New York Life Ins. Co. v. Robertson , 140 Miss. 108 ( 1925 )

^* Headnotes 1. Taxation, 37 Cyc., p. 841; 2. Taxation, 37 Cyc., p. 1191. This is a suit in which the appellee, the state revenue agent, alleges that the appellant for several years has failed to pay the full amount of the tax due by it on the gross amount of its premium receipts and in which he seeks to collect the amount of the tax thereon which he alleges the appellant failed to pay. The tax sought to be collected is that imposed by section 1, chapter 203, Laws of 1916, which now appears as paragraph 3 of section 31, chapter 104, Laws of 1920, as follows:

"All life insurance companies or associations shall pay annually a tax of two per centum on the gross amount of premium receipts in this state, less premiums paid to reinsuring companies authorized to do business in Mississippi and less matured endowments and cash dividends paid under policy contracts in this state during the year; provided, however, that the tax assessed on any such life insurance company shall not be less than an amount equal to one and three-fourths per centum of the gross premiums received by it upon the business done within the state during the said year."

The case was tried by the court below without a jury on an agreed statement of facts, and from a judgment in the revenue agent's favor the appellant has brought the case to this court.

It appears from the agreed statement of facts that the appellant is a nonresident mutual life insurance company without capital stock, and "whatever profits or accretions arise from its business, from any cause, are for the common use and benefit of the policyholders who, in fact, constitute the company."

Its policies are written under "the level premium system" plan by which the maximum annual payment which any policy holder can be called on to pay during the life of the policy is stipulated therein. The calculation of the company's premium rates for life insurance involves:

(a) The adoption of a table of mortality, showing the proportionate death rate of each age of life.

(b) The adoption of an assumed rate of interest, such as the company may reasonably expect to realize upon its invested assets during the lifetime of the policy.

These two factors determine what is technically known as the net or mathematical premiums which are the sums sufficient and necessary to pay all outstanding policies, as they become claims against the company; provided the deaths should occur exactly in accordance with the table of mortality and the rate of interest earned on the investments of such premiums should be equal to the assumed interest rate.

To the said "mathematical premiums" there is added a sum which is technically called a "loading," which may be needed for the purpose of meeting the expense incident to carrying on the business, as well as to cover any unforeseen contingencies that might arise, such for instance as an abnormal death rate which might be brought about by war, epidemic, pestilence, or any other unforeseen fatality.

The net or mathematical premiums, so increased by "loading" as aforesaid, constitute the premium rates stipulated in the policies of insurance.

The premium rates, when so computed, are in the experience of life insurance companies generally found to be in excess of what is actually required to carry the policy.

Such excess constitutes, in mutual companies, their estimated margins of safety and must, therefore, be liberally provided for in the "loading," since a company having no capital stock must rely solely upon premiums collected for funds with which to meet the ordinary and incidental expenses of the business, as well as the unusual contingencies which may, and probably will, have to be incurred. In addition to providing an adequate expense fund, premiums must be sufficiently large to in sure also the company's ability to pay death claims, beyond doubt or peradventure, when they accrue. Though the insurance policies may run for any stipulated number of years, the premiums, as fixed, cannot be increased, but remain level after the issuance of the policy.

In computing premium rates the insurance companies allow for a greater death rate than that which probably will be experienced. The assumed rate of interest also, on the companies' investments, is calculated at a rate below that which they expect to realize. In their calculations for expenses and unforeseen contingencies they provided for a greater amount than is ordinarily and usually needed.

Mutual companies have the above three named margins of safety, and each assumption of the amount needed is usually in excess of what is actually required, and when such collections result in excess or redundant premiums the same is apportioned to its policies and paid back to the owners thereof.

According to the rule and practice of the New York Life Insurance Company, at the end of each year whatever remains of excess premium receipts which it has collected — over and above the expenses and disbursements — is ascertained, and there is then set aside out of said excess such amount as is required for the increase in policy reserves and other liabilities; then whatever balance of excess remains is apportioned and paid back by the company to the policyholders, under the usual designation of "dividends."

Such provision is contained in all of the policies of the defendant company and is as follows:

"Participation in Surplus — Dividends. — The proportion of divisible surplus accruing upon this policy shall be ascertained annually. Beginning at the end of the second insurance year, and on each anniversary thereafter, such surplus as shall have been apportioned by the company to this policy shall at the option of the insured be either: (a) Paid in cash; or (b) applied toward payment of premiums; or (c) applied to purchase a participating paid-up addition to the sum insured; or (d) left to accumulate at such rate of interest as the company may declare on funds so held, but at a rate never less than three per cent. compounded and credited annually, and withdrawn in cash on any anniversary or payable at the maturity of the policy to the person entitled to its proceeds."

For the first year of each policy the appellant company collects the full maximum premium stipulated for in the policy, and such collections form a part of its taxable in come for that year and are included in its reports, respectively, as part of its income on which taxes are due the state, and that taxes were paid on such premiums for each of the years embraced in this suit.

The dividends are not part of the premium receipts of the year in which they are distributed, but are applications of previously accumulated surplus premium collections; that is to say, by way of illustration, the dividends applied to payment of premiums for policy years beginning in the year 1923 are made up of surplus funds accumulated in policy years beginning in 1922 or prior years.

The appellant for each of the years embraced in this suit reported to the insurance commissioner and paid to him the tax due on the actual amount of money collected by it from its policyholders in settlement of premiums due by them on policies issued by it, but did not include therein as a part of its "premium receipts" the dividends apportioned by it to its policyholders under the provision of its policies therefor hereinbefore set out and which were applied by direction of its policyholders "toward the payment of premiums" due by them.

The contention of the revenue agent is that the "dividends" apportioned by the appellant to and applied by its policyholders "toward the payment of premiums" should be regarded as a part of and included in the gross amount of its premium receipts. If this contention is correct, then the appellant admits it has paid for each of the years here in question, after giving it the benefit of all of the deductions allowed by the statute, less than one and three-fourths per cent. of its gross premium receipts, the minimum tax thereon allowed by the statute, and the judgment of the court below should be affirmed.

Judges ANDERSON, COOK, and ETHRIDGE are of the opinion that these dividends should be regarded as a part of the company's gross premium receipts; Judges McGOWEN, HOLDEN, and SMITH, are of the opinion that they should not be so regarded, but that the tax to be collected from the company should be computed only on the money actually received by it in payment of premiums.

Affirmed.