Penn Mut. Life Ins. Co. v. Henry, Ins. Com'r

• Decision Date: 20 December 1915
• Citation: 110 Miss. 402,70 So. 452
• Parties: PENN MUT. LIFE INS. CO. v. HENRY, INS. COM'R
• Court: Mississippi Supreme Court

70 So. 452

110 Miss. 402

PENN MUT. LIFE INS. CO. v. HENRY, INS. COM'R

Supreme Court of Mississippi

December 20, 1915

October 1915

APPEAL from the circuit court of Hinds county. HON. W. H. POTTER Judge.

Suit by T. M. Henry, Insurance Commissioner against the Penn Mutual Life Insurance Company. From a judgment for plaintiff defendant appeals.

This suit was begun by the insurance commissioner of the state of Mississippi against the appellant for taxes on the annual premium receipts received from the appellant company during stated periods for 1912, 1913 and 1914; it being alleged that the appellant had deducted in the settlement with the state from the gross annual premiums the dividends applied during each of the stated periods in the reduction of premiums, and that under the law appellant was liable for the tax on the gross premium receipts, and was not entitled to deduct dividends so applied in reduction of premiums.

Section 2629 of the Code of 1906, as amended by chapter 227, Laws 1912, contains the following provision:

"All life insurance companies or associations shall pay annually a tax of two and one-fourth per centum upon the gross amount of premium receipts in this state, less death claims, matured endowments and cash dividends paid under policy contracts in this state during the year."

Agreement of counsel as to the facts and issues is as follows:

It is agreed:

(1) That Hon. T. M. Henry is the duly elected and qualified insurance commissioner of the state of Mississippi, and that he has made lawful demand of the defendant for the amounts herein sued for, which demand the defendant has refused, upon the ground that it is unauthorized by law, but, should the court hold that said demands are in accordance with law, then the amount of such demands would have been paid, and no penalty or forfeiture, other than lawful interest, shall be imposed.

(2) The Penn Mutual Life Insurance Company is a mutual life insurance corporation under the laws of the state of Pennsylvania; it has no capital stock, distributes no amounts directly or indirectly to stockholders, and all accretions from whatsoever source arising are for the benefit of policy holders in whom the entire management and control are vested that said company is purely a mutual company, acting in all things for the common welfare of all of its policy holders, who, for practical purposes, constitute the company itself.

(3) That each policy holder is chargeable with all expense incident to his particular policy and all taxes imposed thereon by the governmental subdivisions, and that the amount of these taxes, if collected by the state, would be paid by the policy holders of the state of Mississippi.

(4) This corporation operates on the level premium plan. In mutual life insurance there have been three methods employed of securing from members contributions to meet losses:

(a) The pure assessment plan, under which the loss payable on the death of the member is, after the event, contributed pro rata by the surviving members. This plan takes no account of the differing ages of the insured members and the inequality in the probable number of contributions each will have to make, nor of the possibility that diminishing numbers will increase the assessments upon the surviving members. It has been found inequitable and is obsolete.

(b) The natural premium plan, under which each member pays each year the cost of carrying his insurance for that year. As the hazard of death increases annually the premium increases correspondingly, and the plan is objectionable on this account. This plan is used only by fraternal insurance societies.

(c) The level premium plan is the one in general use by all insurance companies, including this company. Under this plan the maximum annual contribution which any member can be called upon to pay is uniform throughout the life of the policy. The member pays during his early years a sum in excess of the current cost of his insurance. This excess is applied to the creation of a reserve or self insurance fund, which serves to maintain the insurance in the later years, when the stipulated level premium would be insufficient to meet the cost of insurance on the natural premium plan.

Whether the mutual company be conducted on the assessment plan, the natural premium plan or the level premium plan, the member receives his insurance at cost. The assessment company collects its premiums after the death has actually occurred, and the cost is thereby ascertained. The mutual level premium company calculates its estimated premium in advance, and adjusts the actual costs afterwards.

(5) The calculation of premium rates for life insurance involves: First, the adoption of a table of mortality showing the proportionate death rate for each age of life; second, the adoption of an assumed rate of interest such as the company may safely 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 necessary to pay all outstanding policies as they become claims, provided deaths occur exactly in accordance with the table of mortality and the rate of interest earned on the investments of such premiums is exactly equal to the rate assumed. To the net or mathematical premiums there is added a sum technically known as "loading," for the purpose of meeting the expense of conducting the business, as well as any unforeseen contingencies, such as an abnormal death rate due to war or pestilence. The net or mathematical premiums, increased by the "loading," constitute the premium rates stipulated in the policies of insurance.

(6) Premium rates so computed are, in the experience of life insurance companies, generally found to be in excess of their requirement. In a mutual company such excess constitutes its margin of safety, and must be liberal. Such a company has no capital stock, and must rely entirely upon its premiums to meet unusual contingencies. They must be sufficiently large to insure the company's ability to pay its claims as they accrue beyond peradventure. Their policies may run for a period of fifty or even seventy-five years, and the stipulated premium cannot be increased after the policy is issued. In computing their rates the companies use, therefore, a table of mortality showing an admitted higher death rate than that which will probably be realized. The assumed rate of interest on investments is also lower than that which the Company expects to realize. The provision for expenses and contingencies is greater than would ordinarily be required. Mutual companies have these three margins of safety, and normally each assumption is in excess of what is actually required. They result in excess or redundant premiums.

(7) According to the practice of this company, at the end of each year the excess of income over disbursements is ascertained, and, after setting aside so much of said excess as is required for the increase in policy reserves and other liabilities, the balance is treated as a resource enabling the company thereafter to demand from the policy holder less than his stipulated premium. Each policy holder's share in this so-called fund is then ascertained, and before his next premium falls due he is advised of the amount thereof, and that the company, if he wishes to use it in abatement of premium, will accept in full settlement of such premium the difference between the premium written in his policy and the amount standing to his credit with the company which arisen out of previous premium payments. Unless used in abatement of premiums, the policy holder may, if he desires, withdraw his share of the so-called fund in cash, permit it to accumulate, or this share is paid to him if he discontinues his policy, or is paid in addition to the amount insured if the policy becomes a death claim. For the first year of each policy this company invariably collects the maximum premium stipulated in the policy, and such premiums form part of this company's taxable income for their respective years. The method of calculating premiums and ascertaining and disposing of the excess described in this and the two preceding paragraphs is practiced not only by this company, but by other mutual life insurance companies generally.

(8) This company permits the policy holder to pay the full stipulated premium, instead of the difference between the stipulated premium and the amount standing to his credit in the abatement fund. In such cases the difference between the amount so paid and the sum required to continue the policy in force is used by this company, either in the purchase of additional insurance, or to shorten the endowment or premium paying period, as the insured elects.

Under the terms of this company's outstanding policies the following sums were, at the election of the policy holders, applied in reduction of renewal premiums during the designated periods:

Six months ending December 31, 1912

$ 17,228.53

Six months ending June 30, 1913

17,066.44

Six months ending December 31, 1913

22,354.53

Six months ending June 30, 1914

20,822.34

Six months ending December 31, 1914

22,740.75

Total

$ 100.212.59

(9) This company by its policy contracts has for many years confined its policy holder's right to participate in the company's annual distributions of the surplus, also for convenience called "dividends." Its form of policy adopted in 1914 provides: "This policy shall participate annually in the surplus earnings of the company in accordance with the regulations adopted by the board of trustees." Its form of policy adopted in 1908 provides: "This policy shall participate annually in surplus earnings in accordance...