An Early History of Life Insurance

Today’s guest post is by 2012 Junior Fellow Alec Korte.

A life worth living is a life worth insuring.

The above quote was the bedrock on which Judge Willard Phillips, a Massachusetts lawyer, founded the New England Mutual Life Insurance Company in 1835. The anchor that held that bedrock firm was the leadership at the top, which stood for honesty and a style of management that was conservative even at that time.

Shortly after winning the first U.S. life insurance charter in 1835, Judge Phillips was told by the Massachusetts state legislature that he had to raise a guaranty fund of $100,000 (half of which had to be in cash) before he could begin selling policies. On top of that, the country was in the midst of a property bubble fueled by an inflow of federal money into President Jackson’s so-called “pet banks”. When the fun was over, however, property values tanked and people subsequently became wary of any money-making schemes.

Despite those difficulties, Judge Phillips’s reputation for honesty allowed him, in 1843, to raise the guaranty fund and write the Company’s first policy. Indeed, it took over eight years to find investors because Judge Phillips wanted to ensure that each knew the risks associated with the venture. (Incidentally, many were later surprised when they received their money back with interest, because Judge Phillips made it seem as though they were contributing to charity.)

The significance of New England Mutual grew immensely thanks to one of its early policyholders, Daniel Webster, who also held one of its most unusual policies. Webster insisted on paying a slightly higher premium (an extra  six dollars per year) on the condition that a portion of his policy, upon his death, be given to “Washington, or any other town or city containing fifty thousand inhabitants, and residence there, for one year or more,” as a provision against the spread of smallpox. (Clark, p.21)

In 1844, New England Mutual became a fortunate beneficiary of very unfortunate circumstances. That was the year that Elizur Wright, a young mathematician, joined the Company. What prompted him to join is quite interesting and eventually became part of the Company’s business. At the time, he was visiting London in search of a career. Wright was invited to the Royal Exchange, where he witnessed a scene that would haunt him forever:  An elderly man was standing atop an auction block as his life policy was sold to the “highest bidder”—for a pittance. The man was unable to pay for his last premium, and because of that he had to surrender his policy for whatever the bidders would pay. To make matters worse, the new policyholder now had an incentive to collect on his claim. In those days, it was not at all uncommon, therefore, to put a bounty out for someone’s head in order to collect on that person’s policy. Life insurance, ironically, had become a threat to peoples’ lives.

Wright was horrified by such a state of affairs and frustrated by the rise of new companies that issued policies frugally and didn’t look out for the best interests of the insured. He determined that he would spend his remaining years working to correct this problem. As Robert G. Ingersoll said of Wright, “When we received our morals from merchants and made merchandise of our morals, Elizur Wright held principle above profit, and preserved his manhood at the peril of his life.” (Clark, p.35)

Two major innovations Wright brought to the industry were net valuations and non-forfeiture. Prior to Wright’s work, the value of any given policy was basically a guess, based on how healthy the insured appeared. As a rational man, Wright knew that looks can be deceiving; so, rumor has it, he made over a quarter of a million calculations in an effort to create what would be called “Wright’s Tables,” which provided a conservative estimate of the premium to be collected as well as reserves to be held. Six copies of such tables were sold for $365.00 each, and they were made the life insurance standard in Massachusetts. Wright’s response to the old man on the auction block was the idea of non-forfeiture, sometimes called cash-surrender value, which is the amount of money the policyholder is guaranteed to receive, should he default on premium payments.

Without a doubt, the Company’s biggest test was the Civil War. New England Mutual did not shirk the risk or abandon its policies.  At a time when its policyholders needed it most, it answered the call. Every policy claim was fulfilled, with special consideration going to the families of those who died in service. In 1862 there were roughly 25,000 people depending on it. After the war was over, it even permitted loyal Southern policyholders to maintain their coverage, provided they kept up on payments.

Subsequent years would bring more economic panics, a flu epidemic, and multiple wars, among other things, but  New England Mutual survived throughout by continuing to provide benefits and peace of mind to its members. Its conservative management consistently attracted more policyholders and its reputation grew stronger each year.

New England Mutual Life Insurance Company lives on as part of MetLife which acquired the company in 1996.

References

Clark, Sydney. The First Hundred Years of the New England Mutual Life Insurance Company. Boson, New England Mutual Life Insurance Company, c1935.