A Noble Venture
Our short primer on the history of life insurance begins when the first life insurance entity in the United States was established in 1759. The Presbyterian Ministers’ Fund was a noble venture by the church to provide life insurance to the widows and orphans of deceased ministers.
By the early 1760s, the corporation had issued 21 policies to ministers and had assets that were beginning to grow steadily. In May of 1777, the board of the company voted to loan 5000 pounds to the Continental Congress to help the States’ efforts against the British as many Presbyterian ministers advocated the case for independence from England.
Gambling with Your Life
It took many years for life insurance to become something other than a rarity though. The late 1700s and early 1800s was a time marked by the low opinion of life insurance as a form of gambling. The other barrier to the beginning life insurance industry was the legal restrictions that barred women from entering into contracts, including insurance policies, or even legally inheriting an estate. As such, a wife was not able to collect proceeds from her husband’s policy in many states. An interesting note, one of the requirements for a minister to be eligible for a policy was that they were prohibited from the consumption of alcohol.
By the mid-1800s life insurance companies were beginning to proliferate. A 5 year depression made it nearly impossible to raise capital to begin a life insurance company, but it was quite simple to begin a mutual company. Mutual insurers have less stringent capital requirements and higher reliance on premiums from policy holders for cash flow. To increase the premiums, mutual insurers launched successful marketing campaigns that promoted ownership benefits; essentially the policyholders were owners of the mutual company and shared in the company’s profits through dividends or reduced premiums.
Many of today’s largest life insurers were formed during this period, including John Hancock, Mass Mutual and MetLife. Prudential was founded from the organization called the Widows and Orphans Friendly Society that sold a single product: burial insurance. The year was 1875, and this was the first company in the United States to make life insurance available to the working class.
War Risk Insurance
The federal government entered the insurance business by offering life insurance (termed War Risk Insurance) to World War I soldiers and their dependents. Life insurance adoption continued to grow, but it should be noted that the life insurance industry’s main adversity prior to the Great Depression was not World War I, but the Spanish influenza pandemic of 1918, that resulted in $110 million in life insurance claims and the deaths of over 650,000 Americans.
Golden Age of Life Insurance
Then came the roaring 1920s which was a time insurance companies grew quickly. Personal consumption, income and production were all rapidly rising and demographics were changing. The country was urbanizing and life expectancy was increasing. This was a time of plenty for both the country and the life insurance industry. And then the Great Depression began after the stock market crash in 1929.
Life insurance is regulated by states and state regulation prohibited insurers from investing in the stock market. So, the stock market crash did not devastate life insurers as it did other institutions. Only 20 out of 250 insurers went into receivership during the Great Depression. But they did not come out of it unscathed. Low interest rates and mortgage defaults hurt both asset valuations and investment earnings. And adding insult to injury, the insurers used overly optimistic mortality tables so their competitive products were mispriced and caused unforeseen losses to their books.
An Honorable Profession
People needed cash during the Great Depression and banks closed their doors and many didn’t allow withdrawal of funds. The life insurance industry played an important role by providing substantial amounts of liquidity to their policy holders at a time when such monies were very limited. Cash value policies saved many families from financial ruin.
After World War II the life insurance industry entered a Golden Age of growth and stability. Economic prosperity from the post-war baby boom raised the overall demand for life insurance products. The banking failures of the Great Depression were fresh in people’s minds and as a result they turned to the security of life insurers as a safe haven. These were the years in which advance agent and underwriting training and professional designations, such as the Chartered Life Underwriter (CLU) arose. Being a life insurance agent was becoming recognized as an honorable profession.
Life insurance continued its stable and steady climb offering term insurance and whole life products. Then came the unprecedented economic event of an interest rate spike leading up to the 1980s where the prime rate climbed up to 20% in the span of about 5 years peaking in 1981. This caused a disruption of the industry and forced many carriers to develop new ways to think about their business. The financial strategy known as “buy term and invest the difference” began caused by the sky high interest rate environment and the life insurers’ responded with a new product, universal life insurance.
The past 25 years have been an interesting ride. Many new life insurance products have come to market including a permanent type of insurance known as guaranteed universal life that functions as term insurance that can last up to age 120. Most of us can rest assured that we will not live to see that advanced age unless there are miraculous advances in longevity and medicine.
Today we are at a 50-year low for life insurance ownership and many of the professionals who are licensed to sell life insurance also offer financial advice along with a myriad of other financial products and services. Today, the average age of the life insurance professional is 58 years old and there is little new blood coming into the life insurance community. Because of these trends, the life insurance story isn’t being told as often as it once was, but the value of life insurance is as important today as it was in the past.
The future of life insurance is certain, but how it will be distributed is not. There are many ideas being implemented including digital life insurance agencies, kiosks, packages at big box retailers, bank mailings and emails, plus many more. The insurance industry is evolving and the future looks bright. There will always be a need for the life insurance professional, but how you will find and work with that professional is rapidly evolving in today’s insurtech world.