Most people have erroneous ideas about "deferred dividends" and "deferred dividend policies," which are so fixed in their minds that, although the truth may be repeated over and over again, it makes no impression, but goes in at one ear and out at the other.

The Hon. Edwin L. Scofield of Connecticut may be pointed to as furnishing a refreshing exception to this rule. In the last report issued by him as Insurance Commissioner of Connecticut, he frankly admits that investigation has shown him that certain preconceived ideas of his were erroneous. He has imbibed certain popular fallacies regarding the practise of the Mutual Life, the New York Life and the Equitable. He had supposed that these companies, at the end of every year, declared a dividend on each deferred policy (laying it aside to be paid later on), but Mr. Scofield's preconceived notion was erroneous, and as soon as he grasped the truth he frankly reversed his conclusions.

The essential difference between the two policies is this: that the dividend on an annual dividend policy is declared at the end of the first year and at the end of each succeeding year. The dividend on a deferred dividend policy is not declared until the end of a period of years, usually twenty, but sometimes a shorter term.

Mr. Scofield now admits this important distinction, and cites the three great companies as exemplifying it in their practise. In commenting on a previous discussion with two of the three companies he says:

"The primal question involved in that discussion was whether the large amount returned ji. e., reported] by the companies, denominated by one 'Contingent Guarantee Fund' and by the other 'Surplus,' had in whole or in part by any action of the company been apportioned or otherwise placed to the credit of policyholders either individually or in classes."

This question Mr. Scofield now answers correctly when he says:

"I find that neither of the companies have, as to the sums reported in the annual statements, apportioned, appropriated or set aside any portion of the same to any policyholders or class of policyholders in any manner or form whereby it can be claimed that there is any present or future fixed liability on account of the same.

No policyholder has any right or interest therein until the expiration of the distribution period, at which time his interest may be calculated upon the development of the business during the period of his membership and the then existing condition of the fund. If necessity requires, it is absolutely within the

power of the officers to appropriate the entire fund for the protection and safeguarding of the institution."

If this sensational statement startles the reader and arrests his attention, it will serve a good purpose; for nine-tenths of the policyholders and agents of the various companies are densely ignorant of the real quality of the surplus accumulated on deferred dividend policies. Mr. Scofield will have done the cause of life insurance a service, therefore, if he awakens some temporary alarm by the bald assertion that "it is absolutely within the power of the officers to appropriate the entire surplus fund for the protection and safe-guarding of the institution." What does this mean? If it is a truth, is it not an alarming truth, which should be referred to only in whispers? No! This fact is the glory and strength of those insurance companies whose management is most enlightened. It is the thing of all others which has made the deferred dividend form of policy the best of all life insurance contracts. Although the public may be ignorant of the fact, it has been the chief factor in making life insurance so mighty a power in the land. It is what has given the people confidence in it. It explains why men of wealth who do not "need" insurance are now investing large sums of money in it. When Mr. Scofield says that the whole surplus of a company may be appropriated to safe-guard the institution, he does not say that it must be so employed, or even that it is likely to be so employed. It does not follow, because the company has a surplus fund of fifty, or sixty, or seventy million dollars, which might, in case of necessity, be used to avert disaster, that the whole or any part of it is likely to be needed for such a purpose. On the contrary, the possession of so large a surplus insures the permanent stability of the company, and averts perils that otherwise might result in loss.

Investors pay a higher price for stability than for any other quality which an investment possesses-and there is no form of investment in which stability is of so much importance as in life insurance. Therefore, it is well that our great companies are

so conducted as to maintain a large surplus, thus heavily buttressing an already strong institution. It would be the greatest of calamities if the surplus accumulated by these companies on deferred dividend policies could be metamorphosed into a fixed liability, for then the fund instead of adding support to the company would be an additional weight of obligation. It is because this fund is surplus that it is of such incalculable value. But because it is surplus, and because it can be used to protect the interests of the company's policyholders, it does not follow that policyholders have any reason to expect a "consequent diminution in dividends.

Many a case might be cited where the captain of a ship has thrown a rich cargo overboard because the ship and the lives of the crew were of greater value than the cargo. But it does not follow from this that we should consider all cargoes in imminent peril. Nevertheless, it would be folly to put to sea with a cargo so fastened down that it could not be removed; for it is better to sacrifice the cargo than to lose the ship and the crew as well as its freight.

Now, the surplus of a life insurance company is, so to speak, a rich cargo representing present wealth and future profit to the policyholders, and it is not to be despised because under a remote contingency it might have a secondary, but most important use, namely, to save something of far more value than itself, i. e., the integrity of the company and every one of its policy obligations. But observe that, as in the case of all illustrations, this parallel must not be pushed too far. The cargo can only save the ship by being sacrificed, whereas the surplus of a life insurance company may often in cases of peril be employed to avert disaster, and yet remain intact and be subsequently distributed to policyholders.

This is a marvelous and admirable paradox-that the surplus may thus be used and yet saved. It is as though the cargo could be sacrificed to save the ship, and yet remain intact and be safely delivered at the end of the voyage, and sold for the enrichment of its owners.

There is another fallacy so firmly fixed

in the minds of some people that it is doubtful if anything short of a charge of dynamite can blast it out. It is a fallacy which even the agents who are selling deferred dividend policies cannot get out of their heads. But we venture to say that any agent who has been groping in darkness hitherto, but who now grasps the following explanation, and appreciates its significance, will find it worth to him anywhere from five hundred to five thousand dollars, according to the volume of the business he transacts. Why? Because it will enable him to sell more insurance with greater ease. And yet we are so liberal minded that we shall not charge a cent for our explication of this truth. But to proceed:

"How," says the man who is able to see only one side of a question, "can it be that a company can pile up surplus without depriving its policyholders of dividends?"

"Why," says the ignorant policyholder, "do you increase your surplus from year to year, when by a more generous division you could increase my dividend without seriously impairing the strength of the company?"

"Stop accumulating surplus!" says the superficial agent in his letter to the Home Office. "For goodness sake pay my policyholders bigger dividends. Then I can send you more business."

How are these objections to be met? Are the companies right, or are they overconservative? Well, as a matter of fact, it is not necessary to answer these questions at all. They would never be asked if the truth were known. Dividends are not cut down by this piling up of surplus. The increase in the strength of a company is not brought about by depriving policyholders of their legitimate profits. The peculiarity of the deferred dividend plan of conducting the life insurance business is that while the strength of the company is maintained and increased, the ultimate profit to the policyholder is not decreased. but if anything, increased. There is no mystery about this if the facts are clearly discerned. Take for illustration the case of a bank which, during a period of several years of successful management, has stored

up a surplus of, say, one million dollars. It may be that the bank has never paid a single dividend, and that the policy of its management is to refrain from paying dividends until the surplus amounts to a million and a half.

Why is it that this fund is not distributed? Is it because the owners believe that by thus holding it they will ultimately lose it? On the contrary, it is because they believe that their ultimate gain will be all the greater for not beginning at once to declare annual dividends. Everybody knows the increased confidence which the public has in a bank if the success of its management and its augmented strength is shown by an increasing surplus. Everybody knows that the larger the surplus of a bank, the larger its working capital, and the greater its facilities for making money. Nor are the owners of this surplus alarmed if it be objected that if the safety of the bank should ever be imperiled this surplus may be employed to maintain its solvency; for they will reply that one of the chief advantages of the maintenance of such a surplus is the protection of the interests of those interested in it, who would be willing if need be to sacrifice the whole or any part of the surplus in order to protect the bank itself-but who know at the same time that instead of sacrificing it, the chances are that the surplus would avert the danger, remain intact, and continue to be a source of profit and emolument.

"But how," it may be asked, "can a life company maintain a large surplus for the general good of the body of its policyholders, and at the same time pay the individual holder of a deferred dividend policy his full share of surplus at the end of the policy's distribution period?" The answer to this question will show the advantage which a life insurance company has over a bank-that is to say, a life insurance company whose business is conducted on the deferred dividend plan. In the case of the bank, when a dividend is declared it is paid on every share of the entire capital; whereas, in the case of the life company, comparatively few of the policyholders receive a dividend in any one year. Consequently, the dividends paid in

any one year, no matter how liberal they may be in each individual case, are small in the aggregate as compared with the entire surplus of the company. Thus a company whose surplus may be fifty or sixty millions may pay out in dividends to policyholders in any given year only two or three millions, and yet each beneficiary will receive a full slice of profits, because he is one of a few thousand men out of a very much larger body. Now, a successfully managed company is constantly making surplus. Hence, if it is paying dividends to only a comparatively small proportion of its policyholders each year, it can readily replace the surplus thus paid out with new profits taken in, and can thus constantly maintain or enhance its financial strength. Here the superiority of the deferred dividend plan over the annual dividend plan is obvious. If every year every policyholder in a great company receives a slice of the surplus, that slice must necessarily be small if the financial strength of the organization is to be rigidly maintained. But when a company's entire surplus amounts to many millions, it can well afford to pay to a few hundred or a few thousand of its members every penny of surplus that has been earned on their policies, and still maintain the strength of the company undiminished for the protection and future emolument of continu

ing members. It must be remembered that when a life insurance company pays a share of surplus this year to every policy that has been in force for twenty years, it still retains surplus that has been accumulating on a multitude of other policies that have been in force for only nineteen years or for still shorter periods. It is true that the policies that are nineteen years old this year will be entitled to a dividend next year, but every other continuing policy of the same character will by this time have contributed to the general fund the profits of an additional year.

Thus by this admirable adjustment the surplus does its perfect work. This work, as we have seen, is two-fold; and, marvelous to relate, the work in one direction complements, and strengthens, and assists the work in the other direction. That is to say, by the building up of surplus the strength of the company is enhanced and the value of the protection conferred upon every policyholder is increased; at the same time this surplus is being employed to breed additional profits, so that, in the long run, the profits received by each continuing policyholder will be greater than if the company were weakened by the annual drain upon its surplus which would result from the payment of even small annual dividends at one and the same time on every one of its outstanding policies.