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Learn about the History of Life Insurance

Where did life insurance come from?

Jack L. Sprat was new to the agency and fresh out of school. A local California boy, he’d graduated from Ventura College.  When he started asking the inevitable questions, young Jack, a bright young man, came under the tutelage of Elmore A. Annuity, the company’s resident sage.

Jack: Where did life insurance come from?

Elmore: Babylonia.

Jack: That must have been a long time ago.

Elmore: It was. We can trace the evolution of life insurance to the year 2506 before Christ, and an enterprising trader of lion’s pelts named Mishra or Mish to those who knew him well.

Jack: How can you be certain? 

Elmore: Ever heard of the phrase, “That’s a near Mish?”

Jack: Yes.

Elmore: That’s where it comes from. Since Mish was unique, there was nobody just like him then – or now. He’s become a legend. To move our story along, Mishra dealt in lion’s pelts. The miracle of his life was that he discovered a way to decrease the risk faced by his caravans …

Jack: Caravans?

Elmore: Mostly camels of the two-humped variety still found in the former Babylonia.

Jack: What risks did the camels face?

Elmore: I’m sure they faced many but I’m referring primarily to the business risks entailed in operating a caravan. Mishra took into his head the concept of lending, and later having the loans repaid with interest once the goods, in this case lion’s pelts, had arrived safely at their destinations.

Jack: What happened to the concept of having loans repaid with interest?

Elmore: It became codified into law by the Babylonian Emperor.

Jack: When did that happen?

Elmore: Still more than two thousand years before Christ.  When lending was codified, it began functioning as insurance.

Jack: But that’s still not life insurance. How did life insurance turn into the entity that it is now in America?

Elmore: First, life insurance had to be born. Like Adam’s rib became woman, life insurance came from the general idea of insurance. Let’s jump ahead to ancient Rome.  Free-born citizens began to form burial clubs for the purpose of paying the funeral and burial expenses of its members and also making payments for deceased loved ones and descendents.

Jack: Burial clubs?

Elmore: Yes. But it took a thousand years longer for these practices to become more refined. Shouting the praises of the legendary Mishra, no doubt, especially with all that talk of “near Mishes”  that had circulated down through the ages, Medieval guilds began to appear, and they took what Mishra had accomplished and built upon the concept. Something called “details” was invented by a guild member named Mishram. He knew that guild members engaging in trade would need protection from loss because of inevitable catastrophes due to fires, shipwrecks, and pirates, and possibly plague.

Jack: How could the guilds protect their members from pirates?

Elmore: They couldn’t really, but if a crew of pirates happened to kidnap one of the traders belonging to the guild, the guild might raise or even pay their ransom, if they were held captive.  They also offered burial expenses like the Roman burial clubs once had and compensation in times of sickness.

Jack: Like health insurance?

Elmore: Exactly. They also might provide guild members who were traders with financial support during hard times.

Jack: That might already be construed as a type of life insurance.

Elmore: It might.

Jack:  But there are several types today, right?

Elmore: Right. But you’re getting ahead of my story.

Jack: I’m sorry, resident sage.

Elmore: As I was saying, we move on to the year 1347 in Genoa, Italy.  A conference there in that year produced the earliest known insurance contract. The representatives of several European maritime nations decided to accept marine insurance as a practice.

Jack: Marine insurance. Is that like Army or Air Force insurance?

Elmore: Not exactly. I’m referring to shipbuilder’s insurance and for all those associated with shipping, otherwise known as the Maritime Trade. The seas around Europe served as the highways of that age during centuries past.

Jack: But what does this have to do with insurance as we know it today, including life insurance?

Elmore: I’m getting to that. Think the year 1688, and a place called Lloyd’s Coffee House of London.

Jack: Is that the very famous Lloyd’s of London?

Elmore: Precisely, in London, England – one and the same. That’s what it evolved into over time.

 Lloyd’s Coffee House became a rendezvous for merchants, ship-owners, and underwriters.

Jack: Like a Star Bucks?

Elmore: Very much so. People met at Lloyd’s Coffee House to discuss and transact business just as they do now in all sorts of public places. By 1795, Lloyds of London had become one of the earliest modern insurance companies.

Jack: But what about life insurance specifically?

Elmore:  Ever heard of Halley’s Comet?

Jack: Of course. It was named after the Astronomer Edmond Halley.  I’ve always loved astronomy. I saw Halley’s Comet the last time it came. It was a spectacular sight in the night sky …

Elmore: Did you also know that Edmond Halley was a pioneer in social statistics? He calculated annuities from the mortality tables of Breslau, Germany, in 1693. I was named after him in a way, and so was life insurance.

Jack: How so?

Elmore: Think about it. Can’t you see the connection between my surname pluralized, annuities, mortality tables, and life insurance?

Jack: Not immediately. What’s the connection?

Elmore: Annuities, annual benefits, are derived from mortality tables, just as life expectancy can be statistically determined by comparing the life spans of lots of different individuals contained in those precious mortality tables.

Jack: So that’s where your last name comes from?

Elmore: I’m Elmore A. Annuities at your service.  When Edmund Halley died on January 14, 1743, my ancestor Elmore B. Annuities wrote about the event in his diary and was very much saddened.

Jack: I’m saddened now, and that was a long time ago.

Elmore:  Edmond Halley devised the first mortality table to provide a connection between the life insurance premium and the average life expectancy of the late 15th Century based on statistical laws of mortality, how long someone might be expected to live then, and compound interest.

Jack: So he made THE connection?

Elmore: He did. But it required revisions to be more like it is now, akin to a life insurance salesperson’s Bible.

Jack: Are you religious?

Elmore: I don’t mix my religious views with the workplace.  But as I was saying, in 1756, Joseph Dodson did his mortality revisions and successfully linked premium rate with age.

Jack: Wow!

Elmore: You can say that again.

Jack: Wow!

Elmore: I was only meaning rhetorically. But history moved quickly after Halley and Dodson.  Insurance came to America in Charleston, South Carolina, in 1735.

Jack: So American life insurance was officially born?

Elmore: Not quite yet. That happened in 1759 when the Presbyterian Synod of Philadelphia approved the first life insurance company in the American Colonies. But their policies excluded most Americans.

Jack: Who WAS eligible?

Elmore:  Just Presbyterian ministers and their dependents, I’m afraid.  In fact, for a long time after the new nation came about, life insurance was available only to a privileged few.  It took a great fire in New York City to begin to change things.

Jack: When was that?

Elmore: In 1835. Suddenly, the catastrophic fire had focused attention on the obvious: A definite need existed to provide for unexpected and overwhelming losses.  Two years later, the state of Massachusetts made it mandatory for companies to keep reserves so that such events might be compensated for. A generation later, Mrs. O’Leary’s infamous cow made it a necessity nationwide.

Jack: A cow? How could a cow do all that?

Elmore: When Mrs. O’Leary’s cow tipped over a gas lantern, she started the Great Chicago Fire of 1871. It was now proven that a great fire occurring in a densely-populated city would result in huge losses …

Jack: And if those losses weren’t compensated for …

Elmore: Precisely my dear Sprat. That’s why reinsurance, the practice of spreading the risk among several companies, was specifically configured for such situations.  So a single company might be spared the full brunt of a major disaster.

Jack: Is that the whole history of life insurance?

Elmore:  A few events can still be added to our timeline. In 1897, the British government – its House of Lords and House of Commons – passed the Workmen’s Compensation Act.  For the first time, a company was obliged to insure its employees against industrial accidents.  It is said that Queen Victoria, who died in 1901, nodded in approval when this historic measure was signed into law.

Jack: Who said it?

Elmore: I’m saying it now. Another innovation was made a necessity with the invention and widespread use of the automobile – public liability insurance.  America pioneered that.

Jack: So it all goes back to those ancient burial societies?

Elmore: Societies that behave similarly – such as fraternal organizations and labor unions – thrived during the 19th Century when low-cost member-only insurance policies became widely available. In fact, the vestiges of such programs live on through fraternal orders and many organizations, and also when an employer sponsors a group insurance policy for their employees.

Jack: Yes, I know what you’re getting at; not only group-sponsored life insurance, but sickness and accident benefits and old age pensions -- when employees pitch in and pay part of their premiums.

Elmore: You are a fast learner Ventura College boy! So let me ask you a question. Can you give me a precise definition for life insurance?

Jack: What kind?

Elmore: Well said! That’s precisely the answer I was hoping for. There are several different kinds of life insurance.

Jack: What is whole life?

Elmore: Whole life insurance gives your dependents permanent protection while it builds a cash value account.

Jack: What does whole life do?

Elmore: It pays a death benefit when you die -- to the beneficiary you name – and it offers you low risk cash value accounts and tax-deferred cash accumulations simultaneously.

Jack: Wow!

Elmore: You can say that again!

Jack: Wow!

Elmore: Again, I was speaking rhetorically. Do you know what else a whole life policy can do?

Jack: You mean it can do more?

Elmore: It provides a fixed premium that does not increase during your lifetime as long as you keep up the payments on your planned amount. It allows the insurance company to manage the cash value amount in your policy so that you don’t have to. With whole life, you get the choice to either get dividends from your policy or else apply the dividends to reduce your payments.  It offers the right to withdraw from the policy anytime during your lifetime.

Jack: Wow! What is there that a whole life insurance policy doesn’t do?

Elmore:  Several things actually. With a whole life policy, you don’t get the flexibility to invest in separate accounts.

Jack: Like money markets or stocks and bonds?

Elmore: Precisely.  You also can’t split your money among different accounts or shift your money around between accounts.  You don’t get flexibility with your premiums. A whole  life insurance policy doesn’t offer face amount flexibility. 

Jack: What are some other types of life insurance?

Elmore:  For instance, there’s universal life insurance.

Jack: What’s that?

Elmore: Universal life insurance does offer permanent protection for your dependents.  It’s more flexible than whole life.

Jack: What else is there?

Elmore: There’s variable universal life insurance. It’s great if you want more control of cash value accounts features. There’s also money back term life. It’s often called “the policy that pays you back.”

Jack: How does that work?

Elmore: Here’s the deal – A 35-year-old man in good health pays $950 a year for a 30-year return of premium (ROP) term life.  He might pay around $650 a year for a plain vanilla term life insurance with the same $600,000 death benefit.

At the end of 30 years, he’ll get a check for $28,500, which equals the total amount of the premiums he paid.  What it really comes down to, is that he’s paying $650 for insurance and investing the other $300 with the life insurance company to get a guaranteed return.

Jack: That sounds too good to be true. There must be a catch.

Elmore: You’re a smart college kid Jack. There sure is. Think about it. How patient are most consumers? The catch is you’re likely to drop the policy early, because a lot of people have the attention span of gnats – especially when it comes to investing money.  If every investor was patient and willing to wait long enough, they’d all be millionaires!

Jack: You can say that again!

Elmore: If every investor was patient and willing to wait long enough, they’d all be millionaires! The sad truth is, most consumers don’t stick with term policies for the entire term, and often for good reason, for instance, a chance to lower their rate might suddenly appear – like a rabbit out of a hat!

Jack: Thirty years can seem like an eternity. I know. I’m not even close to thirty yet.

Elmore: With the so-called “money back” policies, insurance companies are counting on very few people getting to the end. If too many people did, they’d end up losing a lot of money.  Even if you do last until the end of the race, you might end up like the proverbial tortoise instead of the hare – because the rate of earnings are a lot less than say, a balanced investment portfolio that might divvy up 60% in stocks and 40% in bonds.

Jack: Since 2007, it might make sense to take fewer risks. We are currently in the worst economic spiral since the Great Depression, my great-great-great-great-great Uncle Tom always says.

Elmore: He came in here the other day to buy a policy. How old is that geezer relative of yours anyway?

Jack: He’ll be 124 next Thursday. Uncle Tom asked us not to have a party. He can’t stand the excitement.

Elmore: He doesn’t look a day over 122. Does he live in your parent’s home?

Jack: No, Uncle Tom lives in a cabin out in the woods. He calls it his “estate.”

Elmore: What do you call it?

Jack: We just call it Uncle Tom’s Cabin.

Elmore: Let me tell you a little more about variable universal life. As I’ve already alluded to, variable life insurance provides death benefits and cash values that vary –

Jack: That must be the big reason why it’s called variable.

Elmore: Precisely. It varies in accordance with the investment portfolio that you’ve chosen, usually selected on the basis of performance. Variable life insurance has been sold in the United States since about the time that Ronald Reagan was President.  The policyholder may divvy up premiums among investment accounts that offer a wide ratio of risk and opportunity.

Jack: For instance?

Elmore: For instance, money market and government bond accounts to domestic and international equity arrangements.

Jack: Gee. You know a lot.

Elmore: Yes, I’ve been referred to at this company as a resident sage.

Jack: Are you wise?

Elmore: Some might say that. I wouldn’t go that far.

Jack: You were saying?

Elmore: When you consider life insurance, and the different types, most of all you have to consider the times. During the Clinton years, equity values rose rapidly, and sales of variable insurance rose from about 400,000 policies in 1990 to about 1,400,000 policies in 2000. In 2000, variable life insurance captured 57.4% of the market of all policies which were individually sold. But since then, especially in recent years, equity values have been declining.  

Jack: It would seem like an adjustment is in order.

Elmore: Are all the recent graduates of Ventura College as smart as you?

Jack: I hope not. I’d like to gain an edge on my competition.

Elmore: Well said. But there are some adjustments that should be made by consumers to address the economic times we find ourselves in.

Jack: So what kind of life insurance is the best to buy now, during these Obama years?

Elmore: The first thing I want to say is that I’m just an average sage. I’m not a soothsayer. Still, we have begun a recovery of sorts.

Jack: How far along is the recovery?

Elmore: It’s just beginning, in its earliest stages.

Jack: Does the recovery have a lot to do with Obama’s stimulus packages?

Elmore: I don’t think so. Perhaps the banks are starting to re-invest very slowly and the markets are stabilizing. But getting back to your question, ‘What type of life insurance is the best to buy during these uncertain times, I’d have to say …

Just at that moment, everyone in the company’s office suddenly nudge a little closer and perk their ears in the manner of nosy rabbits. It is a beautiful phenomenon to witness, Jack believes.  A prediction is about to be made that could impart real knowledge, and he is surely respected, is the company’s resident sage.

Jack:  When Elmore A. Annuity speaks, people listen. (He spouts this profundity as an aside, with no one in particular listening. Alas, Jack Sprat is far from being a sage.)

Elmore: I’d have to say, that if it were up to me, if I were contrasting the purchase of whole life versus money-back term, versus universal life, versus universal variable life, versus variable universal life, it would be the future of my loved ones at stake, or perhaps of my hated ones, as these might be construed as the antithesis of loved ones, and so they’d require a different policy, so if it were up to me, and it was my family decision and everyone was wondering about what was best, I’d have to ask the resident family sage.

Jack: Aren’t you the resident sage?

Elmore: Not at home I’m not. I can’t even get in the last word!

Jack: Oh.  Who does have all the answers?

Elmore:  That’s an easy one. California Health Insurance agent Matt Lockard!

 

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