Investing Life Insurance Funds 



By A. R. Wright, Chairman investment Comnruttee 



THE highest obligation resting upon 

 the head of a family is to provide 

 support. This obligation is neither 

 fulfilled nor discharged by death. On the 

 contrary, the obligation to provide such 

 support after death of the breadwinner 

 is as great, if not greater, than before. 



The wife and children, inexperienced 

 and perhaps of tender years, are then 

 helpless, unless some measure of protec- 

 tion has been afforded. This protection 

 can best be furnished by the establish- 

 ment of a trust fund to be administered 

 by a trustee at his death or what we 

 believe is better, a life insurance con- 

 tract. 



Purpose of Premiums 



Widows' and orphans' funds, generally 

 speaking, are found in one or both of 

 these positions, if they are to be adminis- 

 tered by others than the beneficiaries 

 themselves. Trusts are administered by 

 corporate trustees, such as the Trust 

 Departments of banking institutions, or 

 by individuals, each acting in a fiduciary 

 capacity. 



The premiums paid by the head of the 

 family upon a life insurance contract 

 ought to be consecrated and sanctified 

 to the purpose for which they are made. 

 That purpose is to relieve the financial 

 distress caused by death of the head 

 of the family, and to prevent the wife 

 and children from becoming charges 

 upon the county or state. 



Under ordinary circumstances, the 

 company should not be called upon to 

 meet the demands of the contract for a 

 long period of years, during which time 

 the reserve portions of the premiums 

 must improve through careful invest- 

 ments. The life insurance company is 

 therefore placed in a position of trust, 

 investing not its own money, but the 

 , funds entrusted to its care for the bene- 

 fit of others. It naturally follows that 

 such fiduciary relationship requires a 

 degree of prudence and caution beyond 

 that which individuals might employ in 

 the selection of their own investments. 



Investment may be defined as the pro- 

 ductive employment of capital under 

 conditions that provide reasonable assur- 

 ance of safety. Investment securities 

 are convenient evidence of such em- 

 ployment. The tests of good invest- 

 ment are primarily a consideration of 

 safety, and secondarily a consideration 

 of convenience. All other factors must 

 be subordinate to that of maintenance 

 of the integrity of the principal sum in- 

 vested. The whole business of intelligent 



investment may be stated in five words: 

 adequate safety with reasonable income. 

 If the members of an investment com- 

 mittee will practice this rule, giving ade- 

 quate attention to protection in purchas- 

 ing and holding, widows' and orphans' 

 funds may be guarded with relative 

 safety. 



The ascertainment of quality in an in- 

 vestment security, requires careful con- 

 sideration of numerous factors, many of 

 which cannot be resolved into a mathe- 

 matical equation. An application of ac- 

 counting principles is needed for the 

 analysis of income accounts and balance 

 sheets, just as an application of engineer- 

 ing principles is necessary in the check- 

 ing of the operating efficiency of an in- 

 dustrial plant. An application of eco- 

 nomic principles is of basic importance. 

 A knowledge of new developments in 

 the fields of science will often influence 

 a decision to the advantage of the in- 

 vestor, since new industries are con- 

 stant'y in the making. A knowledge of 

 geography and natural resources in- 

 dicates a variety of things of economic 

 significance. History, not an infallible 

 guide, is helpful. Psychology can never 

 be ignored, since the attitude of the 

 public carries security prices, at one 

 time to peaks that appear to discount 

 the millennium, and at other times to 

 depths that appear to indicate economic 

 chaos. 



Cause of liOsses 

 Admission of the theory that all known 

 factors can be satisfactorily measured, 

 would not carry assurance against loss 

 from unknown factors that can develop 

 without warning. Earthquakes, fires, 

 tornadoes, riots, wars, epidemics, acci- 

 dents, political upheavals and adventi- 

 tious events of every description oc- 

 cur to invalidate the most carefully pre- 

 pared investment analysis. The investor 

 must ascertain those tests that will in- 

 dicate relatively, rather than absolutely, 

 the degree of risk involved in the pur- 

 chase of any security. It is the common 

 experience of all investors that absolute 

 safety in a security commitment is an 

 idealistic concept, rather than a prac- 

 tical condition. Occasional unavoidable 

 losses in some securities are generally 

 offset by appreciation in the value of 

 others where careful selection is the rule. 

 The various state insurance laws pro- 

 vide for certain restrictions and limita- 

 tions within which investments must 

 be confined. In Illinois the provisions have 

 been strengthened to a marked degree 



following some of the unhappy experi- 

 ences that were had by a few companies. 

 But law or no law, the selection of 

 sound investments is a moral and legal 

 obligation; and any individual, or group 

 of individuals acting in a fiduciary 

 capacity roust erect safeguards fashioned 

 to protect the funds under their con- 

 trol, and thus supplement the limited de- 

 gree of public protection which law 

 provides. 



The measurement of the precise qual- 

 ity in any security involves a thorough 

 analysis. Public and private agencies 

 can offer only limited protection. We 

 must rely upon personal judgment and 

 experience in the selection of securities. 



Federal Bonds Best . .^ ■ • 

 United States government securities 

 obviously offer the highest type of in- 

 vestment. The power of the federal gov- 

 ernment to tax is the fundamental se- 

 curity. Few restrictions of law are 

 thrown around the obligations of the 

 states of the United States. The in- 

 vestor however, has his likes and dis- 

 likes in this field. There are states where 

 records are not enviable as to recogni- 

 tion and treatment of obligations. The 

 forces of nature are not so kindly to 

 some, as others; and natural resources 

 vary greatly. The careful investor recog- 

 nizes these and many other factors in 

 his selection of state government obliga- 

 tions. 



Municipal bonds offer a broad field for 

 investment of life insurance funds. On 

 December 31, 1934. 49 life insurance com- 

 panies owning 92 per cent of the ad- 

 mitted assets of all companies, held 

 one billion twenty-six million state and 

 municipal bonds. This amount repre- 

 sents 5.1 per cent of the total of ad 

 mitted assets. Municipal bonds include: 

 counties, cities, towns, villages, town- 

 ships, school districts and the various 

 legalized units. 



Some of the essential things one 

 must consider in selecting municipal 

 bonds are: 



The purpose of the issue. Are the 

 funds used for the comfort and welfare 

 of the community, or to cushion the 

 palms of the professional politician ? 



What is the nature of the obligation? 

 Is it backed by the full faith and credit 

 of the community without limitation? Is 

 it an assessment bond payable from 

 taxes assessed against the property bene- 

 fited only? Is it a revenue bond pay- 



1. A. A. RECORD 



