Prudential Ins. Co. of America v. Ragen

• Decision Date: 23 May 1919
• Citation: 212 S.W. 123,184 Ky. 359
• Parties: PRUDENTIAL INS. CO. OF AMERICA v. RAGEN.
• Court: Kentucky Court of Appeals

212 S.W. 123

184 Ky. 359

PRUDENTIAL INS. CO. OF AMERICA v. RAGEN.

Court of Appeals of Kentucky.

May 23, 1919

Appeal from Circuit Court, Henderson County.

Action by George W. Ragen, Administrator, etc., against the Prudential Insurance Company of America. Judgement for plaintiff, and defendant appeals. Affirmed.

Wm Marshall Bullitt, Rodman Grubbs, and Bruce & Bullitt, all of Louisville, and Dorsey & Dorsey, of Henderson, for appellant.

Vance &amp Heilbrenner, of Henderson, for appellee.

QUIN J.

By its policy dated July 12, 1912, appellant insured the life of Robert W. Nichols for $15,000. The policy lapsed for the nonpayment of the premium due July 12, 1916. Under the policy insured was given the option upon lapse (1) of taking the cash surrender value specified therein, less any indebtedness; or (2) a paid-up policy for the amount stated in the policy, but this amount to be reduced by the proportion that the total indebtedness, if any, bears to the cash surrender value; or (3) if neither of the above were accepted, the company, without any action on the part of the insured, would write a nonparticipating paid-up term policy for the full amount insured, less any indebtedness, for such a term as the cash surrender value, after deducting the indebtedness, would carry the modified amount at single premium rates at 3 1/2 per cent. Insred did not accept either of the first two options.

At the time the policy lapsed there was an indebtedness on it of $1,185, this being the cash surrender value of the policy. The indebtedness equalizing, as it does, the cash surrender value, we have as the attendant result, under the terms thereof, a valueless policy. After its mutualization in 1915 the company declared a special dividend of $24.90 on this policy; $24.90 would carry a policy of $13,815 (being $15,000, less the indebtedness of $1,185) for 39 days, or to August 20, 1916. Insured died March 24, 1917, 255 days after the lapse.

Contending there was no insurance in force at the time of the insured's death, the company declined payment under the policy. George W. Ragen, as administrator of decedent's estate, brought suit on the policy and recovered judgment in the court below for $13,815, with interest from August 6, 1917.

Section 659 of the Kentucky Statutes provides, in part, as follows:

"No policy of life or endowment insurance upon the ordinary plan hereafter issued by any domestic life insurance company shall become forfeit or void, for nonpayment of premiums, after three full years' premiums, in cash, have been paid thereon; but, in case of default in the payment of any premium thereafter, then, without any further stipulation or act, except, as herein provided, such policy shall be binding upon the company for the amount of paid-up insurance, which, according to the company's published tables of single premiums, the net value of the policy on such anniversary, and all dividend additions thereon, computed by the rule of section 116 of the act, to which this is amendatory, and which section is section 653, Kentucky Statutes, will purchase as a net single premium for life or endowment insurance maturing and terminating at the time and in the manner provided in the original policy; and such default shall not change or affect the condition or terms of the policy, except as regards the payment of premium and the amount payable thereon: Provided, however, that any company may contract with its policy holders to furnish, in lieu of the paid-up insurance provided for in this section, any other form of life insurance lawful in this commonwealth, of not less value.

"The reserve for such paid-up insurance shall not be less than two-thirds of the reserve of the original policy; but, any outstanding indebtedness on account of said policy shall operate to reduce the said paid-up insurance in proportion to its ratio to the reserve of such paid-up insurance, computed by the rule of section 116 of the act, to which this is amendatory, and which section is section 653 Kentucky Statutes.

"Every such policy after the payment of three full years' premiums thereon, in cash, shall have a surrender value, which shall not be less than seventy per cent. of the reserve that would be required for the aforesaid paid-up insurance, after deducting for any indebtedness as above provided, computed by the rule of section 116 of the act, to which this is amendatory, and which section is section 653, Kentucky Statutes."

The rule referred to is the Actuaries' Table of Mortality and 4 per cent. interest. The calculation of the reserve in the policy was based on the American Experience Table and 3 1/2 per cent. interest. Calculating the reserve in accordance with the Actuaries' Table of Mortality and 4 per cent. as provided in the statute, we would have $1,321.95, plus the dividend of $24.90-- $1,345.85, less the indebtedness of $1,185, or $161.85.

The company has no published tables of single premiums for extended insurance, but according to the company's published rates for term insurance the single premium at age 54 (insured's attained age at the time of lapse) for $13,815 insurance for 255 days would be $233.89. Hence the net sum arrived at as above would not be sufficient to pay the premium for the 255 days.

Applying the provisions of the statute as to the reduction of the paid-up insurance by reason of the indebtedness, we have the above sum of $1,346.85, which will purchase in a single premium paid-up insurance of $2,067, the reserve on this at 4 per cent. is $1,090.49 and more than two-thirds of the reserve of the original policy. Reducing said $2,067 in proportion to the ratio of the indebtedness to the reserve of such paid-up insurance, to wit, the ratio of $1,185 to $1,090.49, we find the indebtedness exceeds the reserve; in actuarial parlance, it is greater than unity, thus reducing the paid-up insurance to less than nothing. And so, if we make the calculation by the American Experience Table with 3 1/2 per cent. interest, we have a reserve of $1,397.85; dividend, $24.90; total, $1,422.75--which will purchase paid-up insurance of $2,183. The reserve on this is $1,210.04. Reducing $2,183 in the proportion as $1,185 is to $1,210.04, we get $45 as available paid-up insurance, the reserve of which is $24.94, and this would purchase an equivalent value in extended insurance for 39 days.

It might be well to note the difference between net premiums and published or full premiums. The premium paid by the insured is made up of the net premium and the "loading." The net premium is the mathematical amount necessary to enable the company to carry the insurance represented by the policy, exclusive of expenses, taxes, etc. It is calculated on two assumptions: (1) That the policy holder will die as shown by some mortality table; and (2) that the company wille arn a certain assumed per cent. on its invested funds.

Calculations in accordance with the Actuaries' Table of Mortality with 4 per cent. interest simply means that the predictions of this table of mortality have been assumed as facts and that the company will earn a similar percentage on its investments is liewise assumed. The "loading" is intended to cover expenses, taxes, unforeseen contingencies, etc., for which the net premium makes no provision. The net premium plus the loading makes the full or gross premium--the premium as we know it.

Peak v. Mutual Benefit Life Ins. Co., 172 Ky. 245, 189 S.W. 195, involved questions kindred to those here. There the company insisted it had the right to deduct from the reserve a surrender charge of 1 per cent. of the...