Accounts: Their Construction and Interpretation for Business Men and Students of Affairs

By William Morse Cole | Go to book overview

CHAPTER EIGHTEEN
SOME PECULIARITIES OF ACCOUNTING FOR INSURANCE AND FOR LIFE TENURES

ONE of the commonest types of annuity, of which the principle was discussed in Chapter XII, is attached to life insurance policies. Though it is a rather common thing for a life insurance company to issue annuities for a definite number of years, this is done usually independent of the life insurance business,--as any other financial institution might issue such annuity. The normal form of annuity in connection with life insurance is not an annuity which the company sells but one which it buys,--namely, annual premium on policies. This affords an excellent illustration not only of the method of annuities, but also of a striking type of deferred liability. It will be worth while, therefore, to examine in some detail the principle upon which life insurance is founded.

At the basis of all is the question of expectation of life. The work of determining how long a man is likely to live devolves upon mathematicians who are usually called "actuaries." From elaborate tables of vital statistics accumulated from many years of experience they have learned how many men out of every thousand are likely to survive to a specified age. If, for example, the statistics of the nineteenth century show that of every thousand men thirty-two years of age ten died in the first year, eleven in the second year, and so on, it is a fair assumption that something like the same numbers will die in the years of the twentieth century, allowing, of course, for improved medical and surgical skill; and it is possible on such a basis to figure the reasonable expectation of life for any man at any age. The method of determining the amount of annual premium, or annuity for life, which any man shall pay for a life insurance policy promising to pay a definite sum at death can be best explained after determining the sum which would be necessary to buy what is called a paid-up policy,--by which is meant a sum paid down once for all to insure the man for life. A certain table shows that of 84,-

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