Verhovayak Lapja, 1950 (33. évfolyam, 1-12. szám)
1950 / Verhovay Journal
PAGE 4 Verhovay Journal January 18, 1950 Verhovay Journal Journal of the Verhovay FrateAial Insurance Ass’n. OFFICE OF PUBLICATION 7997 West Jefferson Ave. Detroit 17, Mich. PUBLISHED MONTHLY BY THE Verhovay Fraternal Insurance Association Managing Editor: JOHN BENCZE Editor: JOHN SABO Editor’s Office: 436—442 FOURTH AVENUE PITTSBURGH 19, PA. Telephone: COurt 1-3454 or 1-3455 All articles and changes of address should be sent to the VERHOVAY FRATERNAL INSURANCE ASSOCIATION 436—442 FOURTH AVENUE PITTSBURGH 19, PA. _________________________________________m________________ SUBSCRIPTION RATES: United States and Canada ....................................... $1.00 a year Foreign Countries ....................................................... $1.50 a year Entered as Second Class Matter at the Post Office at Detroit, Michigan under the Act of March 3, 1879. OFFICIAL COMMENT * DO YOU KNOW WHEN AND WHY DIVIDENDS CAN BE PAID? Did any of you think of the question of dividends as you read the Official Comment appearing in the December issue of this publication? Many of you have inquired, and rightly so, why we haven’t paid dividends in the last two years. For the sake of-the record let’s stop right here and find out what is a dividend. The insurance dividend is in no way comparable to the dividend declared to the stockholders of a corporation. The dividend to a stockholder is a return on his investment. The dividend paid by an insurance organization is more in the nature of a refund. Every insurance organization calculates its premium rates on the basis of a conservative view of the future. For the sake of safety, the premium charged will usually be a little more than will actually be required. This is necessary because no one can safely predict the future. No one knows what economic conditions will be ten or twenty years from now. No one knows when a great epidemic, bringing with it many deaths, may strike. So to be on the safe side, the premium usually is a little higher than will actually be required under normal circumstances. If such •normal circumstances prevail, this margin of safety should result in savings in mortality. In other words, the net or mortuary premium which you have paid will not have been used up in its entirety and there will be a saving, or a surplus. Also, the loading, the sum paid for administrative expenses, may be more than sufficient to pay for all expenses and, as a result, this, too, will bring about a saving. Then, too, the rate of interest realized on investments may be higher than assumed which, in turn, would mean excess interest earnings. Of the three dividend producing factors two are directly contributed by the policyholder while the third factor, the excess interest earnings, is the result of the investment of the premium paid. Hence, you can see why an insurance dividend cannot be classed as a return on investments, and why it is preferable to refer to it as a return of an overpayment. INTEREST ASSUMPTION DETERMINES NET PREMIUM The reference made above to interest assumption may be somewhat confusing to those not familiar with the technicalities of life insurance premium calculations. Therefore, for the sake of enlightenment, let us cite an example. Let’s suppose, for illustration, that the face amount of the policy is SI,000, that the policyholder will live just twenty years and for the sake of simplicity, let us assume that there will be no expenses and no interest earned. To accumulate $1,000.00 in twenty years, we would therefore have to have a yearly premium of $50.00. Now, supposing that we were to invest all premiums from the date of payment, we would have to assume a certain rate of interest because we would not know for a certainty what rate of interest could t»e earned during the twenty year period. If we thought we could safely earn 3%, then the yearly premium would amount to $36.13. This yearly payment invested at S% compound interest will amount to $1,000.0(3 in twenty years. If we assumed that we could earn 3 >/2 %, or even 4' ,', then the premium would be correspondingly less. The interest assumption factor is very important in the calculation of life insurance premiums, for you can see from the above that the net, or mortuary, premium which you will pay will be determined by the rate of interest which we assume will be earned over the period during which the policy is to be in force. TWO KINDS OF POLICIES Everyone should know that insurance organizations do not pay dividends on all of their policies. There are two kinds of policies: one which makes it possible to pay dividends and which is called a “participating policy” and one which does not pay any dividends and, therefore, is called a “non-participating” policy. In other words, if you want to take the chance that dividends will be paid in the future, you will buy the participating policy and pay a higher premium rate. 'The non-participating policyholder will not receive a dividend but he wll be content with the fact that he pays a lower premium. He will not worry about contingencies that may arise; the cost of his insurance váll be fixed. The cost of insurance, on the other hand, for the participating policyholder will usually vary depending on how much money will be returned to him from time to time ,as an insurance dividend. LOW EARNINGS — HIGH COSTS What has this 'to do with our dividend question of the present? A great deal. If one will look at our monthly dues calculations, he will find that our monthly dues of the past compare favorably with the premium rates charged on non-participating policies. And since no dividends are paid on non-participating policies, and our rates compare favorably with non-participating rates, we have not paid an extra sum and. therefore, we should not expect a return of any part of the premium paid. Even in the case of participating policies, dividends are not guaranteed. Dividends can be paid only if under normal operating practices and normal conditions, our mortality experience, cur expense experience and our interest earnings will be favorable. Years ago, when everyone could realize a return of four or five percent on his savings,.no one thought that someday it would be impossible to get more than two or three per cent on the best investments. Many insurance organizations have billions of dollars -worth of insurance business on their books on v/hich they have pledged themselves to pay 4% interest. It is impossible to safely earn that much today. High-grade investments today will not yield more than 2 V2 to 3% at the most. If these organizations can earn only 2y2 to 3% on a promised 4%, it can easily be seen that there is a definite loss to these organizations. Just think of it! The money.in your savings bank will yield today no more than approximately 1%, however, the insurance •organizations have guaranteed you 4%, if you have a 4% interest assumption policy, and they are pledged to provide that much. Then there is the expense factor. Just think of how prices have spiraled in the last ten years. You are paying much more for everything. Along with this wages had to rise, too. These costs went up not only for the individual, but also for all enterprises, including fraternal insurance organizations. We, too, had to grant periodical wage increases to our employees and officers. V/e, too, had to pay the high prices for services, items and equipment needed to operate this organization. While we received no more money from our members, we still had to meet the rising costs of business. Certainly no one would then expect a saving to result from the expense factor. The losses sustained due to the rising expenses and declining interest earnings naturally would make it impossible to pay a dividend because the mortality factor, the only one on which gains could be realized, would have to bear the losses arising from the other two factors. The changing economic conditions and the possibility of unforeseen contingencies make it impossible to guarantee payment of dividends. To be sure, dividends may be paid, but only when warranted by normal conditions. SAFETY, SOUNDNESS FIRST CONSIDERATION The membership of our Association may rest assured that they are receiving sound and safe insurance protection. It is the duty of the Associaton to safeguard the interests of its general membership and to provide the best insurance protection at minimum cost to its members at all times and the Association feels that when it does not pay a dividend, it is because none is due. In the Official Comment appearing in the next issue we shall bring to your attention the little publicized indirect dividends which our Association has been distributing all along in the form of fraternal plus benefits.
