One of the most controversial recent developments in the life insurance industry is the widespread introduction and vigorous promotion of "special" policies. Usually on the ordinary life plan, these policies carry a premium rate lower than those of the regular forms. Such policies have long been offered by many companies, but in recent years many more companies have begun to offer them to meet the growing price competition.

A company may justify a special low rate on a particular policy�which, in all other respects, is identical to the regular policy�by limiting the face to a specified minimum amount or by limiting its issue to preferred risks�that is, to groups that should experience a lower rate of mortality than that among insured lives generally because of more rigorous underwriting requirements. In some cases, both practices are factors.

The purpose of the minimum amount is to reduce the expense rate per $1,000 of insurance. Many items of expense reflected in a policy�s gross premium are not affected by the policy�s face amount�for example, the medical examiner�s fee, inspection fee, accounting costs, and general overhead. If the average size of the policy can be increased, therefore, the expense rate per $1,000 will be lower. A class of policies in which the minimum face amount is $50,000 can be expected to develop an average face amount double that of the regular classes in which the minimum is $10,000. Some companies do not offer their special policy in less than a specified amount ($50,000, $100,000, $250,000, $500,000, or $1 million, for example). The savings in the expense rate alone can be quite substantial. Then, because the gross premium is lower, expenses that vary directly with the size of the premium�notably, commissions and premium taxes�will also be less per $1,000 of insurance. In fact, in many companies the commission rate on special policies is lower than that on other whole life policies.

The savings realized by superior selection depend on the nature of the standards imposed, the test of which is actual mortality experience. The potential savings are fairly large since selection standards have a significant impact on mortality rates. Furthermore, preferred-risk policies are almost always issued on a minimum-amount basis and thus reap the expense savings described above. At most ages and in most companies, the difference in premiums between a special whole life policy and a regular ordinary life policy ranges from $2 to $3 per $1,000. On a multimillion-dollar policy, the savings can be very attractive.

The case for special policies is based largely on the grounds of equity. If a policyowner takes out a policy of such size that its expense rate is lower than average, or if he or she is a better risk than average, the policyowner should be given the benefit of the savings in the form of a lower premium.

The principal argument against bargain policies is the arbitrary nature of the underlying classification. For example, the reasons that justify a lower expense loading per $1,000 for a policy of $200,000 than for one of $50,000 argue just as forcefully for an even lower rate for a $1 million policy, a $2 million policy, and so on. In fact, the logical conclusion is that premium rates per $1,000 should decrease as the size of the policy increases. However desirable such a practice might be from the standpoint of equity, it would tremendously complicate the operation of the business and might, in fact, be impractical. Furthermore, limiting the expense discount to policies of $50,000 or over, or limiting it to any other arbitrary amount, is only partial recognition of the relatively lower expenses on large policies.

By the same token, if the principle of granting a lower rate to superior risks is sound, it should be extended to all other kinds of policies and not be limited to the whole life variety. The soundness of the principle has been questioned in some quarters, however, on the grounds that it is contrary to the basic insurance principle of averaging. It is argued that to get average results, coverage of large groups is essential�which, from a practical standpoint, requires including people with widely varying prospects of longevity in the same group. Some insureds must bear more than their theoretically accurate share of mortality costs, while others will contribute less than their true share.

While not a part of the argument for or against special policies, it should be observed that placing larger policies or superior risks in a separate class with a lower premium rate inevitably results in a higher cost of insurance for smaller policies and insureds who cannot qualify as preferred risks.