatement provisions were climaxed by an amendment, approved on May 29, 1928, which provided that all those World W a r I veterans who had ever had the right to apply for yearly renewable term or converted insurance and were in good health, could apply directly for converted insurance. 22 This made all World War I veterans in good health eligible for government insurance. T h e net result was that at the time of the enactment of the Selective Training and Service Act of 1940 there were in force over 600,000 policies, both converted and yearly renewable term, representing more than $2,500,000,000 of insurance. 23 b. Impact

of Selective Training

and Service

Act.

T h e Selective Training and Service Act, approved on September 16, 1940, provided for induction of civilians for military training, the nuipber not to exceed 900,000 at any one time. These men were eligible for U. S. Government Life Insurance under the provisions of Section 300 of the World War Veterans' Act of 1924, and many could be expected to apply for such insurance. T h e r e was under consideration at that time, however, certain proposed legislation which would effect a considerable revision in the contracts of insurance thereafter to be issued. These proposed revisions were concerned primarily with the rate of interest used in the calculation of premiums and reserves and with the disability provisions. 21 Technically, the original W a r Risk Insurance Act ivas the act passed on September 2, 1914, authorizing the insurance of American vessels, freight, a n d cargo by the government. For convenience, since this dissertation deals with government life insurance, the Act of October 6, 1917, authorizing the writing of life insurance, will be referred to as the "original act." 22 45 Stat. L. 970 (1928) ; 38 U. S. C. 512 ( a ) . 23 Administrator of Veterans' Affairs, Annual Report, 1941, p. 22.

HISTORICAL BACKGROUND

13

U. S. Government Life Insurance had been written on the basis of 31/2 P e r cent interest, since that was the interest rate used by most commercial insurers at the time of the inception of the government plan. By 1940, the decline in interest rates had made apparent the need for a lower interest basis, and insurance companies were contemplating the issue of new contracts on the basis of 3 per cent or less. T h e administrators of the U. S. Government Life Insurance Fund were experiencing difficulty in investing current funds at a satisfactory rate of interest. In fact, the interest return on current investments at that time was inadequate to maintain reseñes on the prescribed 3y 2 P e r c e n t basis.24 T h e difficulties were intensified by the reduction of the interest rate on policy loans provided by section 7 of Public Law 198, July, 1939. Some remedial action relative to interest rates, therefore, was necessary. T h e government plan likewise followed commercial insurance practice by offering protection against permanent total disability as well as death in its life insurance policies. T h e disability plan offered, the so-called "maturity type," 25 was obsolescent, and even at the time of the initiation of the government plan had been discontinued by most commercial insurers in favor of a type whose disability payments would not reduce the face value of the policy. Developments in the field of disability insurance during the 'twenties and 'thirties caused many commercial insurance companies to discontinue their disability protection completely and others to modify drastically the terms and benefits offered. T h e government plan, since it stipulated no age before which the disability must occur and charged no extra premium for the protection, would ultimately constitute a heavy drain on the Fund. It was not deemed advisable to extend disability protection on such terms to persons becoming eligible for government insurance through the operation ot the draft law. T h e above considerations, plus the fact that it was not considered equitable to permit the large number of new entrants to share the equities accumulated by previous policyholders over 24 Statement presented by Veterans' Administration to Joint Congressional Committee considering the enactment of Public Law No. 801, 76th Congress (unpublished). 25 See pp. 93-94.

14

GOVERNMENT LIFE INSURANCE

long years and under favorable conditions, resulted in the passage of the National Service Life Insurance Act of 1940. c. Provisions of National Service Life Insurance

Act.

This act, approved on October 8, 1940, established a new system of life insurance for persons who were in the active service of the land or naval forces of the United States on the date of its enactment, or who entered such service after that date. It authorized the issuance of five-year term insurance policies, which were to be convertible after one year into certain permanent forms of insurance. Premiums were to be net premiums computed on the basis of the American Experience Table of Mortality and 3 per cent interest, and the insurance was to be granted in any multiple of $500, but not less than $1,000 nor more than $10,000. Beneficiaries were again restricted, and death benefits were payable in installments. Premiums were to be waived in case of total disability, with certain restrictions, at no extra cost to the insured. The government was to bear the excess mortality cost and the cost of waiver of premiums on account of total disability traceable to the extra hazards of military or naval service. It was to assume all expense of administration. No more insurance was to be issued under Section 300 of the World War Act of 1924, as amended, although veterans of World War I could still reinstate lapsed insurance or make original application for U. S. Government Life Insurance under other sections of the World War Veterans' Act. Most of the provisions of the National Service Life Insurance Act parallel closely the insurance provisions of the War Risk Insurance Act of 1917. The differences that exist were intended to meet the changed conditions that had arisen since the enactment of the original act. Accordingly, premium rates, reserves, and other actuarial calculations in connection with N.S.L.I. are based on the interest rate of 3 per cent rather than the 3y s per cent found in the W.R.I.A. This resulted in slightly higher premiums and smaller death benefits, when paid on an income basis, than for policies issued under the W.R.I.A. N.S.L.I. provides only for waiver of premiums in the event of total disability as compared to the payment of cash benefits, deductible from the face of the policy, under the permanent total disability

HISTORICAL BACKGROUND

15

provisions of the W.R.I.A. A clause providing for cash benefits may be added to an N.S.L.I. policy, however, by making separate application therefor, by paying an additional premium, and by furnishing evidence of insurability. One other significant difference is the financial arrangement under which the two plans are operated. N.S.L.I. has been established and is being operated upon the mutual plan, comparable to commercial life insurance; the temporary insurance granted under the terms of the W.R.I.A. was on an appropriation basis. That is, premiums received from policyholders of yearly renewable term insurance were added to the insurance appropriation, the original one of which was $23,000,000, and disbursements were charged to the appropriation. No insurance trust fund was established, and, as a consequence, no dividends were ever declared on yearly renewable term insurance. T h e premiums on the term insurance issued pursuant to the N.S.L.I.A. are deposited into a separate trust fund, which, together with interest earned thereon, is available for the payment of insurance liabilities. Any funds remaining after the discharge of all liabilities arising from insurance claims will be available for distribution through dividends. And it is contemplated that dividends will eventually be declared for policyholders of N.S.L.I. term insurance. 3. SCHEMA

T h e provisions of the W.R.I.A. have been amended frequently, the first amendatory legislation having been enacted on December 24, 1919.2e Each amendment, almost without exception, has liberalized the original act. The result is that U. S. Government Life Insurance, hereafter to be referred to as U.S.G.L.I., which is the converted insurance provided for by the W.R.I.A., is more liberal in some respects than the insurance, either term or converted, available under the N.S.L.I.A. The permanent insurance available under the two acts is so similar, however, that government life insurance can be considered as an entity. Therefore, the theoretical analysis which occupies the remainder of this volume will treat the two types in conjunction, and any state» 4 1 Stat. L. 372

(1919).

16

G O V E R N M E N T LIFE INSURANCE

ments that are applicable to only one type of insurance will be qualified. Since U.S.G.L.I. has been in existence for a quarter of a century and N.S.L.I. is of comparatively recent origin, most of the historical data, judicial decisions, and administrative interpretations to which reference will be made have arisen out of U.S.G.L.I. litigation and administration.

CHAPTER

II

SELECTION 1. ELIGIBILITY

REQUIREMENTS

Government life insurance is restricted to those persons who, at some time since October 6, 1917, have been or are now on active duty with the military and naval forces of the United States. T h e two basic insurance acts as originally written authorized persons entering the service to obtain only term insurance, which carried with it the right of conversion to permanent forms of insurance. No provision was made for the direct issue of the permanent forms. T h e W.R.I.A. merely stipulated that the yearly renewable term insurance should be convertible for a period of five years after the end of the war into such forms of permanent insurance as might be prescribed by the Bureau of War Risk Insurance. T h e prescribed forms of insurance and the terms of conversion were promulgated four months after the cessation of hostilities. 1 A few months later a directive was issued which ruled that U.S.G.L.I, could be obtained directly and without prior term insurance. 2 This ruling was based on an interpretation of the original law, and much-needed flexibility was thus added to the administration of the act. However, the preponderant amount of insurance issued to persons entering the service until the enactment of the World War Veterans' Act on J u n e 7, 1924, was on the yearly renewable term plan. This act prohibited the further issue of this type of insurance, and thereafter the insurance was on any of the available plans of U.S.G.L.I. T h e N.S.L.I.A. enumerated the permanent forms of insurance into which the term insurance could be converted and the terms of conversion, but it provided that no term policy could be converted until it had been in force for one year. Moreover, 1 2

Treasury Decision No. 42 W. R., March 18, 1919. Treasury Decision No. 52 W. R., September 29, 1919. 17

18

GOVERNMENT LIFE INSURANCE

it made no provision for the direct issue of the permanent forms. This situation was rectified in February, 1947, when the N.S.L.IA. was amended to permit eligible persons to obtain the permanent forms of insurance by direct application. 8 Thus both U.S.G.L.I. and the permanent forms of N.S.L.I. may be obtained either through conversion of a term policy or by direct issue. As pointed out previously, any person who served honorably in the military or naval forces of the United Sutes during the course of World War I,4 and who has ever had the right to apply for yearly renewable term or converted insurance, may still secure U.S.G.L.I. if he is in good health. Prior to the Insurance Act of 1946, any person who failed to apply for N.S.L.I. while on active duty with the military or naval forces forfeited his right to the insurance. That act, however, provided that any person who had served honorably in the armed forces of the United States at any time during the period from October 8, 1940, to September 2, 1945, would have access to the insurance at any time, whether or not application was made while the person was on active duty with the military or naval forces. Any person who makes application for the insurance after being separated from the service must present satisfactory evidence of good health (medical examination), but the existence of good health shall not be denied because of disability or disabilities, less than total in degree, resulting from such active service, if application for insurance is made prior to January 1, 1950. The provision is as liberal and, in some respects, more so than the comparable U.S.G.L.I. provision, which was originally enacted in May, 1928, and placed no deadline on the submission of original applications for insurance, but which required satisfactory evidence of good health in all cases, without exception. T h e "active duty" requirement had to be modified to a certain extent during World War I. It was found that many men sus» Public Law 5, 80th Cong., 1st Sess., February 21, 1947. •World War I has been defined to include the period beginning April 6, 1917, and ending July 2, 1921 (43 Stat. L. 607 (1924); (38 U. S. C. 424). Since the law originally granting insurance was enacted on October 6, 1917, those comparatively few World War I veterans whose service terminated before October 6, 1917, may not now secure UÜ.GXJ. In other words, this privilege applies only to World War I veterans who served at any time from October 6, 1917, to July 2, 1921.

SELECTION

19

tained injuries and contracted diseases, some of them fatal, while enroute to a training camp and before being officially sworn into the service. The Spanish influenza epidemic was rampant at that time, and many inductees contracted the disease and died during the interval between induction and official entry into the service. Such men had not had the opportunity to insure themselves because they were not on "active duty." This condition was partially corrected by an amendment approved on December 24, 1919, which provided that "any insurance application made by such person after induction by the local draft board but before being accepted and enrolled for active service shall be deemed valid." 6 This provision was made retroactive, since it was not approved until after the termination of the war. This, of course, did not take care of the persons who were killed while enroute to the induction station, or who for some other reason failed to make application for insurance, but nothing short of automatic insurance could have protected them. The W.R.I.A. prescribed no minimum period of active service as a criterion of eligibility for insurance. If a person were ordered to active duty for only one day, he became eligible for the insurance. T h e N.S.L.I.A., to the contrary, specifically excludes any person ordered to active duty for a period of thirty days or less. This does not mean, as a cursory perusal might indicate, that a person must have been on active duty for at least thirtyone days before he is eligible to apply for insurance. It simply means that the individual must enter the service on the authority of orders which prescribe a tour of duty in excess of thirty days, such as, "for the duration of the present emergency, plus six months." It does not matter if the actual tour of duty is less than thirty-one days; the intent of the orders is the determining factor. This provision was written into the law for the purpose of excluding from the benefits of insurance those persons ordered to active duty for periodic training, usually for periods of fifteen days during the summer months. Such persons were eligible for and were permitted to take U.S.G.L.I., and it was to correct this situation that the provision discussed in this paragraph was included in the N.S.L.I.A. Persistent efforts have been exerted to make government insur »41 Sut. L. 572 (1919).

20

GOVERNMENT LIFE INSURANCE

ance available to persons who are not on active duty with the armed forces but who are on the borderline of that classification. Such persons might be called quasi-military personnel. T h e affinity to the military ranges from the cadets and midshipmen of West Point and Annapolis, respectively, to civilian workers in the base sections of advanced theaters of operations. Almost without exception, these proposed extensions of coverage have been opposed by the Bureau of War Risk Insurance and its successor, the Veterans' Administration, and in most cases the proposals have been defeated. The first instance of this pressure to open up government insurance to civilians was initiated by General Pershing a few months after American forces started arriving in France in large numbers. He cabled the Secretary of War that he had with the Expeditionary Forces in France several hundred civilian employees who were subjected to extraordinary war risks, particularly aerial bombing, but who, not being part of the military forces, were ineligible for the insurance features of the W.R.I.A. He asked that they be included by regulation, if possible; if not, by new legislation.® Amendments to accomplish General Pershing's request were proposed in Congress, but they were never enacted into law. Then followed an attempt to bring West Point cadets, Annapolis midshipmen, and Coast Guard cadets within the purview of the W.R.I.A. 7 The distinction between these potential officers and those on active duty was certainly tenuous, and an extension seemed justifiable in this case. It was pointed out that midshipmen and Coast Guard cadets were subjected to the risks of active duty while on their summer cruises, and that West Point cadets were forced to undergo strenuous and hazardous training during their course of instruction. The bill was reported favorably by the House Committee on Interstate and Foreign Commerce,8 but it failed of enactment into law. Other prominent groups which presented logical arguments for coverage by government insurance but were not granted the privilege include the Red 6 Thomas B. Love, "The Social Significance of War Risk Insurance," Annals, Vol. 79, September, 1918, p. 50. 7 See Hearings on H. R. 11659, House Committee on Interstate and Foreign Commerce, 65th Cong., 2nd Sess., May 1, 1918, p. 5 and passim. • Cong. Record, 65th Cong., 2nd Sess., Vol. 56, Part 6, p. 5588.

SELECTION

21

Cross, Salvation Army, Knights of Columbus, Y. M. C. Α., Y. W. C. Α., and overseas postal employees. T h e issue arose again during World War II, and the Veterans' Administration continued to oppose the granting of government insurance benefits to civilian groups. A proposal to extend N.S.L.I, coverage to U. S. merchant seamen was successfully opposed, with the result that the War Shipping Administration gratuitously insured all merchant seamen for the amount of $5,000. An amendment to the N.S.L.I.A. was offered to provide for the granting of insurance to war correspondents serving in combat areas. The amendment was disapproved when it was pointed out that most war correspondents received larger salaries than the highest-ranking American generals and could well afford to pay the additional premium for waiver of the war clause in commercial policies.9 T h e policy of restricting N.S.L.I, to members of the military and naval forces was modified on three occasions, however. T h e first modification authorized the granting of insurance to commissioned officers of the Coast and Geodetic Survey, an agency of the Department of Commerce, who were assigned to duty on projects for the War and Navy Departments in areas outside the continental United States, in Alaska, or in the coastal areas of the United States determined by the War or Navy Department to be of immediate military hazard. 10 A few months later a law was approved which provided that service as a cadet at the U. S. Military Academy or U. S. Coast Guard Academy, or as a midshipman at the U. S. Naval Academy, on or after December 7, 1941, and before termination of hostilities incident to World War II, should be considered active military or naval service for purposes of laws administered by the Veterans' Administration, 11 thus making such persons eligible for N.S.L.I. It will be noted that this is a reversal of the policy pursued during World War I with respect to yearly renewable term insurance. The final modification occurred when the privilege of obtaining N.S.L.I, was conferred upon all commissioned officers of the Public Health Service, regular and reserve, who were required to serve 9 Hearings on S. 740, Senate Committee on Finance, 78th Cong., 1st Sess., March 1, 1943, pp. 8, 9. 10 56 Stat. L. 1039 (1942); 33 U. S. C. 855a. 11 57 Stat. L. 556 (1943) ; 38 U. S. C. 730.

22

GOVERNMENT LIFE INSURANCE

during time of war outside the continental United States or in Alaska, whether or not such officers were detailed for duty with the Army, Navy, or Coast Guard.12 2 . MEDICAL STANDARDS

The medical standards established by the administrators of government life insurance may affect the quality of the insureds under the permanent plans of insurance through three channels: (a) initial selection of temporary policyholders, (b) initial selection of permanent policyholders, and (c) reinstatement provisions pertaining to both types of policyholders. The manner in which this influence is exercised, will, therefore, be discussed under those headings. a. Temporary

Insurance.

The initial selection of temporary policyholders affects the quality of the insureds under the permanent plans only at a tangent. This indirect influence is exercised through the right of conversion to permanent forms without a medical examination. If substandard lives are insured under temporary plans, the permanent plans can be expected to receive a portion of the impaired lives via the conversion process. It is impossible to determine the extent of this infiltration of impaired lives into the permanent plans of insurance, but it undoubtedly has occurred on a considerable scale. Temporary insurance under both the W.R.I.A. and the N.S.L.I.A. could be secured13 by men entering the service without a special insurance medical examination. The reason for this was not an utter disregard of the principles of medical selection, but rather the assumption that any person physically qualified for military or naval service could pass a medical examination for insurance. Whether or not this was a logical assumption from a medical standpoint will be discussed later in this chapter. Of the moral obligation of the government to accept an individual " 57 Stat. L . 587 (194S). See also Administrator's Decision 644, April 9, 1945. " T e m p o r a r y insurance under the N.S.L.IA. is still obtainable, and the use of the past tense in referring to it on this and succeeding pagei is merely an expositional device adopted to facilitate a concurrent discussion of the W.R.I.A. and N.SX.I.A.

SELECTION

23

for insurance if he were accepted for military service, there could be no doubt. At any rate, each individual underwent a more or less rigid medical examination upon entering the service, and it was felt that this examination could be substituted for a special insurance examination. T h e privilege of obtaining insurance originally had to be exercised within 120 days after entry into service.14 This limitation was conceived in the W.R.I.A. and carried over into N.S.L.I. Several reasons have been adduced for this limitation. 16 T h e primary purpose was to restrict the insurance to those in sufficiently good health to meet the medical requirements for induction, which could be accomplished only by requiring the application for insurance to be submitted within a relatively short period after induction. The choice of 120 days was partly arbitrary and partly based on the belief that it would require 120 days to explain the provisions of the plan to the men already in the service. It should be remembered that the U. S. declaration of war on Germany in World War I came on April 6, 1917, and the W.R.I.A. was not enacted until October 6, 1917. By that time many men were already overseas, and considerable time was needed to get the proposition before them. T h e deadline for applications was thus set as soon after the medical examination as was consistent with administrative requirements. A second reason for the time limitation was to furnish an incentive for prompt application for insurance. It was thought desirable to create a sense of urgency so that men would not delay making application until it was too late, by virtue of their 14 Men in the service when the W.R.I.A. was enacted were given 120 days after the enactment of the law to apply for insurance. T h i s period was extended 60 days to April 12, 1918, by a Joint Resolution or Congress, approved on February 12, 1918, because it was felt that all the men in the service had not had an opportunity to apply. Persons in the service when the N.SX.I.A. was approved were not granted the opportunity to apply for N.S.L.I. without a medical examination because they had had the privilege of applying for U.S.G.L.I. at the time of their entry into service. T h e fiveyear renewable term policy available under U.S.G.L.I. was comparable to the five-year term policy available under N.S.L.I. except that it was more favorable in some ways. 14 Senate Report No. 428, 65th Cong., l n d Sess., May 6, 1918, Appendix (Hearings on H. R. 11245, H. R. 11520, and H . R. 11659), p. 23; Hearings on H. R . 11659, House Committee on Interstate and Foreign Commerce, 65th Cong., 2nd Sess., May I, 1918, pp. 31, and 37-46; Hearings on H. R. 6219 and S. 2136, Senate Committee on Finance, 77th Cong., 1st Sess., December 16, 1941. p. 5.

24

GOVERNMENT LIFE INSURANCE

having been killed or having sustained permanent disabilities. T h e stimulating effect of the time limit was attested to by army and navy officials alike. A final argument, which does not seem too pertinent, was that the government should be apprised of the obligations it had assumed. T h e government had offered the servicemen, at a considerable financial cost, an advantageous plan of insurance, and it should know within a reasonable time how many men were going to take advantage of the plan. In the absence of a time limitation, the government might suddenly have thrust upon it obligations far in excess of what it expected. No provision was made in the W.R.I.A. for the granting of yearly renewable term insurance under any conditions to a person who failed to apply for insurance within 120 days after his entry into service. Shortly after the expiration of the original 120 day period (extended to 6 months), Mr. Thomas B. Love, Assistant Secretary of the Treasury and Director of the Bureau of War Risk Insurance, recommended that persons failing to apply for insurance within the allotted 120 days be allowed to obtain insurance subsequently by presenting evidence of insurability. 16 A bill (H. R. 10886) embodying this idea, but going much farther in that a "duty" status would qualify the applicant for insurance, was introduced into Congress but was never enacted. It was feared that such a privilege would create a dilatory attitude on the part of the men in the service and would be a source of great harm. 17 The result was that yearly renewable term insurance was never obtainable by persons who failed to apply for it within 120 days after their entry into service, even though they were able to pass a medical examination. The same is not true of term insurance under N.S.L.I. The original act, conforming to the pattern established by the W.R.I.A., made no provision for the granting of term insurance to persons failing to apply within 120 days. However, the impact of the Japanese attack on Pearl Harbor and American embroilment in the actual hostilities of World War II brought about a reconsideration of the entire question of limitations on the 18 Senate Report No. 428, 65th Cong., 2nd Sess., May 6, 1918, Appendix, (Hearings on H. R. 11245, H. R. 11520, and H. R. 11659), p. 2S. 17 Hearings on H. R. 11659, House Committee on Interstate and Foreign Commerce, 65th Cong., 2nd Sess., May 1, 1918, pp. 37-46.

SELECTION

25

granting of insurance, resulting in an amendment which provided that insurance could be granted to a person on active duty at any time after the expiration of the 120-day period, if the applicant gave satisfactory evidence of good health. 1 8 T h e Insurance Act of 1946 went even further and permits the granting of insurance to veterans of W o r l d W a r I I who had active service between October 8, 1940, and September 2, 1945, at any time, upon application, payment of premiums, and presentation of satisfactory evidence of good health. However, the existence of good health may not be denied because of disability or disabilities, less than total in degree and resulting from such active service, if application for insurance is made before January 1, 1950. b. Permanent

Insurance.

T h e initial selection of permanent policyholders of both U.S.G.L.I. and N.S.L.I. may be affected by the medical standards which are applied. Direct applications for U.S.G.L.I. were made possible by the promulgation of Treasury Decision No. 52 W . R . , on September 29, 1919. T h e insurance was obtainable without a medical examination if application was made within 120 days after entrance into service. T h e Act of May 29, 1928, which restored to all veterans of World W a r I the right to apply for any plan of U.S.G.L.I. if they were in good health and could pass the required medical examination, gave added importance to the standards of medical selection. T h e right to obtain the permanent forms of N.S.L.I. directly was bestowed in the Act of February 21, 1947. c. Reinstatement

Provisions.

Medical examinations play an important role in the reinstatement procedure devised for all types of policies under both plans of insurance. T h e reinstatement provisions, applicable to yearly renewable term insurance and U.S.G.L.I., are rather complex and will not be dealt with at this point. Suffice it to say that the submission of a report of medical examination is an integral part of the reinstatement procedure under certain circumstances. T h e reinstatement provisions of N.S.L.I. have been in a period 18

55 Stat. L. 846 (1941); 38 U. S. C. 802 (d)(1).

26

GOVERNMENT LIFE INSURANCE

of transition, but since August 1, 1948, evidence of good health has to be presented if the application for reinstatement is not submitted within three months after the due date of the first premium in default. d. Evaluation of Medical

Selection.

Now that the manner in which permanent government life insurance may be affected by medical selection has been demonstrated, some consideration should be given to the quality of the medical selection practiced by the Veterans' Administration. T h e relationship between the medical requirements for service in the armed forces and those necessary for the obtaining of government insurance will first be examined. T h e discussion will be concerned with N.S.L.I. because medical selection did not play such an important role in World War I. T h e principles are applicable to U.S.G.L.I., however. The medical standards prescribed by the Administrator of Veterans' Affairs in those cases where evidence of good health must be given are admittedly more rigid than those which establish fitness for military service. This fact probably caused more bitterness and misunderstanding during World War II than any other phase of the insurance program. It seems to be an incontrovertible fact to most people, including many legislators, that a man fit for military service is a fit specimen for insurance. They consider this to be true not only from the ethical standpoint but from the physical as well. The answer, of course, is that the test of fitness for military service is not of the same nature as the ascertainment of normal insurability. T h e former is for the purpose of ascertaining the person's physical fitness for a limited future period; the latter is to determine whether any impairments exist which are likely to shorten life or produce total disability at some period in the future. Persons with serious impairments from an insurance standpoint may be able to perform very valuable service in the Army or Navy for a limited period. This was recognized when the armed forces decided to accept persons with definite impairments for limited military service. Since the life insurance contract is a long-term contract, unilateral against the insurer, such impairments cannot

SELECTION

27

be ignored when they are exhibited by an applicant for insurance. T h e medical requirements of the Veterans' Administration have not been static, but have been modified to conform to commercial insurance practice and to fit the requirements to the particular needs of the armed forces. Moreover, the standards of the armed forces were continually modified to reflect the varying needs for manpower. Therefore, it is difficult and of no particular value to designate definite points of disparity between the medical standards of the armed forces and those of government life insurance. However, differences have consistently existed with respect to three types of impairment, and most of the medical rejections have been based on one of those three conditions. These areas of disagreement are, (1) evidence of syphilis, (2) defective hearing and sight, and (3) mild systolic hypertension. T h e above infirmities are no bar to military service but are effective deterrents to obtaining insurance. Some light is thrown on the extent of the problem by the meager statistics that are available. No data on medical examination are available for U.S.G.L.I., but some have been gleaned on N.S.L.I from official Army and Navy correspondence and data compiled by the Veterans' Administration. A study made by the latter organization encompassing the period from the inception of N.S.L.I., on October 8, 1940, to March 28, 1946, revealed that a total of 1,551,346 reports of medical examinations were submitted in connection with the insurance program. T h e examinations were not broken down as to the number submitted in conjunction with initial applications for insurance and those with reinstatement applications, but in view of the subordinate nature of the reinstatement problem during that period, it can be assumed that practically all the examinations were forwarded in support of initial applications for insurance. T h e total number of medical rejections for the period was 24,835, representing 1.6 per cent of those required to undergo a medical examination. Seventy per cent of the rejections were attributable to genitourinary, eye, ear, nose, and throat, or circulatory impairments, of which syphilis alone accounted for 45 per cent. A surprisingly high percentage, 8.8 per cent, was due to neuropsychiatrie diseases. T h e complete list is shown in Table 1.

28

GOVERNMENT LIFE INSURANCE

These data must be interpreted with caution, however, since several factors tend to minimize their significance. Since the enactment of the N.S.L.I.A. there have been three periods of 120 days each during which every person in the service had the privilege of obtaining insurance without a medical examination or other evidence of good health, regardless of his length of TABLE 1 T O T A L REJECTIONS O F INSURANCE MEDICAL EXAMINATIONS OCTOBER 8 , 1 9 4 0 , ΤΟ MARCH 2 8 ,

Disease Genito-urinary Eye, ear, nose, & throat Circulatory Neuropsychiatrie Gastro-intestinal Respiratory Surgery Miscellaneous Total

Number

1946

Percentage of Total

12,417 2,657 2,384 2,185 695 620 422 3,455

50.0 10.7 9.6 8.8 2.8 2.5 1.7 13.9

24,835

100.0

Source: Operating Records of the Veterans' Administration.

service. It can logically be assumed that any person whose application for insurance was rejected for medical reasons would take advantage of a later opportunity to secure it without an examination or other evidence of insurability. Therefore, any rejections prior to August 12, 1943, the termination date of the last such period, can safely be disregarded in any evaluation of the effects of medical selection. There were 8,202 medical rejections prior to August 12, 1943, which gives a net figure, therefore, of 16,633 rejections between that date and March 28, 1946. Thus one-third of the rejections were nullified by this one factor. Similar in their effect are modified procedures permitted by the Veterans' Administration in cases where a complete examination is impracticable. An exchange of correspondence between War Department officials and the Veterans' Administration in January, 1943, regarding the plight of military personnel outside the continental United States or enroute to oversea destinations, who were lacking insurance and needed a medical examination

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29

19

to secure it, resulted in what was emphatically stated to be a temporary modification of medical procedures. For a period of 120 days, beginning January 25, 1943, personnel at staging areas or in active theaters of operations outside the continental United States were permitted to submit a statement of good health certified by a medical officer in lieu of the "Medical Examiner's Report." It was still necessary for the applicant to forward the "Statement of Applicant," which was very searching and could easily be made a basis for rejection. In other words, some degree of selection was still possible. T h e purpose of the modification was not to lower the standards but to facilitate the submission of applications from areas where medical equipment and personnel were lacking or inadequate. T h i s waiving of the examination, which was conceived as a temporary palliative, has been thrice extended 2 0 and is still in effect. A similar procedure was initiated for the Navy and its related components in the spring of 1944,21 and it, too, has continued in force. Furthermore, as pointed out above, the medical standards of the Veterans' Administration have been modified on numerous occasions, and accompanying each modification is a review of all previously rejected cases to determine whether they can qualify under the new standards. Early in the summer of 1944, the standards of acceptability with respect to eye and ear impairments were modified to such an extent that 90 per cent of the applications of Army personnel which had been rejected for such reasons were reconsidered and approved. 22 Later modification of the standards pertaining to syphilis resulted in the approval of 85 per cent of the applications which had been disapproved because the applicant had given evidence of syphilis. A final influence to be considered in evaluating the efficacy of medical selection in government life insurance is the effect of the so-called "limited service" men on the program. These men, " Letter from W. F. Harrell, Col., A.G.D., W. D. Insurance Officer, to General Frank T . Hines, Administrator of Veterans' Affairs, January 9, 1943; lettere from General Hines to Major General James A. Ulio, W. D. Adjutant General, January 11 and 15, 1943. 20 November 4, 1943; December 22, 1943; and March 31, 1944. 21 Letter from General Frank T . Hines to Secretary of the Navv, April 14, 1944. 22 Memorandum from W. D. Insurance Officer to W. D. Adjutant General, 7 March 1945. Figures were secured from Veterans' Administration. No data for Navy personnel were available.

30

GOVERNMENT LIFE INSURANCE

numbering in the hundreds of thousands, had definite physical impairments but were inducted into the armed forces because of urgent manpower requirements. They would have found it very difficult, if not impossible, to secure insurance from commercial companies at standard rates, yet they were eligible for N.S.L.I. without an examination. Such a drastic lowering of standards could have only an adverse effect on the quality of insureds in the government insurance program. Very little can be said concerning the relative medical requirements of commercial and government insurance. T h e standards of commercial insurance vary from company to company and are subject to constant study and revision. The standards of government insurance have likewise been dynamic. There is a general impression that the medical requirements of the Veterans' Administration have tended to be more rigorous than those of commercial insurers. This impression is probably attributable to two factors. One is that most commercial companies have multiple standards of selection, while government insurance has only one. Different classes of risks are established in commercial insurance and the premiums are gradated in accordance with those classifications. Thus there may be superstandard, or preferred risks, who are eligible for a particular policy at a premium rate more favorable than the standard premium, and substandard risks who pay a rated up or higher premium for their insurance. T h e essence of such a system is that a more heterogeneous group of persons, from the selection standpoint, may be insured, differences in risk being compensated by adjustments in the premium. Government life insurance, on the other hand, has only one schedule of premiums, and an applicant must be accepted at that scale of premiums or rejected completely. No classification of risks is possible· Therefore, the medical standards must be stringent enough to eliminate that class of applicants who would be accepted by commercial insurers only at substandard rates. This gives the impression that government insurance standards are higher than those of commercial insurance in general. Actually it indicates only that they are higher than the standards at which subnormal risks are accepted by commercial insurers. Another factor is that the administrators of government insur-

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SI

ance have been slow to adapt their medical standards to the latest techniques and practices of the medical departments of commercial insurers. 23 T h e outstanding example of belated recognition of the changed status of certain impairments in the selection process is the modification of the medical standards of the Veterans' Administration with respect to syphilitic evidence and eye and ear impairments in the summer of 1944. Since a revision of the medical criteria of commercial insurance companies may result in higher standards rather than lower standards, and this seems to be the tendency, 24 the tardiness of the Veterans' Administration in adjusting its standards may produce a more lax standard. At any rate, evidence on the entire question is rather inconclusive, and no generalization on the relative strictness of the various standards can be made. In summarizing the influence of medical selection, it may be asserted that while evidentiary requirements of good health established by the Veterans' Administration are relatively strict, they have been applied in a limited number of cases and their results have been circumvented by legislative action and administrative decisions. Initial entry into the insured group is obtained through an examination administered by the service departments, and its quality, in many instances, is inferior to the examination required for commercial insurance. Evidence of good health is required only when the applicant fails to apply for insurance within 120 days after his entry into service or seeks to reinstate lapsed insurance subsequent to the period during which it can be accomplished without a medical examination. During the period from October 8, 1940 to March 28, 1946, only 9 per cent of the persons making application for insurance were required to undergo a special medical examination, and of that number only 1.6 per cent were rejected. Thus, only .14 per cent of all applicants for N.S.L.I, were rejected for medical reasons. Furthermore, many applicants who were rejected in their initial bid for insurance were granted a later opportunity to secure it without a medical examination, through a recon23 T h i s is merely one aspect of the general tendency of g o v e r n m e n t life insurance to lag behind commercial insurance in according recognition to new developments. Another concrete illustration of this tendency is the failure to eliminate f r o m new policies of U.S.G.L.I. the archaic disability clause provided by the W.R.I.A. 24 See Joseph B. Maclean, Life Insurance, 6th Ed., p . 232.

32

GOVERNMENT LIFE INSURANCE

sideration of their cases following a modification of physical standards, or by submitting an abbreviated form of examination consisting of certain statements of the applicant and a certificate of good health signed by a medical officer. T h e inevitable result has been that the medical examination prescribed by the Veterans' Administration, while it has evoked caustic criticism, has been a very unimportant factor in the overall selection process. 3 . O T H E R ASPECTS OF

SELECTION

There are other features of the selection process peculiar to government life insurance which deserve mention. One of the most significant is that no account is taken of the applicant's occupation. In commercial insurance, the occupation of the prospective insured can be the basis of a complete rejection or the assessment of an additional premium. This is particularly true if a disability clause is to be included in the contract. T h e occupation of an applicant for government life insurance during wartime may be extremely hazardous and not conducive to longevity. T h e degree of hazard associated with different branches of the service, the assignment within the service, and even the rank of the applicant may differ, but these differences are ignored in the process of selection as well as in determining premium rates. They must be disregarded for reasons of expediency, political and administrative. T h e moral hazard is largely ignored in the selection process of government life insurance. The personal habits of the applicant have an important bearing on the decision to accept or reject the application in commercial insurance. Because the bulk of the policyholders under a government plan qualify for insurance by passing a service medical examination which does not concern itself with the character of the individual, it is inevitable that the moral aspects be neglected. T h e hazard assumes very great importance when a total or permanent total disability clause is involved. Some protection against moral hazard is obtained by checking all applications for new insurance, disability coverage, or reinstatement against the file of persons receiving compensation for physical disabilities. Additional pro·

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33

tection is available in disability cases through the requirement that the claimant establish proof of disability both at time of application for benefits and at periodic intervals thereafter. It should be noted, however, that most government policyholders obtained their insurance at the younger ages, while most of the selection problems of the insurance companies are provided by applicants at the middle or older ages. A final difference between the selection practices of life insurance companies and those of the Veterans' Administration consists of the selection exercised by the agent. T h e commercial insurance company places a great deal of dependence on the judgment of the agent in the selection of risks. It instructs its agents as to the classes of risks which it is willing to accept and those it will not write under any circumstances. Obvious physical impairments, questionable habits, or unsatisfactory reputation are matters that come readily to the attention of the soliciting agent. The agent is especially useful in protecting the company against undesirable moral risks. T h e Veterans' Administration operates without an agency force and as a result loses the benefit of this screening by the agent. 4 . ADVERSE

SELECTION

There are definite elements of adverse selection in the process by which eligible persons secure government insurance. In the first place, coverage is optional for the individual. In any plan of insurance in which the prospective insured has the privilege of accepting or declining the coverage, selection against the insurer is likely to occur. Those persons who feel the need of insurance most keenly, and from the insurer's standpoint are the most undesirable risks, tend to be the ones who will take the insurance. Individuals who are active, in good health, and in no particular danger of untimely death, can usually be depended upon to decline insurance protection. This tendency is particularly important when, as in government insurance, no medical examination is required for the initial obtaining of insurance. It is to guard against this propensity that many commercial insurers who write group insurance insist upon 100 per

34

GOVERNMENT LIFE INSURANCE

cent coverage if the plan is non-contributory and 75 per cent coverage if the plan is contributory. This source of adverse selection would have been eliminated if a compulsory plan of government insurance had been established. Its influence may have been negligible (as is pointed out below), because a considerable degree of compulsion was applied in the execution of the plan, particularly in World War I, and a very high percentage of coverage was attained. Undoubtedly, the most significant factor contributing to adverse selection in government life insurance was the repeated extension of the period during which insurance could be obtained without medical examination. 25 This practice initially and primarily affected the mortality experience of the body of temporary insureds, but there were derivative effects on the permanent plans of insurance through the conversion privilege. There were no instances of this during World War I, but three extensions were granted during World War II. T h e first extension occurred on August 17, 1941,26 the occasion being the removal of the one-year time limit on military service authorized by the Selective Training and Service Act of 1940. The underlying thought was that many men who had failed to apply for insurance because they contemplated only one year's service would avail themselves of protection when facing extended military service. A moratorium of 120 days on medical examinations would facilitate the obtaining of insurance by those men who had been in the service more than 120 days. This moratorium expired on December 17, 1941, but, in the meantime, there occurred the Japanese attack on Pearl Harbor and the consequent declaration of war on Germany, Italy, and Japan by the United States. This epochal event was the motivating force for another 120-day extension, this time combined with the provision, mentioned above, granting the right to secure insurance after the expiration of the examination-free period by 20 T h e most potent influence on the mortality experience of the insured group was the granting of automatic insurance (frequently retroactive) to classes of military and naval personnel who had suffered casualties or were exposed to extraordinary hazards. 26 This extension pertained only to the Army, since the Navy and its related components were not affected by the Selective Training and Service Act of 1940.

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35

furnishing satisfactory evidence of good health. It was presumed that the imminence of combat would create a more compelling desire for insurance than military service alone had been able to generate. Congress obliged by removing all statutory obstacles to securing adequate insurance protection. T h e influx of casualty reports from the North African Campaign once more focused attention on the need for more complete insurance protection. Typical of the concern occasioned by them is the following excerpt from an official Army communication: "Twenty-five per cent on a recent casualty list showed no government life insurance at all. W h e n potential beneficiaries of these men all over the nation receive notice of denial of their life insurance claims, public morale will suffer and the Army can only explain some sons did not take insurance. T h i s explanation will not be convincing in view of the fact we have ample evidence that many of our officers are not acquainted with the provisions and merits of this insurance and therefore could not impart to troops generally the required facts to permit them to appreciate the need of this protection for dependents." 2 7 Rumors were rife concerning the lack of insurance coverage on the casualties. T h e Veterans' Administration attempted to allay the rumors by stating that a study of deceased veterans whose death occurred on or after May 1, 1942, revealed that nearly 86 per cent were insured for some amount. 2 8 Data were not available as to the size of the death benefit, but inasmuch as the average policy at that time was for an amount of $7,000, 2 9 it could be assumed that sizeable benefits were being received by the dependents of deceased military personnel. T h e W a r Department admitted that its Insurance Division had not been properly organized at the time of the December 20, 1941 extension and, consequently, had not been able to take full advantage of the extension. 3 0 A reorganization of the division had been effected, and the W a r Department urged that there be 17 Memorandum from W. D. Adjutant General's Office to Office, Chief of Staff, December 14, 1942. a Hearing on S. 877 and S. 903, Subcommittee of Senate Committee on Finance, 78th Cong., 1st Sess., March 26, 1943, p. 35. a / f c i d „ March 26, 1943, p. 38. » Ibid., March 25, 1943, pp. 7 and 36.

36

GOVERNMENT LIFE INSURANCE

granted one more period during which insurance could be obtained without a medical examination. Its plea was favorably received, and on April 12, 1943, another 120-day extension was granted. 81 During this period more than 2,700,000 applications for insurance were received by the Veterans' Administration aggregating approximately $22,500,000,000 of insurance. 82 This pyramiding of periods during which insurance could be obtained without a medical examination had remarkable effects. It gave any person who entered the service four months prior to August 18, 1941, a total of sixteen months during which he could secure insurance without a medical examination. Persons who entered later than that date had access to insurance without an examination for periods ranging from sixteen to four months. Not only that, it made possible the acquisition of insurance without a medical examination by individuals who had not had an examination for five years. In this group were included regular army personnel whose last prewar enlistment was extended to include the "duration of the emergency plus six months." Since the effects of a medical examination are generally conceived to wear off within five years, such persons were no better insurance risks than an applicant who had never been examined. Moreover, as pointed out above, it enabled every person whose application had been rejected for medical reasons prior to the extensions to reapply and secure insurance in spite of his impairment. This was a most powerful stimulus to adverse selection inasmuch as any person who is sufficiently insurance-conscious to submit to a medical examination to procure it could be expected to avail himself of the opportunity to acquire it without an examination. Therefore, a very high percentage of former rejectees probably obtained insurance in such periods. 83 Another way in which permanent insurance may be affected 81

57 Stat. L. 64 (1943); 38 U. S. C. 802 (d)(1). " A d m i n i s t r a t o r of Veterans' Affairs, Annual Report, 1943, p. 27; 1944, p. 309. T h e amount of insurance issued during the two preceding periods of examination-free insurance was negligible compared to the April 12-August 12 period. 85 T h e waiving of the complete medical examination for individuals in overseas theaters and on sea duty had similar, though less serious, effects on selection.

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37

by adverse selection is through the conversion privilege. 34 Both the W.R.I.A. and N.S.L.I.A. provided for the conversion of term insurance while in force into permanent forms without a medical examination. Thus, any individual who was able to secure term insurance was assured of the opportunity to obtain permanent insurance regardless of the state of his health. Those persons who were able to acquire protection in the first instance only through a relaxation of the standards of selection, such as designation of periods during which insurance could be obtained without a medical examination, are very likely to exercise the privilege of conversion. T h e conversion privilege is conducive to adverse selection in commercial insurance, and it is even more so under the peculiar conditions of government life insurance. T w o other factors indirectly promote adverse selection. One is the extremely high lapse ratio of temporary insurance. Available information indicates that about 90 per cent of the yearly renewable term insurance of World War I was lapsed, and the lapse ratio of N.S.L.I, seems to be comparable. Whether such mass lapsing improves or impairs the quality of the remaining insureds is a controversial question. There is considerable evidence that mass lapsing under ordinary circumstances at the younger ages improves the mortality, as the economic factor is paramount. At the older ages, where there are more physically impaired lives, the reverse is true. While the government term insurance policyholders were predominantly younger men, there was a substantial number of impaired lives in the group as a result of service-connected disabilities. T h e two forces may well have canceled out. If adverse selection was operative, it would affect the permanent plans of insurance through the deterioration of the group of insureds who had the right of conversion without a medical examination. T h e very liberal reinstatement provisions of N.S.L.I. could conceivably operate adversely to the interests of scientific selection. Present regulations provide that any level premium term insurance policy which has lapsed, regardless of the date of lapse, MThe conversion privilege has a dual influence on adverse selection. It not only operates as an independent influence on selection as is pointed out above, but it is also the medium through which all the other factors of adverse selection enumerated here influence the selection of the permanent forms of insurance.

38

GOVERNMENT LIFE INSURANCE

may be reinstated up to August 1, 1948, by the payment of two monthly premiums and evidence that the applicant is in as good health on the date of the application for reinstatement as he was on the due date of the premium in default. Any person who lapsed his government insurance, applied for commercial insurance, and was rejected or rated up for physical impairments, could reinstate his N.S.L.I. if his health had not deteriorated since the date of lapse. Its influence, likewise, would be exercised through its effect on the number and type of persons who have the privilege of conversion to permanent forms.

CHAPTER

III

METHOD OF DISTRIBUTION 1. DISTRIBUTION

a. Distribution

SYSTEM

Efforts of World War I.

It is axiomatic that commercial life insurance is sold and not bought; that is, a great deal of sales effort must be exerted to overcome the apathy of the average person toward insurance. This is no less true of government life insurance than it is of commercial insurance. It was realized by the framers of the original insurance act that the decision to issue contract rather than gratuitous or compulsory insurance would entail a tremendous task of distribution, but they felt that the psychological advantages to be gained thereby would outweigh any disadvantages. T h e only feasible method of accomplishing the task was to utilize the personnel and facilities of the Army and Navy, and they were accordingly designated the agents of the government for the writing of insurance.1 The coordinating agency was to be the Bureau of War Risk Insurance, which would issue regulations and directives for the guidance of the service departments and perform all administrative functions not connected with the actual writing of the insurance. T h e service departments were, of course, unprepared for such a novel function, involved as they were in the urgent task of training personnel for combat. The Bureau of War Risk Insurance rendered all the assistance possible and, shortly after the passage of the W.R.I.Α., initiated a three-weeks course of instruction in the fundamentals of the plan for the thirty-five officers and sixty-five enlisted men who were to spearhead the insurance drive. These men departed for overseas immediately after completion of the course and conducted the campaign for insurance 1 T h e Army and Navy were not agents of the government in the legal sense. See pp. 49-50. 39

40

G O V E R N M E N T LIFE I N S U R A N C E

among the American Expeditionary Forces in France. T h e following description of the methods used by this group of men, written by one of their number, not only tells a stirring tale of devotion to duty but provides an insight into the unorthodoxy of more than one phase of government life insurance. "From 5 o'clock in the morning until 9 o'clock at night field squads were at it. Speeches were made in the YMCA huts and at mess and everywhere that the men could be gotten together. After the speechmaking there was personal work. Every man was approached directly. If the proposition was not quite clear to him it was explained in detail; if his attitude remained indifferent all the ingenuity of the insurance squad was bent toward his conversion. They wrote insurance all the way from the farthest western training camp to the most easterly port of debarkation and the receiving port in France. They wrote insurance as near the front-line trenches as any non-combatant was permitted to go, and when they could proceed no farther they sent blank insurance applications into the front trenches on the very eve of battle. "In the Insurance Division of the Bureau of War Risk Insurance, locked up in a steel cabinet, is now treasured the original paper, grimy with the soil of the trenches, but bearing the names of boys who 'signed up' on it for insurance of varying amounts the night before they went out at daybreak into No Man's Land, some never to return. Across the names of these is written simply the word 'Dead.' But these applications collected by insurance officers who had gone into the trenches during a stiff German offensive, have been treated as the last will and testament of these soldiers and the beneficiaries mentioned are receiving government insurance upon as valid a contract as if it had been formally made and taken in triplicate as was the custom. "These insurance officers wrote insurance in hospitals, went into 'flu' wards and among the desperately wounded and wrote insurance for dying men; policies the validity of which was established by a ruling of the Secretary of the Treasury and on which payments are being made." 2 T h e ranks were combed for persons with an insurance background, but the scope of the undertaking and the haste with which it had to be executed necessitated the extensive use of personnel w h o were completely untrained in the theory and practice of insurance. In many cases compulsion was substituted for finesse. T h e r e was no organized attempt to train insurance personnel after the initial course supervised by the Bureau of 2 R. G. Cholmeley-Jones, "War Risk Insurance Bureau, T h e , " The pedia Americana (1936 edition). Vol. 28, p. 685.

Encyclo-

M E T H O D OF DISTRIBUTION

41

War Risk Insurance, 3 apparently because of the speed with which events were moving and preoccupation with the task of insuring the men who were overseas when the program got underway, which was considered the most critical aspect of the problem. b. The Interwar

Period.

T h e tempo of distribution activities was considerably lessened with the advent of peace. After the flurry of activity in the early 1920's in connection with the reinstatement and conversion of term insurance, the Army, Navy, and Veterans' Bureau settled down into a state of complacency with regard to insurance. T h e service departments informed their personnel that the insurance was available but made no active effort to sell it. Congress directed in the Appropriation Act of 1922 that no funds being made available to the Veterans' Bureau should be used to encourage the conversion of term insurance or the reinstatement of any type of government life insurance. The Veterans' Bureau interpreted this surprise provision as a mandate from Congress that it should not actively solicit insurance, even though its efforts should consist only of advising the veterans of their right to convert or reinstate their insurance. This sentiment permeated the Veterans' Bureau during the 'twenties and 'thirties and greatly restricted its insurance activities. Practically the only exception to this attitude of passivity on the part of the Veterans' Administration was the effort directed toward the graduates of the United States Military and Naval Academies. These newly commissioned officers, who presumably were to make the military their career, had only 120 days in which to apply for the insurance or forfeit their right to it; so intensive efforts were exerted to insure them. A representative of the Veterans' Administration customarily visited the Academies shortly before graduation and was usually successful in • T h e Navy established training schools for insurance officers at Princeton University and the University of Pennsylvania after the war had ended. (The first course started in February, 1919.) T h e purpose of the program was not to stimulate the sale of insurance in the first instance, b u t to promote the conversion of term insurance to permanent forms through a campaign of education directed at the men being returned to civilian life. The pressure for demobilization closed the school after only two classes (231 men) had completed the course, and the officers who had been trained were themselves demobilized shortly thereafter. (National Archives of the U. S., Navy Files No. 21417.)

42

GOVERNMENT LIFE INSURANCE

convincing the prospective officers of their need for insurance. They had strenuous competition from the Army and Navy Mutual Aid Societies,4 however, and commercial companies were not inactive. T h e distribution of government life insurance in the interwar period constitutes an excellent example of over-the-counter methods of distribution. If data as to the results were available, this period would afford an unusual opportunity to observe how successful over-the-counter methods could be when a really attractive form of insurance is available. This study to be most valuable would be concerned only with the amounts of insurance issued to those individuals who entered the military or naval forces for the first time during the period under consideration and thus were not exposed to the special pressure and exhortations of the war period. Unfortunately, the records of the Veterans' Administration do not indicate how much insurance was applied for by veterans of World War I and how much was taken by nonveterans, so that a survey of the efficacy of the distribution methods during the period is not warranted. c. Methods

Used During World War II.

T h e distribution of N.S.L.I. proceeded along the same general lines as that of government life insurance during World War I. T h e service departments continued to be the underwriting agents, and the Veterans' Administration, the successor of the Bureau of War Risk Insurance, was the administering agency. Different methods and techniques were used, however. Emphasis was placed on selling insurance to the men as they flowed into training camps and before they were sent to battle stations all over the world. T h e situation lent itself more readily to such a course of action than it had during World War I since the N.S.L.I.A. was enacted during peacetime and before American military and naval personnel had been scattered to the four corners of the earth. Efforts were concentrated on the group rather than on the individual; primary dependence was placed on lectures delivered to small groups of men, but these were 4 Frequently, representatives of the Veterans' Administration were refused permission to visit the Academies by their Superintendents until after the Army and Navy Mutual Aid Societies had had an opportunity to solicit the insurance.

M E T H O D OF DISTRIBUTION

43

supplemented by motion pictures, slide films, posters, and popularized insurance booklets. In some branches of the service the number of men failing to apply for the full amount of coverage was so small that insurance officers were able to analyze the personal objections of each man and convince many of them as to the advisability and advantages of full coverage. Λ much more thorough program of training for insurance personnel was established during World War II than in the previous World War. But neither the Army nor Navy initiated a training program until nearly two years after the enactment of the N.S.L.I.A. The difficulties arising from the use of untrained personnel eventually impelled the Navy to establish a training school for insurance officers in September, 1942.5 The graduates of the school were given a few days of orientation in the Insurance Division of the Veterans' Administration in order to impress upon them the interdependence of the Insurance Division and its agents in the field. T h e Army, because of its size and the fact that it was composed of three semiautonomous components, did not establish a central school for insurance instruction. Instead, training schools for officers were established and operated by each Service Command® after the insurance functions had been delegated to the Service Commands in the reorganization effected in November, 1942.7 T h e Air Forces maintained a separate school which was composed equally of officers and enlisted men. Students in these schools did not have the opportunity to observe the internal operations of the Veterans' Administration, but insurance officials of the latter organization visited the schools and lectured to the classes. A basic weakness of both the Army and Navy systems was the neglect of the training of the enlisted insurance representatives who were in most intimate contact with potential policyholders. Most of the insurance schools trained only officers. Some enlisted men received superficial training in insurance in service schools, but the emphasis was usually on the clerical or administrative aspects of the subject. : U. S. Navy, Benefits and insurance Officers' Newsletter, August, 1945, p. 6. ' Service Commands were the highest subordinate echelons of the Army Service Forces, one of the three m a j o r components of the Army. ; S e e W. D. Circular 368, 9 November 1942. T h e insurance program h a d been languishing before the publication of this circular.

44

GOVERNMENT LIFE INSURANCE

d. Results of Distribution

Methods.

It has been noted that somewhat different methods were employed in the distribution of the insurance during World War II than during World War I, but that the same general approach was used. It may be of interest, therefore, to compare the effectiveness of the two distribution campaigns in terms of the percentage of persons covered and the average size of the policies issued. It has been estimated that 87 per cent of all persons in the armed forces during World War I applied for insurance; of these, 80 per cent carried the maximum of $10,000. The average amount of insurance per policy was approximately $8,700. On the other hand, about 95 per cent of the almost 16,000,000 persons who entered the armed services during World War II applied for insurance, the average size of the policies being approximately $7,800. Inasmuch as the records of the Veterans' Administration indicate that there are about 15 per cent more policies of N.S.L.I. than there are policyholders, however, it would appear that the average amount of insurance per insured person during World War I I was about $8,970. This disparity between policies and policyholders was not present to the same extent during the first war because of the comparatively short period (120 days in most cases) during which the serviceman had an opportunity to apply for insurance. It is apparent that distribution efforts were somewhat more successful in World War II, but remarkable records were achieved in both wars. 2. ADMINISTRATIVE PROCEDURE

a. Processing

of

Application.

The administrative procedure for writing the insurance was essentially the same in both wars and in all branches of the service. Applications were usually prepared by representatives of the insurance office of the military unit involved and forwarded to the Bureau of War Risk Insurance or Veterans' Administration, as the case might be. If the applicant required a medical examination, it was administered by medical officers of the service departments.

M E T H O D OF DISTRIBUTION

45

Applications for insurance are normally executed on the forms prescribed by the Veterans' Administration. However, any statement in writing sufficient to identify the applicant and the amount and plan of insurance, accompanied by a remittance for the first monthly premium, is acceptable as an application. In fact, at one time it was intended to make oral applications valid. War Risk Regulation No. 50, March 19, Ί920, provided that "an oral application for insurance shall be deemed valid when it is definitely and unequivocally established that such oral application was in fact made to a person competent to receive it and where it further appears that the failure to make application in writing was due to exigencies of the military service or to other special and unusual circumstances not within the control of the applicant." The utter impracticability of such a provision quickly became evident, and the regulation authorizing it was rescinded, as of its original date, fifteen days later. 8 Further evidence of the flexibility of the application procedure is the use of radio facilities for the transmission of applications. This method was first used when members of the Byrd Antarctic Expedition were authorized to make application for insurance by radio from November, 1940, to February, 1941.® Only the name of the applicant, amount of insurance, and beneficiary designation were included, evidence of medical acceptability and allotment authorizations being forwarded at a later date. This plan operated successfully and proved a valuable precedent for those persons who were beleaguered or isolated shortly after the Japanese attack on Pearl Harbor. The most spectacular use of this method was the transmission of about 25,000 applications by radio from American forces isolated in the Philippine Islands after the Japanese invasion. 10 8

War Risk Regulation No. 50-A, April 3, 1920. U. S. Navy, Benefits and Insurance Officers' Newsletter, August, 1945, p. 8. Address delivered by H. L. McCoy, Director of Insurance, Veterans" Administration, before the American Bar Association, August 24, 1943. About a year later the original applications signed by the members of the American forces were received by the Veterans' Administration. T h e officer to whom these records were entrusted, Colonel R. G. Jenks, managed to carry them with him by submarine to Australia and later brought them to the War Department in Washington. His efforts were partially nullified when, in the meantime, automatic insurance of $5,000 was granted to each member of the beleaguered American forces. 9

10

46

GOVERNMENT L I F E INSURANCE

b. Payment

of

Premiums.

T h e premium could be paid by direct remittance or by a system of payroll deduction.11 T h e latter system took the form of a straight payroll deduction plan or a more streamlined version known as the allotment system. T h e straight payroll deduction plan was used by the Army during World War I and until July, 1942, in World War II. In accordance with this system the applicant made a formal request that his insurance premiums be paid by deduction from his service pay, after which the deduction was entered on the payroll each month. T h e finance officer of the War Department then prepared from organizational payrolls a consolidated schedule of deductions, which was delivered to the Veterans' Administration along with payment for the total amount of premiums. Premiums were not paid to the Veterans' Administration until the amounts of such premiums were found as deductions on payrolls. Since a considerable time elapsed before the payrolls were received by the War Department and transcribed, long delays ensued before the Veterans' Administration received its money. T o protect the insurance fund against loss of interest, the War Department agreed to make advance payments to the Veterans' Administration each month in an amount estimated to represent the premiums due that month. Adjustments were then made when actual payroll deductions became known. T h e Navy, on the other hand, has used the allotment system since the inception of the government insurance program. The applicant for insurance at the time of his application completes an authorization for deduction of the premium from his service pay, which is forwarded to the finance officer of the Navy Department. This authorization for allotment is considered a lien upon service pay and a power of attorney for the payment of premiums to the Veterans' Administration. Armed with this authority, the finance officer makes payment of premiums to the Veterans' Administration each month without awaiting receipt of payrolls to indicate that the premiums have actually been deducted from service pay. There is no lag in the receipt of premiums by the 11 T h e payroll deduction plan has been adapted to peacetime needs, as some employers pay the government insurance premiums by deduction from payroll.

M E T H O D OF D I S T R I B U T I O N

47

Veterans' Administration and there are no complicated adjustments to be made. T h e War Department finally yielded to the pressure from the Veterans' Administration and installed the allotment system, effective July 1, 1942. 3 . L E G A L ASPECTS

a. Effective Date of

Insurance.

The question of the effective date of the insurance is of sufficient importance to warrant consideration. Whenever the first premium is paid by direct remittance, the insurance becomes effective on the date specified in the application. T h e date specified is usually the first day of the month in which application is made or the first day of the month following the month in which application for insurance is made. It is permissible, however, to designate the first day of any month subsequent to entrance on active duty, provided there is paid an amount equal to the full reserve of the policy at the end of the month preceding the month in which application is made. This privilege, which is extended to those persons desiring to take advantage of the premium rate of a younger age, was limited to a period of six months prior to the month of application for U.S.G.L.I., but the only limit originally imposed on N.S.L.I, was that it could not be made effective at a date earlier than entry on active duty. Later the same six months limitation that was applicable to U.S.G.L.I, was prescribed for N.S.L.I. by a revision of regulations. The effective date of the insurance cannot be later than the first day of the month following the date of application. When the allotment method is used, the insurance becomes effective the first day of the month following the month in which application is made and the allotment executed, provided the premium is deducted from the applicant's service pay in accordance with the allotment. T h e foregoing qualification is extremely important in that it conditions the validity of the insurance upon the proper functioning of the administrative procedures of the service departments. It was modified by statute, however, during World War II. The Army's payroll deduction system, as described above, was so defective in the early days of World War II that an amendment to the N.S.L.I.A., approved September 30, 1944,

48

GOVERNMENT LIFE INSURANCE

provided that payment of insurance benefits should not be denied in any case in which the applicant died prior to July 1, 1942, if the failure to pay premiums or to effect deductions of service pay could in any way be attributed to the inadequacy of the service departments' procedure for authorizing deductions of premiums from service pay.12 More troublesome, however, was the fact that the insurance did not become effective until the first day of the month following the date of application. There was thus an interval, which could be as long as a month, during which the applicant had no insurance protection. This could be avoided by the applicant's paying the first premium by cash or direct remittance, subsequent premiums being paid by allotment of pay, but this presented a financial problem to many persons. Besides, the payment of cash involved a psychological barrier not present in the relatively painless allotment method. T h e service departments recommended that all applications for insurance be made effective as of the date of the application, the premium for the interim between the effective date of the application and the first day of the following month to be borne by the government, as with dependency benefits. The Veterans' Administration opposed this plan and recommended to Congress legislation which would provide that the first premium due under N.S.L.I. policies could be advanced from current appropriations for service pay, the amount to constitute a lien upon any future service pay. Congress approved the legislation, and it became law on February 11, 1942.13 No advance of service pay for the initial premium was made unless the applicant specifically requested that the insurance be made effective as of the date of the application, and many persons failed to take advantage of the provision, either through ignorance or through willingness to take a chance on surviving to the first of the following month. Thus the stage was set for Congress to enact the ultimate in liberalizing provisions when it provided in the Insurance Act of 1946 that, notwithstanding the provisions of any other section of the N.S.L.I.A., in any case in which applicas s e Stat. L. 764 (1944); 38 U. S. C. 802 (s). " 56 Sut. L. 88 (1943); 38 U. S. C. 802 (m)(l).

M E T H O D OF D I S T R I B U T I O N

49

tion was made for N.S.L.I. to become effective subsequent to the date of the application and the applicant died in line of duty prior to such date, the insurance would be paid as if it had been in force on the date of death of the applicant. 14 This provision is also a good example of the detail with which Congress will legislate in a public law, since it was estimated that not more than 400 cases were involved.16 b. Agency

Relationship.

The question arises as to the relationship created when the service departments assume the responsibility of effecting premium payments of service personnel by deduction from payroll. The issue assumes importance when the service departments fail to make the proper deductions, with a resultant lapse of the insurance. Most of the litigation on this score has developed in those cases where the insured has died after his insurance lapsed through the alleged negligence of the service departments. T h e Veterans' Administration has consistently maintained that the service departments are the agents of the insured, and its insurance regulations specify that an allotment will be effective only if the premium is actually deducted in accordance with the allotment. Notwithstanding, the doctrine had been rather firmly established through litigation that the insurance will not be invalidated by failure of the service departments to deduct the premium as authorized, if no fault existed on the part of the insured. The decisions, therefore, have revolved around the question of what constitutes fault on the part of the insured. In an early case, the Comptroller General ruled that, if an enlisted man accepted his monthly pay without deduction of the allotment for the payment of insurance premiums, such acceptance was not sufficient to establish a presumption of breach or revocation of the allotment. 18 Two years later, however, the same authority ruled that a person in the service who accepts his pay with knowledge, actual or presumptive, that the amount of the premium has not been deducted is in no better position than a person outside the government service who fails to forward his u 15 16

Public Law 589, 79th Cong., 2nd Sess., August 1, 1946. Senate Report # 1 7 0 5 , 79th Cong., 1st Sess., July 12, 1946, p. 6. Skomski, Anthony Alfred, 3 Comp. Gen. 202, October 10, 1923.

50

GOVERNMENT LIFE INSURANCE

insurance premiums when due. 17 This seems to have been the rule applied since that time. These decisions, it may be observed, did not declare the service departments to be the agent of the insured, although they pointed in that direction. T h e doctrine which evolved was much more favorable to the insured. Nevertheless, as pointed out earlier, Congress legislated on the subject in World War II and afforded even greater protection to the policyholders. The law of agency has been strictly enforced, however, against those policyholders who, after their return to civilian life, permit their premiums to be paid by their employers by deduction from payroll. The employer in such cases is clearly the agent of the insured. 17 4 Comp. Gen. 691, February 14, 1925; 5 Comp. Gen. 208, September 19, 1925.

CHAPTER

IV

AMOUNT AND PLANS OF INSURANCE 1. A M O U N T O F

INSURANCE

AVAILABLE

Government life insurance furnishes protection against the three major personal hazards to which an individual is exposed during the course of his lifetime: death, disability, and old age. T h e amount of protection is not unlimited, however, and all three types of protection are not available in all policy forms. T h e amount of government insurance which an eligible person may carry at any one time is $10,000. This limit was imposed by the W.R.I.A. and was based on rather sound reasoning. Some limitation was clearly desirable since the insurance was intended to be a partial subsidy, and, in the absence of a limit, affluent, calculating individuals were likely to avail themselves of it to an inordinate degree. This bounty of the government, in that case, would not be distributed equitably but according to the economic circumstances and sagacity of the individual. T h e selection of $10,000 as the maximum seems to have been dictated, on the one hand, by the amount of service pay that would be available for premiums and, on the other, by the minimum income that was deemed necessary to maintain the dependents of deceased military and naval personnel on a standard of decency. In determining the latter, the compensation which would be payable to the dependents of personnel whose death was service-connected was an important consideration, since it would supplement the insurance proceeds. 1 The N.S.L.I.A. contained the same maximum of $10,000, fol1

T h e W.R.I.A. authorized payments to unmarried widows of $25 a month, with allowances for children up to a maximum of $32.50 a month. This has been raised repeatedly until at the present time an unmarried widow receives $60 a month, with an allowance of $18 per child up to a maximum of $60. Similar gratuities are payable to dependent parents and to children whose mother is no longer alive. 51

52

GOVERNMENT L I F E INSURANCE

lowing the precedent of the W.R.I.A. Moreover, individuals who were eligible for both types of insurance were expressly denied the privilege of carrying the maximum of each. Ten thousand dollars was declared to be the maximum amount of government insurance available to any one person at any given time. It should be noted that the maximum amount of government insurance available to eligible insureds has been stated in terms of the amount permitted at any given time. This qualifying phrase is necessary since there is one circumstance, becoming increasingly more frequent, in which a person may secure more than $10,000 of government insurance. This situation arises at the maturity of an U.S.G.L.I. endowment policy on the life of a veteran of World War I. Whenever an endowment policy of any person who served in the armed forces of the United States within the period from October 6, 1917, to July 2, 1921, matures, that person is permitted to secure an additional $10,000 of insurance on any plan, if he can pass a medical examination. This is an unforeseen result of the Act of May 29, 1928. The practice on the part of the insureds of applying for additional insurance upon maturity of endowment policies has become so prevalent that the form letter which is used to notify policyholders of the approaching maturity of their endowment policies informs them of their right to apply for additional insurance.2 This situation may well arise in the case of N.S.L.I, since it may now be secured by veterans of World War II at any time. There is no question that the proceeds from the maximum amount of insurance, when combined with compensation payable as a result of service connected deaths, provides sufficient income to sustain the dependents in the majority of cases.3 T o 2 This practice, interestingly enough, arose out o£ the dismay occasioned by the maturing of endowment policies on the lives of veterans who had selected the endowment forms without realizing the nature of the protection afforded by them. Such large numbers of holders of matured endowments requested the Veterans' Administration to continue their insurance protection that the latter decided to publicize the provisions of the Act of May 29, 1928, in order to alleviate the situation as much as possible. Even more protests have been received from the holders of 20-payment life policies who were incensed that they did not receive the face value of the policy at the end of the premium-paying period. •See Tables 5, 6, and 7 on pp. 74-75 and Tables 11, 12, and 13 on pp. 82-83.

A M O U N T AND PLANS OF INSURANCE

53

this extent the primary short-run purpose of the insurance has been accomplished. But this volume is primarily concerned with permanent forms of insurance, as evidenced by converted U.S.G.L.I. and N.S.L.I., and only a minority of the deaths of these policyholders are attributable to the hazards of the service.4 Therefore, in most cases the insurance proceeds must bear the burden alone, and it is obvious that with the present level of prices, or even one considerably lower, they are grossly inadequate. T h e same criticism can be made of the disability income benefits and the proceeds from endowments. T h e conclusion must be that government life insurance does not afford complete protection because it is not available in sufficient quantity fully to protect the individual and his dependents. 2. PLANS O F INSURANCE

a. United

States

Government

Life

PERMITTED

Insurance.

The three major types of protection mentioned above have been embodied in a variety of policy forms. T h e W.R.I.A. directed that during the War only one-year renewable term insurance should be made available to military and naval personnel. It provided, however, that not later than five years after the date of the termination of the war, the term insurance should be converted without medical examination into such form or forms as might be prescribed by the administrator of insurance. Early in 1919, the administrator set forth the conditions which would govern conversions and designated the following policy forms as being eligible for issue: ordinary life, twenty-payment life, thirty-payment life, twenty-year endowment, thirty-year endowment, and endowment at age 62.5 T h e maturity date of the latter was designed to coincide with the Army and Navy retirement age. These forms became known and are referred to in official correspondence as the "six standard policies." Five-Year Term Policy: This terminology denies recognition to another type policy which has been just as permanent, but which has been the object of official disapprobation, the five-year 4 T h e annual percentages of death and disability cases traced to the hazards of service are shown in Table 32, p. 186. 4 Treasury Decision No. 42 W. R., March 18, 1919; superseded by Treasury Decision No. 42-A. W. R„ April 30, 1920.

54

GOVERNMENT LIFE INSURANCE

convertible term policy and its successor, the five-year level premium term policy.· T h e evolution of this policy will be discussed at length not because the policy itself is so important, but because its development illustrates so forcefully the pressure to which the insurance program is subjected, primarily from veterans' organizations, and because it affords an insight into the nature of the government insurance program. As pointed out above, the original act provided that all term insurance would have to be converted within five years after the official termination of the war or not at all. Since the war was officially declared to be at an end on July 2, 1921, this automatically set the deadline on conversions as July 2, 1926. T h a t date was given statutory confirmation when the World War Veterans' Act of 1924 stipulated that all term insurance must be converted by July 2, 1926. An exception was made in the case of an insured who had been adjudged totally and permanently disabled and who had subsequently recovered after the termination of the period during which conversion could be accomplished. He was given two years from date of recovery in which to convert.7 Conversion proceeded slowly, however, and only one month before the deadline there were still in existence approximately 130,000 yearly renewable term policies aggregating one billion dollars of insurance. 8 It was believed that the principal obstacle to conversions was the veteran's belief that he could not afford the premium on the permanent forms of insurance that were available at that time. It was felt that if a less expensive form of permanent insurance were available, more term policies would be converted. Accordingly, the Veterans' Bureau urged Congress to authorize the issue of a five-year level premium term policy and to extend for one year the period during which yearly renewable term insurance could be converted in order to make possible a campaign for conversion to the new type of policy. These recommendations were embodied in legislation approved June 2, 1926.» 8 T h e original five-year term policy was designated the "five-year convertible term policy." Policies which were originally issued in the second and succeeding five-year periods were designated "five-year level premium term policies." * 43 Stat. L. 624 (1924). 8 Veterans' Bureau, Annual Report, 1926, p. 56. 8 44 Stat. L. 686 (1926).

A M O U N T AND PLANS OF INSURANCE

55

T h e five-year term policy which was authorized by the Act of J u n e 2, 1926, was designated the "five-year convertible term policy" as it could be converted at any time during the five-year term into any of the six permanent forms. If it had not been converted by the expiration of the term, it was to be automatically converted into ordinary life. T e r m policies which were converted into ordinary life were thereafter known as "Whole Life" policies rather than ordinary life. This strategy was only partially successful. A large number of conversions was brought about, 1 0 which, of course, was the object of the legislation, but the Veterans' Administration has been unable to terminate the policy at its normal expiration date. In 1932, when the first of the five-year convertible term policies began to expire, it was contended that the personal affairs of many veterans were still too unsettled to permit conversion; so legislation was enacted which permitted these policies to be renewed without medical examination at their present age for another five-year period. 11 In 1937, the issue again came up. At the initiative of the veterans' organizations, legislation was introduced to provide for a third five-year period. T h e Veterans' Administration opposed it strongly, and when the bill was approved by Congress, induced the President to veto it. In his veto message the President stated: "Enactment of this proposed legislation would constitute a breach of faith on the part of the Federal Government toward the large body of converted policyholders contributing to the Government life insurance fund, and on two counts: (1) the small group of term insurance policyholders would continue to carry their life insurance at considerably lower premium rates than the great majority of converted policyholders are allowed; and (2) the reserves which have been built up almost entirely by the converted policyholders would continue to be drawn off to meet undue losses sustained in carrying the lowpremium term policies. "It should be kept firmly in mind that the veterans of the World War expected that the Federal Government, in setting a limiting date for the conversion of term insurance into some permanent form of life insurance, would stand by its declaration. Consequendy at the close of the five-year period allowed to veterans within which to convert their 10 25,000 yearly renewable term policies h a d been converted to the new type policy by July 2, 1927, a n d several thousand additional applications for conversion received prior to t h a t date were approved later in t h e year. Veterans' Bureau, Annual Report, 1927, p. 42. See also p p . 263 a n d 264 of this volume. 11 47 Stat. L. 334 (1932) ; 38 U. S. C. 512.

56

G O V E R N M E N T LIFE I N S U R A N C E

term insurance, 423,557 had converted to some permanent form of insurance in a total sum of $1,773,075,664. In many cases, veterans made considerable sacrifices, either reducing the amount of insurance carried or paying the increased premiums required to maintain the original temporary war insurance on a permanent lifetime basis. W h e n legislation was subsequently enacted and re-enacted, permitting a relatively small preferred group who had not seen fit to make the same sacrifices as the converted policyholders have made, to extend their temporary insurance at the war-time low premium rates, an unwarrantable disservice was rendered to the several hundred thousand who had placed their insurance on a permanent basis. "Of the present policyholders, over 85 per cent have converted their insurance to whole life or endowment forms, while the reserve which the converted policyholders have been chiefly instrumental in creating is being used to supplement the inadequate premiums paid by term insurance policyholders in order to pay the extra losses on the policies of the latter group. It is pertinent here to observe that at no time has the loss ratio on term policies been down to the level of the American Experience Table of Mortality according to which the premiums are computed, the most favorable year showing a loss ratio of 3.89 per cent above that table and in one year it went as high as 53.52 per cent. In other words, the loss ratios on term policies range from 45 per cent to over 100 per cent higher than those on the converted forms. "There appears to be no justification whatever for continuing to burden the converted policyholders with the excess losses of the term insurance policyholders who, under the present law, without physical examination, are privileged to convert their policies to whole life or endowment forms. It, therefore, should be obvious that the remaining less than 15 per cent of the policyholders who continue to carry term insurance should now make provisions for the future by determining the amount which they can afford to pay as insurance premiums and plan accordingly." 12 Both the H o u s e a n d Senate voted overwhelmingly to override the President's veto, and the bill became law. T h e approach of July, 1942 saw the veterans' organizations again agitating for the privilege of renewal. Realizing the futility of opposing the movement, a n d d e e m i n g it undesirable to request the President to place himself in position for another rebuff from Congress, the Veterans' Administration accepted the extension without a fight. Five years later a fourth renewal was authorized, 1 3 likewise w i t h practically n o opposition. "Presidential Veto Message on H. R. 5478, May 28, 1937. " Public Law 34, 80th Cong., 1st Sess., April 15, 1947. Some 10,000 policyholders were immediately affected by this latest renewal.

AMOUNT AND PLANS OF INSURANCE

57

This series of extensions was particularly objectionable because they were made applicable to anyone who had taken out a five-year term policy at any time rather than being restricted to the original group of World War I veterans for whom the policy was originally designed. Thus a person who entered the armed services as late as 1940 and applied for a five-year convertible term policy, as was his privilege, will be able to renew the policy quinquennially until 1965. This is a gross perversion of the original purpose of the policy and could have been prevented if either the policy itself had been restricted to veterans of World War I or the privilege of renewal had been limited to that group. This renewable feature of the five-year level premium term policy has created an inequity far more serious than the failure of the policy to bear its full share of mortality costs. It arises from the fact that many, if not most, of the term policyholders will be able to mature their insurance by a permanent and total disability claim without ever having converted to one of the more expensive standard forms. This is made possible by the absence of an age limitation in the permanent and total disability clause of U.S.G.L.I, policies. With the approval of a fourth renewal, any person who availed himself of a five-year term policy at age forty or any age thereafter will stand a good chance of proving permanent and total disability by the end of the fifth five-year period. In that case, he will have secured his insurance protection at a total cost of only $340 per $l,000. u If he had taken an ordinary life policy at age forty, his insurance would have cost him $593.50 per $1,000, while a twentypayment life would have required $619. T h e Veterans' Administration fully expects such possibilities to materialize. Premium Rates: The premium rates for the policies available under the U.S.G.L.I, program are shown for selected ages in Table 2. b. National

Service Life

Insurance.

T h e National Service Life Insurance Act of 1940 provided that the insurance made available therein would be issued originally only on the five-year level premium term plan. After the term 14

Dividends have been ignored in the illustration.

58

G O V E R N M E N T LIFE INSURANCE

insurance had been in force for one year, and within the fiveyear term period, it could be converted to the ordinary life, twenty-payment life, or thirty-payment life plan. Hence, there was a break with the tradition of the War Risk Insurance Act in two respects. Five-year term insurance was provided rather than one-year renewable term, and conversions were authorized during the war, the governing conditions being incorporated in the original act. T h e substitution of a five-year level premium TABLE 2 ANNUAL PREMIUM

R A T E S PER $ 1 , 0 0 0 O F U N I T E D STATES G O V E R N M E N T I N S U R A N C E AT S E L E C T E D A C E S O F ISSUE

Type of Policy

5-Yr. Convertible Term Ordinary Life 30-Payment Life 20-Payment Life Endowment at Age 62 30-Year Endowment 20-Year Endowment

LIFE

Age 20

25

30

35

40

45

7.68 13.58 16.59 20.79 17.01 24.33 39.10

7.91 15.24 18.07 22.56 19.85 24.69 39.34

8.39 17.36 19.96 24.81 23.74 25.40 39.69

8.98 20.08 22.44 27.52 29.30 26.46 40.28

9.92 23.74 25.63 30.95 37.56 28.47 41.46

11.69 28.71 30.00 35.32 50.91 31.66 43.47

50

55

60~

15.00 20.79 30.60 35.56 45.13 58.36 36.38 45.36 58.47 41.34 49.50 61.31 75.72 135.26 487.63 37.09 45.60 58.47 47.02 53.04 63.08

Source: Veterans' Administration, Premium Rates and Policy United States Government Life Insurance (VA pamphlet 9-2).

Values for

term policy for the yearly renewable term policy was particularly important, since the administrative burden imposed by the renewal of millions of policies at a higher premium rate was thereby avoided. These improvements over the W.R.I.A. were made possible by the fact that the framers of the N.S.L.I.A. had the experience of U.S.G.L.I from which to draw, and they were able to produce a much more complete and carefully contrived piece of legislation than did their predecessors. It was contemplated that a five-year term policy would be sufficient to cover the period of the emergency. The conflict dragged on so long, however, that it became obvious that a longer period would have to be substituted. One solution would have been to declare the policies renewable and permit their renewal for another five-year period. This would have necessitated new applications, recalculation of premiums for all policyholders to reflect their attained age, execution of new authorizations for

A M O U N T AND PLANS OF INSURANCE

59

allotment, and, in general, an impossible amount of administrative work. Another solution would have been to extend the term but authorize the service departments to pay the higher premiums that would be required. No action would be required of the policyholders. Both of these possibilities were rejected, and all policies which were issued on or before December 31, 1945, were declared to be eight-year level premium term insurance with no provision for adjustment in the premium. T h e small deficiency in premiums which resulted was absorbed by the National Service Life Insurance Fund, and adjustments will be made through the dividend formula. The National Service Life Insurance Act has been the subject of considerable criticism from various veterans' organizations. This is attributable to the fact that the act was put on the statute books by means of a parliamentary maneuver which prevented the veterans' organizations from expressing their views on it. T h e preliminary drafting of the act was begun only shortly before the enactment of the Selective Training and Service Act of September 16, 1940, and it was completed a month later. T h e officials of the Veterans' Administration, desirous of getting the legislation approved before the first selectees reported to training camps, and fearful that it would be delayed in committee hearings if it went through normal channels, succeeded in having it tacked on to the Second Revenue Act of 1940 as Title VI, which was approved shortly thereafter. Thus, no interested parties had any opportunity to express their views on the proposed legislation. The veterans' organizations have fought consistently to have inserted into the National Service Life Insurance Act the most favorable provisions of United States Government Life Insurance; they contend that the veterans of World War II are being discriminated against because there is not available to them the same insurance protection that was extended to veterans of World War I. At one point, they even had introduced into Congress a bill which would have rescinded completely the N.S.L.I.A. and substituted the War Risk Insurance Act as it existed in its amended form. 16 They have long urged that more types of policies 11 Hearings on S. 263, Subcommittee, Senate Committee on Finance, 78th Cong., 1st Sess., June 7, 1943, pp. 9-16.

60

GOVERNMENT LIFE INSURANCE

be provided into which term insurance could be converted. I n the general revision of N.S.L.I. which was accomplished by the Insurance Act of 1946, their aims in that respect were achieved, since twenty-year endowment, endowment at age 60, and endowment at age 65 were added to the other forms of insurance into which term policies could be converted. They unsuccessfully urged that the five-year level premium term policies be made renewable to conform to the special five-year term policy made available in 1926, which was discussed above. T h e premium rates for these policies are shown in Table 3. It will be observed that they are higher than those established for comparable U.S.G.L.I. policies. This is due solely to the fact that U.S.G.L.I. premiums are computed on the basis of 3]/2 per cent interest, while N.S.L.I. premiums are on the basis of 3 per cent interest, since both are^net] premiums calculated on the basis of the American Experience Table of Mortality. TABLE S A N N U A L P R E M I U M R A T E S PER $ 1 , 0 0 0 O F CONVERTED N A T I O N A L L I T E INSURANCE AT SELECTED A C E S O F ISSUE

Type of Policy

Ordinary Life 30-Payment Life 20-Payment Life Endowment at Age 65 Endowment at Age 60 20-Year Endowment

SERVICE

Age 20

25

30

35

40

45

50

55

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