according to another.
The economy of the expense of any transaction, or work, can only be
intelligently judged by the value of the _result_. This truth is too well
recognized to need illustration, and it only needs to be called to mind,
to perceive both the error of ratios of expense based on premium, which is
not the result but the _raw material_, so to speak, of insurance
transactions; and what, on the contrary, the true basis is.
It is thus clear that in insurance the economy of expense must be judged,
not by comparison with the premiums paid, but by comparison specifically
with the resulting advantages in fact secured by such payments. Now these
are of two kinds: which may be called the _insurance advantage_ and the
_investment advantage_.
(1) Each death claim paid is an insurance advantage, though it is so only
to the extent of the excess of the amount of the policy which has become a
claim over its premium reserve, or value, for the latter being the balance
(with interest) of the policy holder's own premium money, could have been
left or secured to his representatives without the intervention of the
policy and company.
It is true that the advantage or benefit of insurance does not consist in
adding anything to the wealth of a company, but only consists in drawing
from the premiums paid into its treasury by the policy holders generally,
to meet each death claim which arises; or can only be called an _advantage
of distribution_, or process of collecting aid from the living members, to
assist the representatives or dependents of the deceased ones; but it is
not the less on this account an advantage worth _same expense_ in
securing.
(2) Interest realized by the investment of premium while it is in the
keeping of a company is an advantage; in every sense so, since it comes
wholly from outside sources, and accrues proportionally to all members; it
may be called, as above, the investment advantage, and of course justifies
some _expense_ to secure it.
Hence the expenses incurred by any company in a given; time must be
divided into two parts, one being the expense incidental to insurance, and
the other that incidental to investment, which parts are to be compared
respectively with the insurance claims met, and interest receipts of the
company for the same time; or what is equivalent in the latter case, the
net rate of interest earned after deducting the incidental investment
expense may be found.
When this
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