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A Primer on the History of Life Insurance

July 23, 2015
Our goal is to educate and advise on life insurance options, so you can feel confident in making the right choice, whether that’s through Quotacy or somewhere else. To ensure we provide accurate and trustworthy information, our writers follow strict editorial standards.

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. 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.

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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.

Industry Disruption

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.

Insurtech

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.

5 Comments

  1. Larry Howell

    this is a question, not a comment. I recently attended a seminar by a financial advisor who was selling fixed index annuities. He made the comment “this has been around a long time. the first one was written in 1805. Not a single person has ever lost money in a fixed index annuity.” That seems rather amazing to me given that hundreds of companies selling life insurance – the underwriters of these fixed index annuities- have gone bankrupt over the years – including AIG, one of the largest insurance companies in the world. Do you think the claim that no one ever lost money in a fixed income annuity is true?

    Reply
    • Natasha Cornelius

      Hi Larry, there is a lot to unpack here. Life insurance companies have been around since the early 1800s and so far, all death benefits promised by carriers with policies in good standing at time of death have been paid out in America.

      Fixed Indexed Annuities (FIA) have been in the market since 1995 and became quite popular in the early 2000s after the dot com bust. FIAs have a floor of zero and so no money can be lost in them as long as the consumer holds onto the annuity through its surrender period. If an annuity is surrendered during the term period, there is a charge and possibly a client could lose money if they surrendered a contract very soon after purchasing the annuity. There is a state guarantee fund to cover annuity up to a few hundred thousand dollars and is specific to the state.

      I have not heard of anyone losing money from an insurance company going bankrupt. Your example of AIG is a good one, but they did not go bankrupt. They were deemed too big to fail and were given massive debt relief (which thankfully, they did pay back in full and then some to the U.S. government). All of their obligations to consumers were fulfilled.

      If FIAs fit in your financial plan and make sense for you based on your financial advisors direction, then they may fit well into your planning. Just make sure that you will leave the money in the FIA for the entire time of the fixed duration of the annuity. If you are going to possibly need the money sooner (many of them are offered with a 7-year fixed term), then an annuity most likely won’t be the fit as an investment vehicle.

      Reply
  2. Brenda

    I have been trying to collect payment on a group life insurance that was purchased by my great-grandfather in the year 1929 since 1974 was the very first intent I made on trying to resolve this matter through metropolitan life Insurance and up until this day I have gotten no answer or resolution on my great-grandfather life insurance policy and my greatgrandmother policy as well that my greatgrandmother also purchased for her about a year after he had purchased the life insurance coverage for himself.
    I would appreciate it if you could advise me on what I should do next to have this situation finalized and resolved once and for all. Thank you for your time. ( Please keep in mind that no one was issued social security numbers because this life insurance policy was purchased before November of 1936 which was the month and year when the very first social security number was issued to someone for the first time. ) My great-grandfather passed away on February 28, 1936. ) Thank you. And I hope to hear from you soon.

    Best Regards,

    Brenda Alva

    Reply
    • Natasha Cornelius

      Brenda, Metropolitan Life Insurance is now called MetLife. You can reach them at 1-800-638-5000. Their customer service representatives should be able to help you.

      Reply
  3. C. Turner

    This was an insightful article, but i was perplexed that it left out a mutual life insurance company that was even older than the ones mentioned in the article. New York Life was established 175 years ago (1845) and I thought it was the oldest mutual life insurance company. The article did say “mid-1800’s” as a general reference to mutual companies being formed, but again, why was the name of the oldest company omitted? I’m an independent agent, but wanted to completely understand the history.

    Reply

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