Mutual Benefit Life Insurance v. Fischer

The majority sees no conflict between our decision in New York L. Ins. Co. v. Burbank, 209 Iowa 199, 216 N.W. 742, hereinafter called the Burbank case, and Prudential Ins. Co. v. Green,231 Iowa 1371, 2 N.W.2d 765, 141 A.L.R. 1401, hereinafter called the Green case. The majority feels its opinion is in line with the two opinions cited. I fail to follow the reasoning and I do not agree with the conclusion.

The point decided in the Burbank case was that a dividend was not a refund of an unused portion of the premium but a profit, and, when used by the insured to pay for insurance, it was a premium within the act taxing gross amount of premiums received. The same issue was involved in the Green case and a contrary result reached but the Burbank case was not overruled. The same issue is involved in this case and the Green case is followed. It seems to me that a decent regard for the decisions of this court as precedents demands that they either be followed by this tribunal or expressly overruled. In no other way can certainty, stability, and uniformity be preserved in the field of jurisprudence.

My position can be best illustrated by discussing the specimen policy which was in evidence in this case, with its options as to the application of the dividends. The thousand-dollar policy issued to the insured in 1905 when he was twenty-one years old provided for a level premium of $18.40. Upon the payment of the second year's premium the insured had certain options which he could exercise with respect to the dividends. He could have the dividend paid to him in cash or he could apply the dividends as a part payment of the $18.40 premium. This is what the insured did for the second year with the dividend of $1.96. He merely sent his check for $16.44 with instructions that his dividend was to cover the balance. Of course, this, under the Burbank case, resulted in a tax on $18.40 as the "gross premium received" by the company.

Another option given the insured was called the "Dividend Additions" plan. Here the insured could leave the dividends he was entitled to with the company and these "* * * Dividends are applied at Net Single Premium rates to the purchase of Additional Participating Insurance (herein referred to as Dividend Additions) payable with the Policy."

If the insured had exercised this option his insurance would have been increased from $1,000 to $1,000 plus paid-up additions purchased by his dividends. The insured in the specimen policy did not exercise this option, but it was the one exercised in the Green case. There this court held that the dividends so applied to purchase paid-up additions to the policy were not a part of the gross amount of premiums received. The conclusion was arrived at without overruling the Burbank case, but, as stated in the opinion, "* * * in line with that decision."

The third option in the policy gave the insured the right to apply his dividends under the "Accelerative Endowment Plan." Since this is the plan the insured chose, beginning with the third year, or 1907, I will quote the testimony of the vice president of the company as to the working of this plan under the specimen policy:

"When the third year's premium fell due in 1907, the insured requested that the dividend then due and until otherwise ordered, all subsequent dividends be applied upon the Accelerative Endowment Plan. The dividend of 1907 amounted to $2.10. That was sufficient to enable the Company to agree to pay the policy in full as an endowment when the insured obtained age 84, provided the policy was then in force. It also gave the insured at the time, the option of having the policy converted into a fully paid-up participating policy, payable at death when the insured attained age 80.

"When the fourth premium became due in 1908, the Company was enabled to agree to pay the policy as an endowment at age 82 instead of age 84 and also to reduce the age at which the insured might obtain paid-up policy from age 80 to 77. As subsequent premiums were paid in full and the dividends applied upon the Accelerative Endowment Plan, the maturity age of the policy and also the age at which the policy might be converted into a paid-up policy, was gradually reduced so that upon the payment of the premium due in 1931, the insured had the option of taking a paid-up policy upon the anniversary in 1932. The maturity date of the policy was fixed at 1946."

The majority opinion holds that when dividends are applied in furtherance of the "Accelerative Endowment Plan" they are not part of "gross amount of premiums received" within the provisions of the taxing statutes. This result, too, is arrived at without overruling the Burbank case, and the language from the Green opinion that the conclusion there reached is in line with the New York Life Insurance Company case is quoted with approval.

I. The word "premium," as used in the law and business of insurance, is the consideration paid for a contract of insurance. Northwestern Mut. L. Ins. Co. v. Murphy, 223 Iowa 333,271 N.W. 899, 109 A.L.R. 1054; Equitable L. Assur. Soc. v. Johnson,53 Cal. App. 2d 49, 127 P.2d 95.

Dividends, as the vice president of the company testified:

"* * * come, primarily, out of the premiums paid or out of current earnings. The contract premium is first determined on the American Experience Table of Mortality. The next item would be interest earnings and the third is that the provision made in the premium for expenses and contingencies is not all required and that is what we call ``loading' in insurance terms * * * When a dividend is declared by the Board of Directors, then the dividend becomes the property of the policyholder * * * The policyholder has the right to say to the Company what he will do with the dividend * * *."

If the dividend is the cash credit that is owned by the insured and it is used for the payment of the insurance contract under any of the three plans enumerated, then it seems clear to me that it is part of the gross amount of premiums received under the definition that a premium is the consideration for the insurance contract. The policy which the insured received here could not have been purchased for $18.40 a year. Note again the clear testimony of the vice president of the company. After stating that the dividend was the property of the insured to do with as he saw fit, he testified:

"* * * by the exercising of the option to take under theAccelerative Endowment Plan he is using his own money. That isthe dividend which was his money to purchase this type of policywhich would have required a greater rate of contract premium hadhe taken it in the first instance and he is paying the Company anadditional premium to take advantage of the different type ofpolicy which he elects to take under his option."

Could anything be clearer? The vice president of the company calls the dividend "his [insured's] money." He speaks of exercising the option as "using his [insured's] own money." He actually describes such use as "paying the company an additional premium" for a different type of policy, and yet the majority rejects this testimony and holds it is not a premium at all.

It seems to me that consistency would require the tax base to include dividends when applied under any one of the three options. If this dividend is money in the hands of the insured, and it is transferred to the company by any one of the options, (1) to pay in part the contract premium (2) to purchase a paid-up addition to the policy (3) to (in the words of the insurance company's vice president) purchase a different type of policy requiring an additional premium, then clearly the dividend is being used to purchase insurance in each case. The insured is certainly not making a gift of this dividend money to the insurance company. He is getting an insurance contract which he could get only by assigning the dividend to the company or sending the company cash in the amount of the dividend.

The majority finds no inconsistency in holding that the company received a premium when it received the dividends under option 1, but that it did not receive a premium when it received the dividends under options 2 and 3.

The majority opinion poses the question: "Would it be logical or reasonable to say that the annual contract rate was the taxable basis in the Burbank case and then say in the present case that the annual contract rate plus dividends was to be the taxable basis?" It protests loudly that to so hold would be "unfair," "unreasonable," and "inconsistent." Then it answers the question in this italicized language from the Burbank case:

"If the statute does not contemplate any reduction from thecontract premium because of the payment of dividends, to beconsistent we must also hold that it does not contemplate anyaddition thereto because of the application of dividends."

To me this is mere indulgence in rhetoric in disregard of logic. Where is there any logic or consistency in such a statement or holding? This is saying to the insurance companies: "If you take the dividend as a part premium payment (option 1) on the originally issued policy for $1,000 it is a premium, but if you take it as the purchase price for a paid-up addition to the $1,000 policy (option 2) it is not premium, and if you take it to accelerate the ordinary life policy of $1,000 into a more expensive endowment policy (option 3) it is not premium." In all three cases the premium was captured by the company as consideration, in whole or in part, for insurance — insurance that would not have been issued unless the insured either transferred his dividend to the company or paid its equivalent in cash. Why speak of "reducing" and "increasing" the tax? The tax is upon the "gross amount of premiums received." The only test is whether the dividend is being used to pay for insurance. The vice president of the defendant company said it was. The tax base here is increased over the level premium of $18.40 because the company received more than $18.40 premium for the policy it issued. To read the majority opinion one would think the statute taxed only the level contract premium instead of the gross amount of premiums. But if it be thought that the contract premium is to control, then what is the contract premium? If the insured in the specimen policy takes his dividend in cash the contract is $18.40. If he exercises option 1, applying the dividend on the $18.40 premium, he has agreed to pay the contract premium of $18.40. If he exercises option 2 or 3 he contracts to pay $18.40 plus his dividends for the policy contract he receives. Let the insurance company, charged with the duty of paying the tax on the gross amount of premiums received, pay on the contract premiums if you will, but let it be on the entire contract of which the exercised options are a part.

Does the majority feel that the insured gave this dividend, which he could receive in cash, to the company as a gift? Does the majority feel the company gave nothing in return for the dividend received over and above the $18.40 premium, under options 2 and 3? This must be their thought if the tax is to be based on $18.40. And yet, if the company sold a policy, endowment at age fifty-nine — which is what the specimen policy with the exercised option amounted to — the annual premium would, according to the testimony of the vice president, be more than $18.40 annually.

The insurance company admits it received more than $18.40 annually for this contract of insurance; that it would not issue this insurance contract for $18.40 annually. Still the majority feel the insurance company should be taxed only on the basis of $18.40. A logical statement would be one to the effect that the dividend is taxable as a premium when used to pay for any insurance contract.

Despite the fact that most persons would instantly say that in the Burbank case we held dividends taxable because they were used to pay for insurance — on no other theory can the decision be sustained — the majority, by adherence to and approval of the Green decision, continues to thrust upon the commissioner, or tax collector, the responsibility of determining which case we will follow. For there will be other cases. The insurance companies display great ingenuity in drafting many option plans designed to secure the dividends from the insured in giving him a more favorable insurance contract than he would otherwise receive. This is more than I can reconcile with my view of the functions of this court. Either the Burbank case or the Green case should be overruled. I would favor overruling the Green case, and therefore, I would reverse.

OLIVER and BLISS, JJ., join in this dissent.