THE YALE LAW JOURNAL VOLUM E 61 JANUARY 1952 NrncR 1 EDITORIAL BOARD CHARlms A. REwc- Editor-in-Chief FFmcxIC M. RowE Executive Editor ROBERT ALAN Bics JosEPH GoLDsTEmN HowArm I. Fnisu. CnrARs L. MANDELSTAM Article and RIcAR D N. GoLP- TaN Comment Editors Book Revicwt Editor GEoRGE A. Miss Note Editors WARzREN H. SALTZMAN BOUDINOT P. ATERDURY Case Editor Managing Editor HEATH L. ALLEx HARDIN HOLMES ALAN Y. NAFTALI.; TIMOTHY ATYESON SAUL D. KRoNovET ALXN L. IRNsTr N WVALLACE BARNES LEOXAP LEHM AN WILLIAM C. SCHA1AB JANET C. BRowx DEAN B. LEwIs HE.nRy C. SHAYEV.ITA AN,-.N THACHER CLARKE IMOGENE MCAULIFFE HovwaRD SnmomoN JAMIES B. FRINKEL SANFORD C. MILLER Howa.Ro L SwAn -,T:N JAY V. GRimm R..moND S. Troruu Editor h Military Serdce STEP x IV. TuLiN, Comment Editor MARIE McIMAHON 26.mvI H.M orS Business Secretary Student Business Manager Subscription price $5.50 per year This number, $1.0 Canadiansubscription price $6.00 per year: Foreign, $425 per ycar; For prices on other issues inquire The Yale Law Journal, 401A Yale Station, New Haven, Connecticut CONTRIBUTORS TO THIS ISSUE NORMAN KOGAN, A.B. University of Chicago; Ph.D. 1949, University of 0hicago. Instructor, Department of Government and International RelatiQns, LUniversity of Connecticut. ARTHUR M. MICHAELSOx, A.B. 1947, Columbia University; LL.B. 1950, Yale Law School. Member of the New York Bar. Research Assistant, American La: Institute Income Tax Project, 1950-1. COST AND COVERAGE OF INDUSTRIAL LIFE INSURANCE LIFE insurance is necessary financial protection for people in lower income brackets.1 It offers not only family security in the event of the breadwinner's unfimely death, but also a convenient method of building and investing savings.2 Not all types of life insurance, however, are within the reach of low-income earners. To obtain ordinary life insurance, they must purchase a ,policy with a face amount of at least a thousand dollars.3 Often they cannot meet minimum premium payments.4 Insurance coverage that can be bought in lesser face amounts and paid for with smaller premiums has a natural appeal to this income group.5 Industrial life insurance 6 has tapped this market. Policies can be pur- chased in any amount less than a thousand dollars; the average policy today has a face value of 300 dollars. 7 Unlike premium payments in ordinary life 1. DAVIS, INDUSTRIAL LIFE INSURANCE IN THE UNITED STATES 3 (1944) [hereafter cited as DAVIS]; MASON, TEE BRANDEIS WAY 286 (1938). 2. See HUEBNER, LIFE INSURANCE 13-35 (1925) for an analysis of the family and personal uses of life insurance. The savings and investment function of life insurance is most clearly demonstrated by the purchase of endowment policies. VANCE, INSURANCE 32 (3d ed. 1951) ; MEHR & OSLER, MODERN LIFE INSURANCE 61-66 (1949). An endow- ment policy, in addition to coverage in the event of earlier death, provides the insured with the face value of the policy at a given maturity date. MACLEAN, LIF IusuRA ic 44-50 (1935). For further analsyis of life insurance as an investment, see Timberg, Insurance and Interstate Commnerce, 50 YALE L.J. 959, 978-94 (1941). Policy loans further demonstrate the savings function of a life insurance policy. The policyholder may borrow from the insurer at a specified rate of interest a sum of money equal to the cash surrender value of the policy. The policy is security for the loan. The loan need not be repaid during the life of the insured. VANCE, INSURANCE 644-5 (3d ed. 1951). 3. DAVIs at 5-6. Some companies offer ordinary life insurance at face values as low as $500. Id. at 12. 4. Most ordinary life insurers require a ten dollar minimum premium payment. DAVIS at 12. Wage earners covered by group insurance have no problem meeting premium payments, for employers pay a substantial part of the premium. For the extent to which low-income workers are covered by group insurance, see pages 71-2 infra. 5. DAVIS at 4-7. 6. Industrial life insurance, often called weekly premium life insurance, takes its name from the industrial workers who typically are its policyholders. GESELL & HowE, STUDY OF LEGAL RESERVE LIFE INSURANCE COMPANIES 254 (TNEC Monograph 28, 1940). For historical treatment of industrial life insurance, see TAYLOR, TE SOCIAL COST Ol' INDUSTRIAL INSURANCE 9-16 (1933) and DRYDEN, ADDRESSES AND PAirRs ON Livr INSURANCE AND OTHER SUBJECTS 19-43 (1909). Industrial life insurance is defined in N. Y. INS. LAW § 201 as "that form of life insurance, either (a) under which the premiums are payable weekly, or, (b) under which the premiums are payable monthly or oftener, but less often than weekly, if the face amount ... is less than one thousand dollars and if the words 'industrial policy' arc printed upon the policy as a part of the descriptive matter." 7. INSTITUTE OF LIFE INSURANCE, LimE INSURANCE FACT Boor 22 (1950), [hereafter cited as Ln INSURANCE FACT Boox (1950)]. 1952] COVERAGE OF INDUSTRIAL LIFE INSURANCE 47 insurance, the small weekly or monthly premium for the industrial policy is typically collected at the home of the insured by the company's collecting agent.S Unlike ordinary life insurance, where policy amounts determine fixed premium charges, industrial life insurance tailors face value to any premium in a multiple of five cents that the insured wishes to pay.0 Instead of the medical examination required in ordinary life insurance, most indus- trial policies are issued on the basis of the soliciting agent's recommendation 10 and the applicant's own statements as to his medical history and present condition of health." Industrial insurance is big business today. 109 million policies are in force in the United States.'- One insurer alone furnishes ten billion dollars worth of industrial life insurance coverage.13 In the single year 1949, 212 million 8. MEHR & OsLEa, Momma LuE I.-sm .cn 189 (1949). 9. DAvis at 6-7. TAYLO.R, THE SOCIAL COST Or I::orsTrhLuL L:surr:acz 23 (1933). 10. The agent's recommendation is presumably based not only on the questions and answers in the application and his observation of the applicant, but on an informal investigation of the living conditions in the applicant's home, his and his family's general health, his occupation, and information furnihed by his neighbors or cmployer5. D.AIs at 107-9. Most industrial applications require the agent to state his personal opinion of the insurability of the proposed risk. See, e.g., Part D of Metropolitan application form, id. at 105. 11. For a sample of questions asked, see application form of the Metropolitan Life Insurance Company, reprinted in DAvis at 104-5. Another distinctive feature of the industrial life insurance policy is the "facility-of- payment" clause, designed to facilitate immediate payment of death benefits. Under it, the named beneficiary in the policy must file a claim within thirty or si-:ty days after the insured's death in order to preserve a vested interest in the proceeds. If the claim is not filed within the time specified in the policy, or if the beneficiary predeceases the insured, or is a minor or incompetent, the insurer has the right to pay the proceeds to a relative by blood or marriage, or under some policies to any person it deems equitably entitled to them. Possible recipients are friends, relatives, or persons who have incurred expenses in behalf of the insured. See cases collected in Note, The Facility of Payl"nent Cla2use, 166 A.L.R. 10 (1947). During the twenties and thirties, the clause vas a constant source of litigation and often a source of insurers' abuse. See Fuller, The Spcdil Nature of the Wage-Earmer's Life Insurance Problem, 2 LAw & CoSlu,. Pnoe., 10, 29 at scq. (1935). The typical abuse caused by payment to undeserving persons has been largely corrected by giving the named beneficiary a vested interest for thirty or skxty days from death of the insured. But since many industrial beneficiaries may be unaware of their rights, the shortness of the period may still produce harsh results. 12. L= INsuRANcE FACt' Boo 23 (1950). There are approimately 65 million ordinary life insurance policies in force. Id. at 19. Since many industrial policyholders own two or more policies, it is difficult to ascertain the e-mct number of individual policy- holders. In 1943, there were 50 million. DAvIs at 3. Today the number is probably closer to 60 million. 13. Communication to the Y.ux LAw JOURNAL from Malin :. Davis, Actuary of the Metropolitan Life Insurance Company, dated July 17, 1951, in Yale Law Library. This is appro-dmately one third of all industrial insurance in force in the United States. Three companies, Metropolitan, Prudential and John Hancock furnish about three- fourths of all industrial insurance coverage. D.vis at 6. THE YALE LAW JOURNAL [Vol. 61 :,10 dollars were paid out in death benefits. 14 An army of agents solicits sales and collects premiums. And each year's business is greater than last.'5 For all its present vigor, industrial life insurance has had a checkered pabt. As early as 1906, Louis D. Brandeis pointed to grave abuses in the cost struc- ture and selling practices of industrial insurers."; Others raised sporadic protests for the next thirty years. 17 Individual efforts culminated in the TNEC life insurance investigation in 1938. Summarizing exhaustive hearings and field investigation into all aspects of industrial life insurance, two monographs laid bare a long list of defects-enormous expense, low benefits, and high lapse rates for the insured; and predatory selling practices and huge profits for the insurers.' Public reaction was aroused.