Content: Page 36, Becoming Your Own Banker Fifth Edition
First of all, we need to consider where the idea of insurance began. From all that I can gather, it started in a coffee shop in London, England. It was named Lloyd’s. The business is now known as Lloyd’s of London. Businessmen were sitting there drinking coffee on a regular basis and were watching ships come and go from the harbor. Even now the high seas can be a treacherous place, but in those days with the frail ships that were in use, it was particularly dangerous. A lot of the ships did not make it to their destinations. This was a great loss to the owners of the ships and cargo.
So, the businessmen conceived an idea of writing their names under the portion of the cargo for which they would be responsible in case the ship did not make it to its destination. This is where the word “underwriter” originated. If the ship made the voyage successfully, then the underwriter kept the fee that was charged. If the ship didn’t make it then the underwriter had to cough up the agreed upon value. It was all “term insurance.” It only applied to the term of the voyage.
Sometime later the idea of life insurance was developed. It, too, was all term insurance. A person contracted with a life insurance company and paid a premium. He didn’t die that year, so he had to re-negotiate with the company for the next year. It should be pretty obvious that the premium would have to go up because he was year older, and hence, that much closer to the time that death would occur.
And, so, the insured kept up the practice of renewing each year, and the premiums kept getting higher and higher. Ultimately, the premium got so high that he couldn’t afford it anymore – and just a few years later – he died!! Now, Ralph Nader did not invent the idea of consumerism – that idea has been around since time began. Study the archives carefully and I think it is pretty obvious that life insurance companies did not invent whole life insurance – it was the observation by consumers that the yearly term life insurance was a rip-off and that the life insurance companies had to come up with a better solution.
It was pretty obvious that when you buy fire insurance on a house, the odds are that it will never burn. There are all sorts of other forms of insurance that are similar. The odds are that the event insured against will probably never happen. But death is not an if – it is a when!! And so, in response to the obvious, the life insurance companies came up with a plan of collecting more premium than was necessary in the early years of the contract, putting that money to work at interest, and providing a fund that would offset the higher premiums that would otherwise be necessary – and now the insured would have a death benefit no matter when he died. They called their product Whole Life Insurance.
It is my contention that this was a gross misclassification of a product. I was educated as a forester, and during forestry school we had lots of courses that involved classification. Dendrology, the study of classification of trees, lasted an entire year. After a number of courses like that, hopefully, one will learn that you must correctly classify whatever you are studying before going any further. Otherwise, you are just wasting time and you are going to get wrong answers.
You classify things on the basis of their major characteristics, not incidental ones. I submit that this thing the life insurance companies came up with had much more characteristics of a banking system than it did of insurance. If I were assigned the job of naming it, I would have called it, “A Banking System, Plus A Death Benefit Thrown in For Good Measure.” Or maybe it needed to be an acronym of some sort because that’s quite a long name.
According to Webster’s Third New International Dictionary the definition of Banking is: The business of a bank, originally restricted to money changing and now devoted to taking money on deposit subject to check or draft, loaning money and credit and any other associated form of general dealing in money or credit. A bank is really nothing more than an aggregation of whatever item is under discussion. For instance, my wife gives blood regularly. Guess where she goes to perform the activity? Right! The Blood Bank! Last winter I spent a week in Utah and saw a lot of snow. Where the snowplow had come along the roads there were mounds of snow piled up on each side of the road. Yes, we refer to them as snowbanks!
A life insurance company has to collect lots of premiums (That is an aggregation of money) and must put that money to work somewhere that is pretty safe and secure (Loans to certain business activities). The policy owner has needs for financing many of the things in life – autos, homes, etc. – and he out-ranks all others in access to the money that must be lent by the insurance company. If he will contract with the life insurance company to pay enough premiums, he can build a system that is large enough to handle all his needs for finance. Since all the earnings in a mutual insurance company go to the policy owner, he will build wealth that can dramatically change his life for the better.