423. Reinsurance. A small company accepting a large single risk may feel it is too large to carry. In that case the company will reinsure all or part of the risk in a larger company. Reinsurance is usually effected at a lower rate than original insurance because it is less expensive to the company than original insurance.

In this manner the smaller local companies become in a measure field agents for the larger companies.

424. Replacing Lost Property.

Insurance companies usually reserve to themselves the option of replacing the lost property, reserving a reasonable amount of time in which to do this.

425. The Arithmetic of Fire Insurance. - There are three elements involved in problems on insurance, viz. the amount insured, the rate, and the premium. The amount is the base in percentage, the rate of insurance is the rate, and the premium is the percentage.

The rate is fixed by the company according to the probability of loss as determined by the collective experience of all insurance companies. When the amount of insurance and the rate are known, the finding of the premium is the simplest case in percentage.

Example 1. Household goods valued at $5000 are insured at the rate of 50¢ per $100. What is the premium for a three-year period? Solution. The premium for one year is $25.

Premium for 3 years = 2 × $25 = $62.50.

Example 2. An office building valued at $175,000 is insured under the average clause for $140,000. A fire damages the building to the extent of $12,000. What is the amount of insurance paid?

Solution. The ratio of the total insurance to the value of the building is

Example 3. Find the cost of insuring a stock of merchandise for $45,000 for 90 days, the annual rate being 11%.

Solution.

=

=

1% of $45000

=

$506.25.

Premium for one year
Premium for 90 days 40% of annual premium (§ 416).
Hence the required premium is 40% of $506.25 $202.50.

=

Example 4. A building valued at $240,000 is insured under the average clause as follows: Company A, $60,000; company B, $45,000; Company C, $100,000. The building is damaged by fire to the extent of $145,000. How much must each company pay?

Solution. The total insurance is $205,000.

Example 5. A factory building valued at $48,000 is insured for three years, the annual rate being 65¢ per $100. For how much must the building be insured to cover both building and premium in case of total loss?

Solution. The rate per $100 for 3 years is $1.625 (see § 416).
Net insurance for each $1.00 = 1.01625.98375.

Hence 48000 ÷ .98375 = $48792.88.

The amount of the policy could therefore conveniently be made $48,800.

PROBLEMS

1. A man owned of a shop and insured of his interest at 14%, paying $112.50 premium. What was the value of his interest in the shop? If the shop was damaged to the extent of $4000, what did he receive from the insurance company?

2. A mill worth $30,000 was insured for an annual premium of 13% on 90% of its value. In the second year it was injured by fire to the amount of $1175. How much did the mill owner save by insuring?

3. The premium on a building, of which is insured at 14%, is $25.50. What is the value of the building?

4. Find the cost of insuring a grain elevator for $12,000 for 3 months if the annual rate is %.

5. A house valued at $4500 was insured for of its value for 1 year at 60¢ per $100. At the end of 7 mo. the house was sold and the policy was canceled by the insured; how much should be returned?

6. Find the cost of insuring stored wheat valued at $310,000 for 3 months at 80¢ per $100 per annum.

7. Find the cost of insuring a factory for $10,000 for 5 years if the annual premium is 3%.

8. A manufacturing plant valued at $20,000 is insured for $12,000 at 1% per annum. A fire causes a damage of $8000. damage of $8000. What amount would be paid by the insurance company (a) under an ordinary policy; (b) under an average clause policy?

9. For what sum must I get my shop insured at 3% to cover a loss of $7330 together with the premium?

10. A factory valued at $9000 has been insured for $5000 at 11%, $6 being charged for the policy and examination of the premises. If it should be destroyed by fire, what loss would the house suffer?

DRILL IN FUNDAMENTALS

Find the rates of income on the investments given below and check. Find each rate to the nearest hundredth of one per cent.

CHAPTER XXXI

LIFE INSURANCE

426. Kinds of Personal Insurance. There are several kinds of personal insurance, such as life insurance, health insurance, accident insurance, etc.

427. Life Insurance. A life insurance policy is a contract whereby a company agrees, on consideration of a premium, to pay a certain sum at a certain time or on the death of the person insured.

428. Health Insurance. - A health insurance policy is a contract whereby a company agrees to pay a specified amount each week during any illness of the person insured.

429. Accident Insurance. An accident insurance policy is a contract whereby a company agrees to pay a specified sum in case the insured meets with an accident which kills him or incapacitates him permanently or for a limited period.

An ordinary accident policy excepts accidents due to a variety of causes, such as extra hazardous occupations or carelessness.

430. Kinds of Life Insurance Policies. There is a large variety of life insurance policies. The most important are straight life, limited payment life, term policies, and endowment policies.

431. Straight Life Policy. A straight life policy is a contract to pay a specified sum at the time of death of the insured, the premium being payable throughout the life of the insured.

432. Limited Payment Life Policy. - A limited payment life policy is a contract to pay a specified sum on the death of the insured, the premium being payable for a specified number of years, say twenty, or during the life of the insured if his death occurs before the end of the specified period.

433. Endowment Policy. An endowment policy is a contract to pay a certain amount to the insured at the end of a certain period or on his death if that occurs before the end of the specified period.

434. Term Policy. - A policy which is to run for a certain number of years and then cease to be in force is called a term policy. The payments continue during the time the policy is in force.

435. Beneficiary. The policy may be payable to a person specified in the policy, called the beneficiary, or to the estate of the insured. If the policy is payable to a beneficiary, it is not liable for the debt of the insured and he cannot divert it to his estate or to another person by will. If it is payable to the estate of the insured, it is liable for debt the same as any other property belonging to the estate.

436. Premiums. The premiums are specified as so much per year per $1000 of insurance. They vary with the age of the insured, and the kind of policy.

437. Reserve, Surplus. An insurance company is compelled by law to set aside a certain per cent of the premiums as a reserve for the payment of death claims, endowment claims, etc. Any earnings of the company over and above the amount required are set aside as a surplus and may be used to pay dividend on stock in case the company is a stock company, or it may be apportioned among the policy holders as profits in the case of a mutual company.

438. Surrender and Loan Value. - For some reason a policy holder may decide not to continue paying his premium. In that case his policy has a certain specified surrender value. On turning the policy over to the company it will pay him the surrender value in cash. The insurance company will loan the insured an amount equal to the surrender value of the policy.

439. Continued Insurance, Paid-up Insurance. If the holder of a policy fails to make a premium payment, it automatically converts into a paid-up policy for such an amount as the surrender value of the policy will buy. If he chooses, he may have instead an extension of the full amount of the policy for a certain specified time.