Sec. 6. #Insurance as mutual protection.# Modern insurance is conducted either by enterprisers for profit, or by mutual companies; but in any case in large measure the losses in insurance are mutually shared, as the premiums (plus interest earned) equal the total losses plus operating expenses and profit, if any is made.  Each insured gets a contract of indemnity for the payment of a sum that will help cover the losses of others.  Such an exchange is mutually beneficial.  The premium comes from marginal income; the loss if it occurs would fall upon the parts of income having higher value to the insured.  The less urgent needs of the present are sacrificed in order to protect the income that gratifies the more urgent needs of the future.  In insurance each party gives a smaller value for a greater; each makes a gain.  The greater security in business stimulates effort.  This effect is quite the opposite of that of gambling.

Sec. 7. #Conditions of sound insurance.# To be economically sound, insurance must have to do with real productive agents, and with a group of occurrences which, as a whole, are approximately ascertainable in advance—­however irregularly they may fall upon individuals.  The beneficiary must have an incurable interest in the property or person insured; that is, the beneficiary must actually suffer a loss by the occurrence insured against.  Finally, the amount of the indemnity must not be greater than the loss incurred.  Some of the greatest difficulties in insurance arise from the absence of these essential conditions.  When there is no insurable interest or when the indemnity is greater than the loss that may be incurred, the beneficiary may and sometimes does find it to his interest to bring about the socially injurious event insured against.  He artificially increases the loss against which insurance was taken.  When the insured sets fire to his own buildings, he makes an illegitimate use of insurance.  Constant efforts are made by insurance companies to guard against these “moral risks,” the least calculable of any.  Merchants whose stocks have been mysteriously burned two or three times find difficulty in getting further insurance.  Formerly insurance was not paid in case of death by suicide; but now usually no such limitation is contained in a policy after a period of one or more years.  As men rarely plan suicide years in advance, death by one’s own hand some years after taking life insurance is regarded as coming under the ordinary rules of chance.  Yet it is to be feared that this liberal policy serves as a temptation at times to crime and to self-destruction.

Sec. 8. #Purpose of life insurance.# Property insurance is mainly an aspect of enterpriser’s cost, whereas personal insurance is more closely connected with the object of saving.[3] We shall in the rest of this chapter limit the discussion to the one most important form of personal insurance, that called life insurance (sometimes called survivors’ insurance).