INSURANCE IN PRACTICE 457 



mium paying to the end of the term, the question may be 

 asked, Where does the company's money come from ? 



The primary source of income is, of course, the premium 

 receipts from the policy holders. If the experience of a life 

 insurance company showed that its expenses each year were 

 exactly equal to the total of the items for expenses, and that 

 its death claims were equal to the total of the contributions 

 for death claims of all its outstanding policies, and that it 

 earned interest on its reserve funds at the exact rate at which 

 it is assumed it would earn interest in constructing its premium 

 rates, the result would be shown in the illustration on the en- 

 dowment policy above ; the company would just be able to ful- 

 fill its contracts — pay death losses as they occurred and pay to 

 the endowment policy holder the face amount of his policy, 

 $1,000 at the end of the twenty year endowment period. 



The experience of all legal reserve companies, however, 

 shows that in practice the death losses are less than indicated 

 by the mortality tables upon which the premium rates are 

 established, and that interest earnings are in excess of the 

 assumed rate of earnings. This salvage from the mortuary 

 element of the premium and the excess interest earnings, 

 together with any portion of the expense element of premiums 

 not used for expenses, constitutes the principal secondary 

 source of accretion to the companies' funds. 



The experience of American companies shows that each 

 policy's share of actual death claims incurred ranges from 85 

 per cent to 90 per cent of the item "For death claims" included 

 in the premium. The savings out of the expense apportion- 

 ment is practically nothing. The majority of the companies 

 operating in America in determining their premium rates 

 assume that their future interest earnings will be at the rate 

 of 3 or 3^ per cent; no companies assume a rate higher than 

 4 per cent. During 1904 the average rate of interest realized 

 by the seventy leading American legal reserve companies was 

 4.33 per cent. On the average, therefore, the rate of interest 

 earnings was something more than 1 per cent higher than the 

 rate assumed in constructing premium rates now in use. 



The salvages on mortality and expense, together with the 

 excess interest earnings, constitute the surplus funds of life 



