Fraternal Benefit Societies
MR. WATSON: We are going to talk about fraternal companies . They are organized under a special section of the insurance code as non-profit.
MR. WATSON: The Knights of Columbus or The Independent Order of Foresters are a fraternal organizations. Their goal is to benefit society somehow. But they also sell insurance. Just like stock companies sell insurance, just like mutual companies sell insurance, they also sell the same kinds of insurance -- whole life, universal life, term insurance, variable life. It doesn't have to be the Knights of Columbus. It can be any fraternal organization that sells life insurance. It's just an example. But, what happens to the money at the end of the year? It is passed down to the members in the form of benefits.
MR. WATSON: An example of the benefits: Someone joins the Knights of Columbus. When he gets old and senile and he is incontinent, can't take care of himself, getting lost in the neighborhood; instead of sending him to a nursing home, which is very expensive, he can transfer his assets. No matter how great or small, he can transfer those assets to the Knights of Columbus. And they will take care of him with dignity, style, and class for the rest of his life as well as his wife.
MR. WATSON: What happens to the money at the end of the year, if they have money left over, with the fraternal organization like the Knights of Columbus? They don't give it back to anybody. It's funneled down to the members in the form of additional benefits. Maybe they're going to add a new wing to their old folks' home up in Cleveland. Maybe they're going to build a new old folks' home over in St. Petersburg. But no money actually goes back in the form of cash to these guys. It's funneled back down in the form of benefits. Does that make sense?
STUDENTS: Um-hmm.
Characteristics of Fraternals
MR. WATSON: You need to know the four characteristics that make up a fraternal organization like the Knights of Columbus or the Masonic organization, Shriners, or The Independent Order of Foresters.
There are four characteristics of a fraternal organization:
- lodge system (must have regular meetings)
- non-profit
- officers
- rituals
- offers certificates, not policies
Home Service, Industrial, or Debit Insurance ***
MR. WATSON: I want to talk about home service companies . Not very common at all. Some states don't allow it anymore. They sell industrial insurance , debit insurance, burial insurance. These are sold by home service companies.
MR. WATSON: 150 years ago John Hancock started out like this. Every company started out like this if they have been around a long time.
MR. WATSON: Take a coal miner. He couldn't afford to send his premiums in advance. So the agent would come by and sell him a small policy, less than $3,000. Back then it might be a $100 policy, or $150, enough to get him in the ground, pay for his burial. So the agent would come by every Thursday. He would knock on the door. Knock, knock. Did the coal miner answer the door? No. Where was he? In the coal mines.
MR. WATSON: Now, hanging on the screen door on a hook is a long envelope with a nickel in it. The agent would grab that nickel and he would shake it out in his hand and put it in his pocket, and he would mark "paid." Next Thursday, he repeats the whole process. Every Thursday, knock on the door; go through the whole process again.
MR. WATSON: They are home service companies. The agents collected the premiums at the home of the insureds, because the insured person didn't have enough money to send it in advance. Home service companies do the same with debit insurance and burial insurance.
Industrial policies are characterized by
- a small death benefit,
- less than $3,000 usually,
- collected by the agents on a weekly basis
MR. WATSON: There are two classifications of insurance.
- Industrial - paid weekly
- Ordinary - the most common; paid any other way (annually, quarterly, monthly)